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As you all continue to learn the ITMS Methodology, I felt it was important to go over the Three Day Rule. This rule was developed to increase the success of InTheMoneyStocks members. It is something I use constantly and has saved me hundreds of thousands of Dollars.

ITMS Three Day Rule: Anytime news breaks, whether positive or negative, allow three days to pass prior to buying or shorting the stock.

Reasoning: After good or bad news, money will flow into the stock or out of the stock for three days due to margin calls and institutional involvement. Buying or shorting prior to three days is an easy way to lose money. Amateurs buy on the initial drop or the initial pop. Pros wait and re-evaluate after three trading days.

Example: A stock gets crushed on earnings. It gaps down 50%. The average investor thinks it is a steal of a deal and buys. The stock continues to sink for the next few days. It may fall another 10-25% or more before it reaches a bottom and bounces.

Why this happens more often then not: Hedge funds and institutions will sell millions of shares. This cannot be done in one day. In addition, margin calls will be issued. This can take days to be dealt with.

Buying a huge gap down or shorting a massive gap up is a fools trade with no more than 50/50 odds of success.

A recent example of this is Crocs, Inc. (NASDAQ:CROX). This stock reported a horrible quarter. It opened lower on the morning of the October 18th, 2011 at a price of $17.25. This was a gap down of 35%. While average traders may buy it, the ITMS Three Day Rule tells us not to. After three days, re-evaluate.

As the chart shows below, it went lower for three days following the initial gap. Today, it finally found some support on the chart. Amateur traders that bought on the initial gap lower would be down another 12% while intelligent ITMS member would now be re-evaluating the trade.

The ITMS Three Day Rule is something to always keep in mind. Naturally, when we see a drop like CROX we want to buy. Avoid it. The key is to only take trades where you have the advantage in a major way. Understanding margin selling and institutions through the ITMS Three Day Rule will help you profit for life!

Note: CROX is not a buy or short here. It is purely an example of the ITMS Three Day Rule saving investors and traders money.