Everyone knows that insider trading is illegal, but do you think that keeps it from happening? Of course not. Just because you’re not allowed to trade on insider information doesn’t mean you can’t trade on the telltale signatures that insider trading activity leaves. This can be quite profitable if you can detect it in a reliable way.
Some tools are very useful in detecting insider trading. For one, most of the better discount brokers aggregate the news for you. Be sure to use this valuable feature. Having scanning software that filters for price moves on volume is also vital.
You can suspect insider trading is going on when you see a strong price move in the stock picks you’re monitoring on increasing volume with no news about those stocks. This is the key to detecting insider trading. If the price goes up suddenly on good volume with no news, you really need to ask yourself “Why?” One possible explanation is insider trading.
To detect these strong price moves you should have scanning software that filters for price moves on volume. These scans should be run a number of times daily, focusing especially on early in the day. It’s also important to know that there is no significant “important news” to explain the price moves. Deciding what constitutes “important news” requires some experience. Of course, insider trading volume spikes can also happen toward the end of the day as well.
These happen in anticipation of important announcements after the market has closed.
When you see a price spike on volume, another thing you can check for is whether there is expected to be some significant “newsworthy event” about that stock in the next day or two. Examples of such “newsworthy events” include earnings announcements, announcements of research results, announcements from various kinds of industry-related conferences or any kind of imminent news item about the stock or the industry. This is another sure way of detecting that perhaps insider trading is going on.
Once you’ve detected this possible insider trading, the next question is what to do about it. How and when do you enter the trade? Here is where some experience comes in at detecting what insider trade price moves look like. You can develop this experience by studying price charts that show evidence of insider trading. With some good scanning software you can detect these kinds of price movements.
Finding a good entry point is half the battle, but finding the right exit point is actually even more important. You have control over when you enter the trade and which stock you pick, but once in it, you need to find the exit for that particular stock.
Often, insider trading will plateau, and also perhaps you’ll suddenly find that there is a newsworthy event that could explain the insider trading. This is how you find the exit point. So, exiting insider trading trades is a great example of buying the rumor, which in this case is unexplained strong price movement on high volume and “selling on the news.” This is to say, when the news comes out, the party’s over, and it’s time to go find another trade.
So, as you can see from these tips, riding on the coattails of insider trading can be quite profitable with the right preparation.
Doug Newberry founded Investing Systems Network. He is also its Director. Investing Systems is a vibrant company with more than 20,000 customers who hail from more than 70 countries. These customers use the tools and services they get from ISN to become better, more disciplined investors. To learn more about insider trading, go to Stock Picks.
Note By John:
I like Doug's article. You can pick up on insider trading, and it can be quite profitiable. I've used it myself on occasion. But you have to use caution, I've been burned by this before. But if you see a spike, on high volume, you can ride it. This is a good trade for options, small potential cost, large potential return, short time frame. Usually only a couple of days before the news breaks and the option price rises pretty quickly. Keep in mind, that if the price drops on high volume with no news, the insiders are bailing on the stock. Get a short term put. For more information on trading stocks, check out my website at www.Trade-The-Stockmarket.com
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