2 Unsophisticated strategies, what do you think?

[SuitedSixes]

My wife has an e-trade account with about $3k in it that she has me make the decisions on. I am coming at this from a compounding interest type of standpoint where I make many small, repeatable, profitable transactions. I have used this strategy so far:

Buy shares in a company that has just announced a split, is about to split, or has just split, hold on to them until they go up 3% and sell. (I would eventually like to do this with options and increase the % of target profit). This has been taking 3-5 days on average to complete.

This has been a good strategy so far, but there are not always companies available that meet this criterium, therefore I am looking for another strategy. What I was thinking about was investing in companies that have had announcements of aftermarket upgrades from "buy" or to "strong buy" first thing in the morning and hold on to them until close to the close of the market and sell them, rinse, lather, repeat.

Any thoughts or suggestions? Thank you in advance.

[ctv1116]

You can try the upgrade strategy if you like, but most of the price increase will be factored into the openning price the next day, the price you will be paying for the stock.

[Sniper]

Stock Split startegies can be good.

Playing based on Analyst upgrades/downgrades is not.

Analysts are more often than not wrong, and their changes usually occur after a stock has already moved. There may be very short term scalping opportunities in pre and post market trading, but this is like the wild west and definately not for beginners.

[StickyWicket]

You're going to run the risk of establishing a patterned day trader practice, and then BAM-they're going to make you deposit $25k...FYI and FWIW:

On February 27th, 2001, the Securities and Exchange Commission (SEC) approved amendments to NASD Rule 2520. These amendments modify margin requirements for individuals who actively daytrade stocks and become effective on September 28th, 2001.

While the recent amendments largely focus on "Pattern Day Traders" (i.e. active intra-day traders), we feel it is still very important for anyone who trades the markets to review these changes.

Following are key points to keep in mind regarding this rule change:


1. Your broker and/or the NASD will consider you a "pattern daytrader" if you buy and sell (or short and cover) any security on the same day in a margin account AND you execute four (4) or more such trades during any rolling five business day period (Saturday, Sunday and market holidays do not impact the five day rolling period).

2. If, at any time, you execute four (4) or more such trades in a rolling five day period, you'll then be required to maintain a minimum equity of $25,000 in your margin account prior to any further day-trading activities. This may also impact other investing in the account as well (check with your broker).

3. At some brokerage firms, if you meet the "pattern daytrader" requirements and maintain a margin account of at least $25,000 as required, you will be extended buying power of up to four times your maintenance margin excess. Keep in mind, however, that this buying power is limited to intra-day trades only and you must be flat by the end of the trading day or your account will close trading at 25% equity (resulting in a house/margin call).

Sticky [img]/images/graemlins/heart.gif[/img]

[Sniper]

As I've already stated, trading on analyst recommendations is not a good idea.

As for the day trader rule, he can get around that by only intraday trading 2 days each week.

However, another reason why intraday trading with 3K is not a good idea, is commissions. With only 3K to trade, the commissions will be quite significant compared to your potential return.

[SuitedSixes]

Is the day trader rule a factor if I am not trading on margin? I am currently not trading on margin, and really don't intend to (especially if trading options).

When factoring my 3% target sell price I include the commission (currently $9.99 each way).

At the beginning of this strategy, the commission is a noticeable percentage but as the wonder that is compounding interest takes over, it will be a smaller and smaller percentage.

[Sniper]

[ QUOTE ]
Is the day trader rule a factor if I am not trading on margin?

[/ QUOTE ]

The day trading rule becomes a factor if you trade intraday (ie in at the open out by the close), regardless of whether you are using margin or not. If your account is labled as a pattern day trader (4 intraday trades in any rolling 5 days), the 25K limit restriction goes on your account, which means you will not be able to trade until your equity goes above 25K.

[ QUOTE ]
I am currently not trading on margin, and really don't intend to (especially if trading options).

[/ QUOTE ]

Options are not marginable in any case.

Also, intraday option trading your suggested strategy holds even more risk. For an option to show a profit, generally you need a stock to make a strong move in a short period of time. If the upgrade/downgrade was going to cause a large move, its most likely already occurred in premarket. Also the option pricing model includes volatility which would most likely be juiced on any gap open from an analyst comments, so the options would most likely be overpriced at the open, and likely lose value regardless of what the stock did the remainder of the day. With options, you are also dealing with a wider bid/ask spread and slightly higher commissions.

[ QUOTE ]
When factoring my 3% target sell price I include the commission (currently $9.99 each way).

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Just how many 3% intraday moves (not including gap openings from the previous close) do you think there are in a typical day?

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At the beginning of this strategy, the commission is a noticeable percentage but as the wonder that is compounding interest takes over, it will be a smaller and smaller percentage.

[/ QUOTE ]

Correct, but you asked about a strategy you are thinking of employing NOW, with a 3K port. My comments would be different if you were thinking of doing this with a 30K port.

[SuitedSixes]

Sorry, I didn't make this clear. I have no expectation of doing this multiple times in a day. I have neither the time, training, nor desire to spend more time on this than finding a stock that has a reasonable expectation of showing a small profit over a day to three days.

Here is an example that got me thinking of the strategy:

7/21/05 VDSI was upgraded to 'buy'
When the market opened on the 22nd I purchsed 305 shares at $11.18.

During that day, VDSI reached (I think $11.48).

I sold my shares on 7/25 for $11.58 for a profit of $101.87. That is small potatoes, (but about $600/hr for my troubles). But could I have sold at the close of the market on 7/25 and found another similar situation to enter on 7/26? I am just looking for some similar strategies. That may be repeatable more than one every week.

[Sniper]

I think it was this comment from your original post that prompted the daytrading discussion...

[ QUOTE ]
What I was thinking about was investing in companies that have had announcements of aftermarket upgrades from "buy" or to "strong buy" first thing in the morning and hold on to them until close to the close of the market and sell them, rinse, lather, repeat.

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