Forward Looking Strategies to Trade Equities

Forward Looking Strategies to Trade Equities

The goal of any trader is to make as much profits as possible in the financial market. To achieve this, traders spend considerable amount of time studying the market and the strategies to use. Luckily for them, there are many instruments which traders can trade with today. These instruments/assets include: equities, indices, currencies, commodities, derivatives, bonds, and futures among others. Trading these assets is quite different because each of them has its own features. For instance, in currency trading, people who trade emerging market currencies face a liquidity problem. On the other hand, bonds are not efficient for day traders because of their marginal increments. In this article, I will explain quality day trading strategies for day traders.

Consolidation

As a day trader, one thing you can always do to maximize your returns is to look out to consolidation (Mergers and Acquisitions). When a company announces a bid for another company, the market reacts in favour of the company being acquired. In addition, in many times, when the announcement comes, shares of the acquirer tends to go down. Therefore, in this situation, there are two ways a trader can benefit: shorting the acquirer and buying shares of the company being acquired. The logic here is simple. Shareholders of a company being acquired will only accept a premium for the sale process to go through. Say company A (trading at $56 a share at a market capitalization of $2 billion), and company B wants to buy it. The only way this transaction can go through is if company B offered a premium (such as $65 a share).

On the other hand, for this sale to go through, company B will need to spend or borrow money which will increase its costs. Since no investor likes this, the company’s shares will head south, opening an opportunity for shorting.

A good example of this situation happened yesterday (16th September) when AB InBev made a bid to buy SAB Miller at a deal valued at more than $100 billion. After the details leaked, a trader made more than $1.6 million according to Bloomberg.

Activist Investors

Activist investors are now changing the way companies are managed in many parts of the world. An activist investor starts by spotting a company and researching about it. After this, the investor goes ahead and buys a significant stake in the company if he feels that it is either being mismanaged or it is ripe for consolidation. After making the purchase, the investor will put pressure on the management to change strategies.

As a day trader, following activists can be very lucrative because shares of the companies they have announced ownership tends to go high. For instance, according to Bloomberg, shares of a company called Mondelez went high after activist investor Bill Ackman announced ownership. In 2014, shares of Apple went high after activist investor Carl Icahn announced stake.

Activist investors are not always bullish on certain companies. In July, activist investor David Einhorn gave a talk at the 20th Sohn conference. In his talk, he talked about fracking companies and singled out Pioneer Resources. He noted that these companies were not sustainable in this period of low oil prices where they lose $0.2 for every dollar invested. As seen in the chart below, shares of Pioneer Resources tanked by more than 2.66%.

Earning Season

Listed companies are mandated to release quarterly results by the SEC. This earning season presents an opportunity for traders to understand how the company has been doing. It also serves as a good opportunity for the company to issue estimated financial information. In addition, when releasing the results, the senior management responds to questions raised by analysts.

This provides an opportunity for traders to make short term gains. In many cases, the company’s shares will go up if the company announces good results and guidance thus opening an opportunity to go long. On the other hand, if the company’s prospects are not good, the shares will tumble creating a short opportunity.

A trader therefore needs to understand a number of things. One, he needs to understand when the company is expected to issue quarterly or full year results. Second, he needs to understand the expected results in terms of EPS (Earnings per Share), and revenue. Third, he needs to understand the ‘trigger’ points. The ‘trigger’ point represents the key metrics that investors will be looking at. A good example in this is Facebook.

It is possible for a company like Facebook to go south even when they issue strong financial performance in terms of revenue and EPS. This is because investors are looking at other metrics such as active monthly users and revenue per user.

In conclusion, it is possible to run a successful day trading account with a focus on stocks. A number of successful hedge funds have used this strategy to make a lot of money. In fact, as a day trader, using the traditional long term investing could hinder you from maximizing the full potential of the account.