Trade Selection

Regular readers will have noticed that I have made significant changes in how I select trades over the last month or so. Here’s my method as of January 2018.

I’m looking at three metrics: The Zacks earnings surprise predictor (ESP) and the Zacks rank to assess the professional analysts’ opinion of the stock’s prospects, and the Fisher Transform trend metric to assess the trend, up or down, which is as indirect way of assessing trader and broader public sentiment. For this method, the Fisher is uptrending if its present level is higher than its one unit prior level on the daily chart and downtrending if the present level is below the one before. The trend is given on my spreadsheets as a 1 (uptrending) or a -1 (identical or downtrending).

The Zacks ESP is given as a percentage, and the rank as a score from 1 (bullish) to 5 (bearish).

I trade both options and shares, and in both cases I require that whatever I trade be followed by at least three analysts as reported by Zacks. That ensures that several experts are involved in reaching a consensus on the two Zacks metrics.

I trade several weeks before earnings are published, on the theory that stocks are going to have the most predictable moves in the run-up to earnings; as analysts publish their estimates, producing the Street consensus, traders  use that consensus to help determine their buy-sell decisions. More traders are interested, so there’s more movement in the price. As time passes, analysts revise their estimates, the price settles into a trend — analysts and traders, and the news organizations that report on the markets, have all fallen into a consensus that a trend follower can profit from. So my thinking goes.

What follows, of course, is the earnings announcement, which like many binary events produces outsized moves in unpredictable directions. So my goal is to trade before earnings but to get out before the announcement.

For shares, I’m looking for an uptrending profile, since the no-fee brokerage I use for shares trading, Robinhood, and indeed most brokerages won’t allow me to sell short on most equities.

An uptrending profile for shares looks like this:

  • An ESP above 1.0%
  • A rank from 1 to 3 (bullish to neutral)
  • An uptrending Fisher Transform
  • The diretoin of the Fisher Transform must math that of the ESP (both must have positive signs).

For options, I can make the full spectrum of trades, uptrending, downtrending or range-bound.

The profiles I require for the the uptrending options plays is identical to that of the shares trades.

For downtrending, the profile is this:

  • An ESP below -1.0%
  • A rank of 3 to 5 (neutral to bearish)
  • A downtrending Fisher Transform.
  • The direction of the Fisher Transform must match that of the ESP (both must have negative signs).

For the range-bound trades, the profile is like this:

  • An ESP between -1.0% and 1.0%.
  • A rank of 3 (neutral)
  • There is no Fisher Transform requirement, but I’m looking for a slow trend, with the line the chart moving at close to 90 degrees on the compass.

My preference is for trending options plays.

And that’s it. A symbol that meets one of those three criteria sets qualifies for the full detailed analysis that I do right before a trade.

By Tim Bovee, Portland, Oregon, Jan. 22, 2018


Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

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