The stock market volatility has been unstable for the last two days. The ^VIX (Volatility S&P500) was holding the last couple of days at 20, but it gained 20% yesterday and climbed 60% today. The VIX shows an investor how much uncertainty there is in the markets. As it increases, so does the uncertainty on Wall Street.

For the last few months, I’ve been writing on my other blog, Beating The Stock Market, about how the markets were going to turn ugly, and informing my readers to sit patiently on the sideline to prepare for a day like today. I’ve mentioned how when a sell off like this happens, there is always too much selling of any and all stocks. Other investors are too busy saving their own skin to realize that so many more are doing the same. Causing the price of most stocks to fall below or close to the company’s “book Value”. To figure a company’s book value, look at the shareholders’ equity minus all intangible assets. This will give you in theory, the value of the company’s tangible assets, also known as “net tangible assets. There are plenty of stock market books as well as stock market trading software to assist you in learning more about book value.

The big sell-off started just after 2:30pm and the DOW fell below the 10,000 mark around 2:45pm at which point investors realized that too much selling had occurred, at which point it was time to put in Limit orders to start acquiring more shares. After the DOW and the S&P 500 fell 10%, I started to buy. I may have been a little early but it’s fine with me. I typically wait for the markets or an individual stock (one that I’ve researched) to fall 8% before I buy more shares or start a new position. That is one of my stock market strategies to help me make more money.

Today was a great day to make some quick money in the stock market today, If you’re a day trader, I’m sure you jumped out of those position before the end of the trading day, but if you’re an average investor, be prepared to sell off those share real soon. Like I also stated on my other blog, I expect the markets to fall much further than it did today.

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During the time that I was working full-time, I didn’t have time to sit and watch the tickers during the day’s trading hours. I would sit home at night and catch up on the day’s news and do research on the stocks that I was interested in buying. If there were stocks that I decided to buy, I would set up a limit buy order, which was typically lower than the stock’s closing price. The next day after work I would come home to see how my trades went.

After I stopped working for someone else, I started spending more time during the day tracking the activities of the day’s events on Wall Street. I would be able to keep closer tabs on what was going on and react when I thought the time was right and the opportunity was good. I also started to take Jim Cramer more seriously.

I started to notice that my gains weren’t as good as they were when I was working. I wondered what was the problem. I took a little while for me to realize I had changed my trading strategy, without meaning to.  Since I was able to watch the stock market more closely, I was also exposed to the constant fluctuation of the share prices.

For example, let’s say I was researching stock XYZ  and it had a share price at the close of the day of $20.65. I would set the limit order to buy at $20 per share. Since I was at work I never really saw how the price reacted throughout the day. Once the price dropped to my target, the sale would trigger at the point and I would have my shares at the desired price.

When I was home and watching throughout the day, I started to react to the minute by minute moves. Let’s use the same example of stock XYZ. If the price opened up at $21.05 and then for the first hour or so of trading it moved up to $21.35, I would think that others had seen the same good numbers on XYZ and were buying up as quick as possible. I would set a limit order at $21.25 just to grab it a little lower than where it was. Wouldn’t you know that after the stock climbed, it started to descend. It would go down below where it closed the day before and in some cases, go below the original limit order price of $20 per share.

What I was doing is what I refer to as chasing a stock. Chasing a stock will do nothing for you but make you lose profits and wait longer for a turn-a-run after you’re in the hole by a couple of percentage points. Granted, the stock I would get into would go up well above the $25 dollar range and I would still make a profit, but like I said earlier, my profits weren’t as big as before.

If you want to be successful in stock trading, you need to understand your actions first. Many people don’t realize that the individual’s emotional state will totally effect the profitability of your portfolio.

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It’s no different than a child who is growing up and learning about life. When you are new to something, it’s expected that you will make mistakes. The important thing about it is that you learn from those mistakes and move forward. One quote that I keep in mind every time I trade stocks is “Knowledge Is Power”. Knowledge is one thing that no one can take away from you. Once you know it, it’s a tool to be used again and again,  throughout your life.

What you do after you’ve made a mistake is just as important as learning from that mistake.

Let me tell you about my very first trade. I was trying to place an order with TD Ameritrade for 1000 share of a beverage company that had a earnings report coming out the following day. After I clicked on the confirm button, I waited for the transaction to go though. About a minute later the screen change and informed me that my order “timed out”. I didn’t know what had happened. My mentor and I decided that I should place the order again. I went through the steps again and wait for the confirmation, but again the order “timed out”. I went to my portfolio page and according to the page,  my balance was zero. Needless to say I went ahead and for the third time, placed the order, only to have it time out one more time.

My first mistake was that I didn’t call the customer service number to check out what the status was after the first attempt. The second mistake was not to call customer service when it happened again.

One would think that after three attempts to place the order, I would have wised up and called. Yes, you would think that but I proceeded to do it again for the fourth time. When it timed out on that attempt, I finally called to find out what had happened.

The customer service representative informed me that each time that I placed the order it was filled. So now I was the proud owner of 4000 shares of a company that was to be a speculative play. I had 50% of my portfolio money tied up in a stock that if it had a bad earnings report, I could be hit hard since the report wasn’t due to come out until after the close of the day.

The next day I watched the streamer all day long, waiting to see the action throughout the day.

At 3:50pm, ten minutes before the close of the trading day I was up $1 per share. If you do the math, I was up $4000 dollars. I had a bad feeling though and considered dumping the shares and call it a good day, but I didn’t do that.Another mistake. I didn’t listen to my gut instinct. Instead I listened to the advice of my mentor and made the decision to ride it out.

Do I really need to tell you what happened to me in the next 17 hours while I waited for the stock market to open up?

The report came out at 4:05pm and the company missed the street’s (Wall Street analysts) estimates by $0.04. Not only that,  they also stated that their guidance for the next quarter was grim. I watched as the stock price dropped down to my cost basis and continued to go south from there. By the time I was able to sell out of my position, I had lost $12,000.

That was the most expensive lesson I have learned up to this day. I realized that not only did I make one mistake, I made five in in a twenty-six hour period involving the same stock. The reason that I say the “lesson I have learned” is because I’ve never made any of those mistakes again. It’s been years since that trade, but it’s the one I will always remember.

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Earnings reports are quarterly releases that a company will put out to their shareholders to inform them of their progress over a period of time. The period of time is three months (henceforth, quarterly) where the company did business and either made or lost money during that time.
Along with them reporting their past three month performance, they also give guidance to where they believe the company is going.

Wall street analysts who follow the company will put together their estimates as to what they think the company will announce in regards to their earnings. They look at the company’s past report to see if their estimations were correct and also take into consideration what the economy is currently doing. They look at if the company has had a new product come out during that time and how well that product is moving. They will also look at the company’s competitors to see if they are taking business away from them.

After all the information is put together, they release their estimate on what the earning per sharewill be for the company. If the company’s report is in-line with the estimate, it’s looked upon as a good thing providing that the guidance for their next quarter is a favorable one. The company can also, what Wall street refers to as “miss” their earnings report, which means that they made less than what the analyst predicted. When that happens Wall street will look unfavorable towards that and you will see the price of the stock drop and in some cases drop a large amount. If the company “beats” the estimate and gives a great guidance report as well, you will see the price per share jump by a big percentage gain.

This is where you can make some big money within your portfolio.

In the fall of 2007 a company by the name of Research In Motion (NASDAQ:RIMM) was about to release their earnings report. If you’re not familiar with the company, they are the manufacturer of the BlackBerry cell phones. I was following the company for a few months already and knew the the report would be a great one. The company didn’t miss their last four earnings report and their phones were selling like crazy during the summer months.

I went ahead and bought 200 shares of the RIMM stock a couple of days earlier when the priced dropped for just a day and waited for the report. When the report was released, it not only gave a great earnings, but also stated that it would exceed their previous predictions for the next quarter. In that day alone the stock went up $12 per share and continued for to climb for the next two days.

The reason I shared this story with you isn’t to show off, but to let you in on the different ways to make money in the stock market. Like I stated in the beginning of this post, there can be some costly mistakes as well and I’ve lost thousands of dollars in some of my other earnings report plays. The only way that I feel comfortable with trading on the results of earnings reports is during a bull market. My advice is always to do your research and due diligence on every company that you want to invest in.

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