How I Went from Total Trading Chump a to Semi-Respectable, Yet Still-A-Little-Bit-Crazy Trading Guy
By Rob Booker, RobBooker.com
I like trading stocks, and I hope you do, too. I started my trading career in 2001, with $2,500 and a dream. Then I crushed my own dream by losing all of my money. I blew up my trading account in a stupid trade.
Why? Because I lost focus, like an animal chasing after a shiny object. I vowed never to do that again.
This little article is about finding great stocks before they move big. I call them “Easy Stocks” because they’re easy to say yes to. They’re easy to spot, after you know what you’re looking for.
This is my way of protecting my portfolio - I look for good stocks that are undervalued, then I buy them. Even if there is a stock-market shock, at least I’m holding companies with good fundamentals.
All right, then. If you’re ready ...
We’re going to have a good time in the next few pages, because if you’re interested in reducing your losses and maximizing your returns, you’re in the right place.
So grab a cup of your favorite drink, maybe a hot cup of tea, and settle in. You can get comfortable and spend the next few minutes with me - because we’re going to do this the easy way.
I call this “Easy Stocks” for a reason. So, if you’re looking for complicated stuff … I’m not your guy. But if you’re into simplicity, and stuff that works, and saving time, and having the chance to make more money ...then let’s light this candle.
Most Investors Hate Value Stocks - and That’s Our Big Opportunity
A value stock is a stock with good fundamentals, a good price/earnings ratio - stuff like that - that is priced well below its peers. That’s an oversimplification, but I passionately hate complexity. I see no point in wasting time. These stocks have fallen out of favor for two reasons:
Some of these stocks are garbage. They’re “on sale” for a reason.
Everyone wants to buy bitcoin, and the FANG stocks. We’re in a bubble.
But my value stocks are killing it. I mean, killing it. I’ve built a way to scan for high-quality stocks with good fundamentals, and then buy them on sale. It’s the fastest way I know to find the biggest movers, in the shortest amount of time. And because most investors avoid these value stocks right now - because they’ve fallen in love with the newest fad - you and I have an opportunity. Because you’ll be paying attention, you’ll be able to find the big moves before they happen.
The Easy Stocks Scan: How to Find Value Stocks that Aren’t Complete Garbage
We’re going to do a scan (I’ve already done it for you, and I’ll share a link with you in just a moment).
But first, I want to teach you “how to fish,” so to speak. I’ll show you how to do it, and then if you want me to do it for you, I can do that, too.
Go to http://finviz.com
Or, if you want to skip to the good stuff, and you want me to do the scan for you, just go to https://easystocks.net and I’ve got the scan already done for you. (No need to worry, it’s free).
Run a scan for stocks with these parameters:
Return on Equity - above 20%
Return on Investment - positive (anything positive is good)
Return on Assets - positive (once again, anything positive is good)
Average volume - above 1 million shares
Current ratio - above 3
This is what it will look like when you’re done:
In this scan, we found 30 stocks. That’s normal. When you do this, you’ll find 20-50 stocks worth buying.
Everything else is garbage. That’s the way I see it.
This is how I look at it, so I don’t get sucked into a stupid trade, or a “new shiny object.” This is how I focus. And focus is money. I’m sure there are lots of other “good” stocks out there. No denying it. But I need to focus. Remember that: focus is money.
Now that we have a watchlist of value stocks, we’ve opened the door of opportunity. Some of these stocks will be famous names. That’s ok. But most of them won’t be on anyone’s watch lists. The windbag financial TV hosts will never feature these stocks.
Great. We don’t want to trade stocks that a TV host recommends. Those people are paid to have ideas, not to have good trades. Good for them. I’m sure some of them are ok people. I’m also sure that most of them should be thrown off the air for just spewing out trade ideas that they don’t even take. Sorry. I get a bit hot about all this.
If you’re interested in getting more details on the “why” behind these stocks, and a complete list of the latest names on my scan, go to https://easystocks.net and grab the scan. I’ll also send you a detailed explanation of why the scan finds the best value stocks.
Now, let’s talk about getting into the trade.
The Trade: When & How to Get into Easy Stocks
You’ve had your eye on a little storage business down the road. It’s probably worth a million dollars. But you don’t have a million dollars. You’d sure like to own that storage business, because it keeps churning out money, month after month. People have a lot of junk and they need someplace to put it. So they take it down to the storage place, put it in a garage, and never look at it again. Oh, and they’re paying $50 a month to do that. Month after month.
The business has great fundamentals. It’s never going to do anything fancy. It’s just going to make money, like a little cash machine. Oh, and one more thing: It always pays its bills on time, and has no debt.
Now - what if …
That business has one bad quarter. Say, there’s a big storm in your area, and there was a lot of flooding. The storage facility was fine. But the owner got freaked out, and now … he wants to get out. He wants to sell the business.
In fact, he’s met the love of his life on Tinder. They both “swiped right,” or whatever people do on that website. Now he wants to get out of town, sell the business, and move to Topeka, where he can make 1,000 babies with his new love, and he will never have to worry about big storms.
He suddenly gets freaked out, and he wants OUT of his business. He puts it up for sale. As they say, “time is of the essence.” You walk down the road, pop into the office, and you offer him $800,000. You know the business is worth at least a million bucks. And he says yes. Right on the spot. You got a deal. You got a great business at a fair price. Nice work!
Here’s the great news: This is exactly how we do it with value stocks.
We wait for the owners of a good company (the shareholders) to freak out. When they freak out, they jump out of the stock. And we jump in. Here’s how I do it.
Step One: Earnings
Here’s a photo of what happens to ordinary investors at earnings:
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At earnings, people go a little bit crazy. Here are just a few things that can happen after earnings:
A good stock can fall fast because of an earnings miss.
A good stock can fall fast because of a statement made on the earnings call.
A good stock can fall fast because of a statement in the 10Q filing. I read these for fun, because I am a nerdface.
When any of those 3 things happen, we have an opportunity.
It’s okay if a good company misses on their earnings. It’s ok if they have a temporary setback. If they are a good company, and have little or no debt (this is key) then we can bet that over time, they’ll make money, and if they make money, investors will want to own a piece of the company.
In other words, we like it when good companies have short-term problems.
We want to own those stocks, but we don’t want to pay full price.
STEP TWO: PRICE DROP OF 7-10% (or more)
Next, we want to wait for the stock to go on sale.
There are two ways this can happen:
Price drops almost immediately - 24-72 hours after earnings. I’ll show you what this looks like in a moment. This is my favorite kind of trading opportunity, because it shows that investors have panicked. We like to take advantage of that. Panic moves down can lead to euphoric moves higher. That’s exactly what we like.
Price drops during the 2-3 weeks after earnings. This is also common, and it’s ok but not great. If price is falling steadily, that means that people are thinking about it, thinking through it. Maybe there’s a good reason the stock is falling. So I’ll be more cautious in these instances. I’ll probably still take the trade. But I’ll reduce the size of the trade.
I thought you might like to see some examples of what all of this looks like.
So here are some charts:
Figure 3: OCLR After Earnings
In Figure 3 above, traders go into “panic sell mode” after OCLR reports earnings. The stock drops 10%. What do we do? We step in and we buy.
I know you’ll have questions about indicators, trade size, stop-losses, and more - and we’ll get to all of that in a moment.
But here’s another example:
Figure 4: GTN after earnings
In Figure 4, the sell-off takes longer. Two weeks after GTN reports earnings, the stock slips lower, finally reaching a 10% drop. That’s when we buy.
Now, let’s look at a third example, and then I want to answer all your questions about the charts and trade sizing and position management, so you’re feeling like you know what you’re doing here.
Figure 5: CORT after earnings
In our final example, we’ve got some crazy shiz going down. One day after earnings, price shoots WAY up. Then, within just 60 minutes, it drops 10%. Or more. That’s when we buy.
Got it? We’re waiting for earnings. We’re only trading after earnings. We’re only looking at companies with good fundamentals. We’re only trading when a stock we like goes on sale. Now let’s talk about managing the trade.
Managing The Trade: You’re in the Trade - Now What?
The first rule of Easy Stocks: Trade Small and Don’t lose money. Well. At least - don’t lose a lot of money. If we get into a trade, and the price drops another 2-3% then we’re OUT. We drop it. We’re done. Cut the losers.
Of course, if we want to do a long-term buy and hold strategy - sure, that’s fine. These are value stocks. Trade small, hold on, build a portfolio. That’s fine with me. Of course, you’ll pay less taxes on your gains when you hold for 12 months. So, please, by all means, be my guest - I do this as well.
Guidelines for Short-Term Trade Management
Size of Trade: Allocate a small portion of the portfolio for the trade - maybe set aside 2% of total available trading capital to buy a value stock.
Stop-Loss: Stop out if the price drops another 2-3% (maximum 5%). When in doubt, get out. We can always get back in. Short-term traders get into massive trouble when they try to turn a short-term trade into a long-term position.
Profit Target: When the stock gains 5-10%, we take our gains.
Time-Based Stop: We have a maximum holding period on short-term trades of 30 days. If the stock hasn’t hit our stop, or our profit target, during that time - we simply get out.
Guidelines for Long-Term Trade Management
Size of Position for Longer-Term Traders: If the plan is to buy and hold longer term, allocate a maximum of 4% - and enter a half-sized position to start. This means we’ll have capital left over to add to the trade.
If the Stock Drops, Add to the Trade: If it goes on sale again - another 10% - then we can add a bit more to the trade. We never allocate more than 4% of our total trading capital.
Stop-Loss: We’re holding these trades for the long-term. We don’t jump out of these trades on a whim. We’re expecting that over the longer-term, our portfolio of value stocks will appreciate. Generally, I will buy these stocks with a small amount of capital (maybe allocate 1% of my portfolio) and then forget about them. Just check on them once a quarter.
Profit Target: Once again, with longer-term trades, we’re less concerned about getting out. We want to hold these for 12 months or more. But if after 12 months, the stock has jumped 20% or more, we’re happy to close the position and move on to another idea. Or hold on for the long-long-long term, and not worry about taking profit at all.
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I hope you’ve enjoyed this article. I’ve had a great time writing it.
As a way of saying thank you for finishing this book - you’re clearly a Person Who Takes Action- I’ve got some gifts for you:
Would you like me to scan for these stocks, for you? Go here, and you can get the scan for free:
You’ll get a link to my spreadsheet where I’ve got my primary value stock watchlist.
You probably noticed that I’ve got some extra indicators on my charts. These help me time my trade entries and more. As I’m typing these words, my programmer is finishing up the indicator package for TradeStation, Esignal, TOS, Sierra Charts, NinjaTrader, and more. If you jump over to the website, and download the scan, I’ll send you an email when the indicator package is ready:
And - if you’d ever like to say hello, I’d love to hear from you. You can text me anytime at 1-304-281-8332 - and let say hello, let me know you read the ebook, and tell me where you’re from.Get My Done-For-You Stock Scan and Indicator Here