Tuesday, December 14, 2004

Insider Buying

In the past month I've alluded to my stock day-trading system without discussing many details. I'd now like to explain some of the technical aspects, in case any of you reading this are going to set yourselves up for day-trading. What follows is my technique for day-trading Insider Buys.

The concept behind my insider trading is to take advantage of the SEC "Form 4" filings that describe insider transactions in publicly traded companies. The SEC web site runs all through the day with new filings showing which insiders are buying what company's stock. Once that information hits the market, the underlying stocks are often good for anywhere from a 2% to a 10% "pop" in a matter of minutes, hours or sometimes, days.

In order to trade these pops, you need to gather, organize and recognize these insider transactions and then get into the stock before it has popped too much. There are a number of commercial services set up to do just that for traders, some of them are even advertising on this blog. Each one provides a similar service, presenting the essential information you need to trade these pops, although they differ in formats, approaches and cost. Most offer trials of varying lengths to try out and see if it works for you and your trading style. I've tried a number of these services and have been using SEC Analytics because I like their format, speed of posting and ease of use.

SEC Analytics takes the SEC published filings and publishes them almost simultaneously on their web site. The table at the site refreshes itself every five seconds. When a new Insider Buy hits, I quickly discern whether it is likely to pop the stock. For example, a CEO buying $100k of a low cap tech stock will almost certainly pop the stock, usually significantly. A Director buying $5k worth of Cisco usually will have no effect on Cisco's stock price. SEC Analytics, as well as many of the other Insider Buying services provide background information on this type of trading, what insiders are best to monitor for influencing stock pops with their buying and what purchase amounts will most likely move the stock.

As pointed out above, there are a lot of Insider web sites providing this kind of service, which implies that there are a lot of traders participating in insider trading, all keying off of these Form 4 filings. I like SEC Analytics because they are timely, have a well formatted table for identifying new trades, offer a free trial for newcomers and maybe most valuable of all, they have a real time chat room where these trades are discussed by not only SEC Analytics but other subscribers to the service. Although SEC Analytics is designed for the short-term trader, some of the other services are longer term oriented and some do all the work for you, narrowing the process down to one or two insider picks a month.

The beauty of day-trading though is that you are only in these stocks intra-day and usually are in cash overnight. All you need are two or three decent trades a day, averaging a few percent each, to generate a very respectable monthly return. Of all my day trading techniques, Insider Buying ranks at or near the top in terms of percentage wins and average percentage profits per trade. If you're going to start day-trading, this is where to begin.

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