Catalyst Trading
Catalyst trading focuses on stocks experiencing significant fundamental news events that create momentum opportunities. This guide covers the Episodic Pivots methodology and related catalyst-driven approaches.
Core Philosophy
Catalyst trading is based on several principles:
- Information drives price — Fundamental news creates repricing events
- Gaps reveal conviction — Large gaps with volume show institutional participation
- Momentum persists — Initial moves often continue for multiple days
- Not all catalysts are equal — Quality and type of news matters
- Risk management is paramount — Catalyst trades can be volatile
The Episodic Pivots Strategy
Episodic Pivots (EP) systematically identifies gap-up stocks with catalyst-driven momentum potential.
Candidate Identification
The scanner filters for:
| Criterion | Threshold | Purpose |
|---|---|---|
| Gap % | 3%+ | Minimum meaningful gap |
| Volume | 1.7×+ average | Confirms participation |
| Price | $5+ | Filters penny stocks |
| Score | 3+ | Quality threshold |
Scoring System
Candidates are scored 0-12 points:
Gap Magnitude (0-3 points):
- 3%+: 1 point
- 7%+: 2 points
- 15%+: 3 points
Volume Confirmation (0-3 points):
- 1.7× RVOL: 1 point
- 2.0× RVOL: 2 points
- 3.1× RVOL: 3 points
Market Cap Bonus (0-2 points):
- Under $300M: 2 points
- $300M-$1B: 1 point
Technical Factors (0-4 points):
- Broke 20-day high: 1 point
- Broke 52-week high: 2 points
- RS > 1.2: 1 point
- RS > 1.5: 2 points
Catalyst Classification
Understanding the catalyst type informs expectations:
Earnings Surprise:
- Typical gap: 5-15%
- Duration: 2-4 weeks
- Often has follow-through on guidance
FDA/Clinical Results:
- Typical gap: 20-100%+
- Duration: 1-7 days
- Binary outcome, high volatility
M&A Announcement:
- Typical gap: 10-30%
- Duration: Days to weeks
- Often gaps to deal price
Analyst Actions:
- Typical gap: 3-10%
- Duration: 1-2 weeks
- Lower conviction signal
Market Cap Considerations
Research shows market cap significantly impacts EP behavior:
| Market Cap | Avg Move | Duration | Strategy |
|---|---|---|---|
| <$100M | 400%+ | 1-5 days | Hyper aggressive |
| $100M-$1B | 100-200% | 1-2 weeks | Momentum |
| $1B-$10B | 50-100% | 2-3 weeks | Swing |
| >$10B | 20-50% | 2-4 weeks | Position |
Entry Tactics
Pre-Market Entry:
- Riskier but better prices if successful
- Use limit orders only
- Respect pre-market highs as resistance
Open Entry:
- Wait for opening range (first 5-15 minutes)
- Enter on break of opening range high
- Stop below opening range low
Pullback Entry:
- Wait for consolidation after gap
- Enter on breakout from consolidation
- Lower risk, may miss fast movers
Position Management
Initial Stop:
- Setup type determines stop width
- Hyper momentum: 15% trailing
- Swing: 8% fixed or below key level
- Position: 8% or below structure
Signal Monitoring:
- Green: Trend healthy, hold
- Yellow: Tighten stop, consider partial exit
- Red: Exit triggered, close position
Profit Taking:
- Partial profits at 1× gap size
- Trail remainder with moving average
- Exit fully on breach
Volume Analysis
Volume is critical for validating catalyst moves.
Volume-to-Gap Ratio
Research-derived conviction metric:
VGR = Volume / (|Gap%| × Prior Close × Shares)
Interpretation:
- VGR ≥ 3.1: Strong conviction (78% success rate)
- VGR 1.7-3.1: Moderate conviction
- VGR < 1.7: Weak conviction (12% success rate)
Float Rotation
Volume relative to tradeable shares:
Float Rotation = Volume / Float Shares
Significance:
-
30%: Exceptional turnover, squeeze potential
- 10-30%: High activity
- <10%: Normal institutional participation
RVOL Interpretation
Relative volume by market cap:
| Market Cap | Typical RVOL | What's Significant |
|---|---|---|
| <$100M | 100-500× | Normal for EP |
| $100M-$1B | 20-50× | Shows interest |
| $1B-$10B | 5-10× | Meaningful |
| >$10B | 3-5× | Noteworthy |
Risk Management
Position Sizing
Catalyst trades require careful sizing:
Size = Account Risk% / Stop Distance%
Example:
- Account: $100,000
- Risk: 1% ($1,000)
- Stop: 8%
- Position Size: $12,500 (12.5% of account)
Correlated Positions
Avoid loading up on similar catalysts:
- Multiple biotech FDA plays
- Multiple earnings in same sector
- Positions that move together
Maximum Risk
Per-day and per-week limits:
- No more than 3 active EP positions
- Maximum 3% total account risk in EPs
- Reduce during volatile markets
Common Catalysts
Earnings
What to Look For:
- Revenue and EPS beats
- Raised guidance
- Positive commentary on growth drivers
Red Flags:
- Beat on cost cuts, not revenue
- Lowered guidance despite beat
- One-time items inflating results
Clinical/FDA
Positive Indicators:
- Phase 3 success
- FDA approval
- Expanded indications
Caution:
- Binary outcomes (can go either direction)
- News interpretation matters
- After-hours/pre-market volatility extreme
M&A
Characteristics:
- Usually gaps to near deal price
- Limited upside if at deal price
- Downside risk if deal fails
Contract Wins
What Matters:
- Size relative to market cap
- Revenue vs one-time
- Customer quality
Avoiding Traps
Low Volume Gaps
Gaps without volume confirmation often fail:
- Market makers moving price on low volume
- No institutional conviction
- Higher failure rate
Overnight News Reversal
When pre-market gap fades:
- Watch for price failing below VWAP
- Opening range breakdown is bearish
- Don't fight failed gap
Extended Entries
Entering after large initial move:
- Late entries have poor risk/reward
- Wait for consolidation or pullback
- Accept missing some moves
Performance Expectations
Typical Outcomes
Not all EPs succeed:
- ~50-60% of high-score setups profitable
- Average winner: 15-30%
- Average loser: 5-10%
- Occasional outsized winner (100%+)
Time Horizon
Duration varies by setup type:
- Day trade: Same day exit
- Swing: 2-10 days
- Position: 1-4 weeks
When EP Works Best
- Bull market conditions
- Risk-on environment
- Low VIX (volatility)
- Strong sector leadership