In this section I am going to explain what I look for in stock for both day trades and swing trades. Along with how long I hold for, how I determine my entry points, how I set my stops, and what I look for as a selling point.
First off I should tell you my goal. My goal is not to buy the perfect bottom, nor sell the perfect top. In fact I try NOT to buy the bottom. And the top is a tough place to unload shares. If I do it, cool, but there's no reason to get too excited over such a trivial thing. My goal is to buy the confirmed uptrend/breakout and sell when it stops moving, it's that simple.
For you to fully understand my methodology there is a major misconception you are going to have to overcome. The misconception is: "it's good to buy stocks that are at lows." This is completely false. The best stocks to own are stocks that are making new annual highs. "Why," You ask? Because those are the stocks that are in demand. Most people have a hard time buying stocks that are up big, but let me pose two questions that will hopefully help you understand why you should be buying these stocks.
I don't remember what year(s) furby's were big, some time in the nineties
If I remember correctly. They were selling for ridiculously high prices at that time
and those prices only seemed to go up didn't they? Now what does a furby
Cost? A few dollars? So would it be smart to load up on furbys today in hopes
that they'll soon be in demand again? No. So why would you buy a stock that is no
longer in demand?
Second question, or rather situation. In 2005 you could have bought dell at the 52 week
Second question, or rather situation. In 2005 you could have bought dell at the 52 week
low at the price of $29.40. The biggest rally following that was to $30, a whole .60 gain.
Today you would be down about 38%, and it has recovered a lot of what it lost.
The point is, there is a reason the stock you are looking at is so cheap, nobody wants it. So why do you? Now lets take a look at the reverse. In early 2010 NFLX was at an all time high of about $62.25. You could have balked at it and said it was too expensive, but over the next year and a half, it would rally to the price of almost $300, a price gain of over 470%. And it NEVER dipped back below that initial entry price.
Of course, you shouldn't just go out and buy every stock that is making new highs, there are rules and guidelines you'll need to follow to make sure you weed out the weak stocks as best you can.
My Strategy
Of course, you shouldn't just go out and buy every stock that is making new highs, there are rules and guidelines you'll need to follow to make sure you weed out the weak stocks as best you can.
My Strategy
When I do my nightly scan of the market there are two things I look for; breakouts and volume. When these two things are combined I almost always win. If I have one of them, I will do okay, but both to me means buy!
Buying- I buy stocks when they break out on good solid volume, I don't care what the company does, if the big institutions want it, I want it.
Buying- I buy stocks when they break out on good solid volume, I don't care what the company does, if the big institutions want it, I want it.
Breakouts- The breakouts I look for are many. I look for stocks that are breaking out of downtrends (breaking a trendline). I look for stocks that are breaking resistance (which are previous points where a stock has consecutively held above, or long term moving averages). I look for stocks that are breaking out to new highs. And I look for stocks that are breaking out of bases. (I will post charts of what each of these breakouts look like)
Volume- Volume is paramount. It tells me how committed the stock is to the breakout. With a trendline or resistance breakout I look for at least 25% more volume than the 20 day avg volume. Higher is better. With base breakouts I'll look for 25-50% more, depending on other factors of the stock. Stocks that are breaking out to new highs need to impress me, they need at LEAST 35-40% more volume than the 20 day average. The reason is; if a stock is breaking out to new highs I need to know that the big institutions are the ones pushing this higher. They're the ones that can move a stock from $50 up to $100+ in a short amount of time.
Selling- I watch two things when looking for a sell point, loss of volume and a break of the trend.
Volume- I watch the volume and price action, if the volume melts away but the price continues up I'll continue to hold, but once that volume starts melting and the price along with it, I'm out. Now, it should be noted that I usually play the options, so I have to be a little more nimble than someone just playing the stock.
Breaking the trend- after a stock has been in an uptrend for a few days it will have some good solid trendlines to work with. When the stock breaks down through these it usually means its time for some consolidation or correction.
Breaking the trend- after a stock has been in an uptrend for a few days it will have some good solid trendlines to work with. When the stock breaks down through these it usually means its time for some consolidation or correction.
Swing Trades- When I swing trade a stock that means I will be holding at LEAST overnight, or until it stops running, whether that is a week or months down the road. If I am playing the options side and its a good runner, if I start coming up on my options expiration I will roll my options into a later expiration or just sell and move on, just depends on how I feel about the stock.
Day Trades- When I say I'm looking for a day trade I may hold it for five seconds or a few hours, and on the rarest of occasions, overnight.
Day Trades- When I say I'm looking for a day trade I may hold it for five seconds or a few hours, and on the rarest of occasions, overnight.
Stops- I look for the nearest support (on daily chart for swings, 5m chart for day trades) and use that as my stop most of the time, once in a while I'll go back to the support below that, but there has to be good reason. ALWAYS STICK TO YOUR STOPS, ALWAYS!!!!!!!!!!!!!!!!!!!!!!
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