Today's Quote: “The quality of our expectations determines the quality of our actions.” Andre Godin.

There are several good books out there about trading that should be on every trader’s must read list. If you were forced to choose one and only one, the only possible pick would be “Tools and Tactics for the Master Day Trader”. We are going to run a series of excerpts from the best selling book for the next series of lessons. Now in the words of the master trader himself, Oliver L. Velez…

SECRET #12: PLAYING EARNINGS IS A GAME FOR NOVICES

If I have said it once, I've said it a thousand times. Earnings reports don't move stocks. It's the expectation of earnings that move stocks. Too many novice market players miss this point. And because of it, they find themselves frequently perplexed as to why some stocks actually rise on bad earnings and some fall on good earnings. The key point every master trader knows is that the market is a discounting mechanism. It will attempt to anticipate what each report will say. The anticipation of positive results will help bid stocks up in advance of their reports and the anticipation of negative results will cause many stocks to drop before their reports. The master traders also know that those stocks, which have risen very sharply in advance of their reports, are the most susceptible to a decline when the report is out, even if it is positive. Why? Because the positive nature of the report was expected and lacked the element of surprise. Of course, if the report comes in negative right after the stock has been bid up, the stock will plummet. The reverse of this scenario is also true.

MASTER TRADING TIP

The master trader is always looking to sell positive facts. Why? Because facts, such as a company's earnings results for a prior quarter, are events staged and packaged for the public. These eagerly awaited facts almost always cause large crowds to act in one direction. This is why the master trader, who tries never to act with the crowd, will often sell positive facts against the crowd, especially when they are positive facts that were expected to be positive. Buying during the anticipation period in order to sell to those who buy during the factual period is the modes operandi of a true master trader. This approach does not always capture the biggest gains, but as we've said before, home runs are for losers.