How to play BAC breakout ahead of earnings safely
A common problem we're faced with when trading stocks is how to safely trade a stock that is breaking out right ahead of earnings. As we know, when a stock reports earnings, it is typically when it will be the most volatile. A stock can easily gap up or gap down +/- 10% or more!
BAC is experiencing this right now. It is breaking out...well, attempting to breakout, from an advanced pivot at 22.96. It has had a powerful move since the election of over 30% and has spent the past month consolidating on relatively light volume. All bullish signs.
After earnings, it is possible that BAC will gap up above the classic pivot at 23.39 so if you don't trade it here, you risk missing it. However, it can also gap down against you and you may end up with a loss that is greater than you intended. What's a trader to do??
The answer...position sizing!
I use a risk-based position sizing model that backs into the number of shares I can buy. I start with my entry price, my exit if I'm wrong, the percentage of capital I want to risk on the idea, and then I click calculate (here is a calculator I developed for position sizing: https://chartyourtrade.com/how-to-use-the-chartyourtrade-position-size-calculator/
Back to BAC...
If BAC were not reporting earnings in 3 days I'd use support #1 at 21.77 as my exit. HOWEVER, on a poor report, BAC could easily gap below this level and I'd lose far more than I had intended. Instead, I'd use Support #2 at 20.80 or the current 50dma. This is nearly 10% below the current price and allows for a test of the 50dma and 10wk lines.
What do you think of this idea? Let me know!
BAC is experiencing this right now. It is breaking out...well, attempting to breakout, from an advanced pivot at 22.96. It has had a powerful move since the election of over 30% and has spent the past month consolidating on relatively light volume. All bullish signs.
After earnings, it is possible that BAC will gap up above the classic pivot at 23.39 so if you don't trade it here, you risk missing it. However, it can also gap down against you and you may end up with a loss that is greater than you intended. What's a trader to do??
The answer...position sizing!
I use a risk-based position sizing model that backs into the number of shares I can buy. I start with my entry price, my exit if I'm wrong, the percentage of capital I want to risk on the idea, and then I click calculate (here is a calculator I developed for position sizing: https://chartyourtrade.com/how-to-use-the-chartyourtrade-position-size-calculator/
Back to BAC...
If BAC were not reporting earnings in 3 days I'd use support #1 at 21.77 as my exit. HOWEVER, on a poor report, BAC could easily gap below this level and I'd lose far more than I had intended. Instead, I'd use Support #2 at 20.80 or the current 50dma. This is nearly 10% below the current price and allows for a test of the 50dma and 10wk lines.
What do you think of this idea? Let me know!