/pead-screener

PEAD Entry and Exit Rules

Entry Rules

Primary Entry: Red Candle Breakout

• Trigger: Weekly candle closes above the red candle's high on a green candle (close >= open)
• Entry Price: At or slightly above the red candle high
• Confirmation: Volume on the breakout week should be above the 4-week average
• Timing: Enter after the weekly close confirms the breakout (end of Friday session)

Gap Minimum Requirement

• Minimum 3% gap-up on earnings day to qualify as a PEAD candidate
• Larger gaps (5%+) generally indicate stronger earnings surprises and more persistent drift
• Gaps below 3% may represent noise rather than genuine earnings surprise

Pre-Entry Checklist

1. Earnings gap-up was at least 3%
2. A clear red weekly candle has formed (not a doji or inside bar)
3. Current weekly candle is green with close above red candle high
4. ADV20 (20-day average dollar volume) is at least $25M for adequate liquidity
5. Stock price is above $10 to avoid penny stock volatility
6. Within the 5-week monitoring window from earnings date

Exit Rules

Stop-Loss

• Level: Below the red candle's low
• Type: Hard stop (not mental stop)
• Rationale: If price drops below the red candle low, the pullback pattern has failed and institutional support has broken

Profit Target

• Primary Target: 2R (2x the risk from entry to stop)
• Calculation: Target = Entry + (Entry - Stop) x 2.0
• Example: Entry at $100, Stop at $95 (5% risk) -> Target at $110 (10% gain, 2:1 R:R)

Trailing Stop (Optional)

• After reaching 1R profit, move stop to breakeven
• After reaching 1.5R profit, trail stop at 1R below current price
• This locks in profits while allowing the PEAD drift to continue

Time-Based Exit

• If the position has not reached the profit target within 4 weeks of entry, consider closing for a scratch or small profit/loss
• PEAD drift weakens significantly after 6-8 weeks post-earnings

Position Sizing

Risk-Based Sizing

• Risk no more than 1-2% of portfolio value per trade
• Position size = (Portfolio x Risk%) / (Entry - Stop)
• Example: $100K portfolio, 1% risk = $1,000 risk budget
  • Entry $100, Stop $95 = $5 risk per share
  • Position = $1,000 / $5 = 200 shares ($20,000 position)

Liquidity-Based Constraints

• Never take a position larger than 1% of ADV20 (20-day average dollar volume)
• This ensures the position can be exited within a single day without significant market impact
• Example: ADV20 = $50M -> Max position = $500K

Portfolio-Level Constraints

• Maximum 3-5 PEAD positions simultaneously
• Diversify across sectors to avoid correlated earnings risk
• Reduce position size if multiple PEAD trades are open

Monitoring Window

Duration

• Default: 5 weeks from earnings date
• The PEAD effect is strongest in weeks 1-3 and diminishes by weeks 4-5
• After 5 weeks without a breakout signal, remove from monitoring

Weekly Review Process

1. Check if a red candle has formed (MONITORING -> SIGNAL_READY)
2. Check if breakout has occurred (SIGNAL_READY -> BREAKOUT)
3. Review volume on the breakout candle for confirmation
4. Calculate risk/reward based on current red candle levels
5. Verify liquidity is still adequate for entry

Special Situations

Multiple Red Candles

• If multiple red candles form, use the most recent one for entry/stop levels
• Multiple red candles may indicate weakening momentum; reduce position size

Gap-and-Go (No Red Candle)

• Some stocks gap up and never pull back meaningfully
• These are not PEAD screener candidates (require red candle for defined risk)
• Consider alternative entry strategies if conviction is high

Earnings in Consecutive Quarters

• A stock that gaps up on earnings for 2+ consecutive quarters shows persistent fundamental strength
• These are higher-conviction PEAD candidates when they form the red candle pattern