Growing up playing card games, I never had much of a poker face. I feel like all of my friends and family could tell what I was holding and knew when I was bluffing. The same could be said when my mom asked me if I cleaned my room. The successful poker players I know have always told me that they have made more money sitting than playing their hand. I believe the same strategy can be done to maximize your success in trading. In today’s article, I’m going to be breaking down the importance of quality over quantity and giving you the steps I use if I’m thinking of entering a trade.
Initially starting out, I was day trading to gain most of my income. This is a highly speculative form of trading and involves buying and selling a stock within the same trading day (often in an hour or less). The amount of trades I was executing was enormous and it was highly stressful because you are trying to take profits in a short window of time. As time went on, I began to realize that I was not cut out for this form of trading and found much more success when I focused on quality trades. This involves not chasing stocks, waiting for the perfect price breakout, and not getting emotional with trades.
What to look for in a Trade
- Stocks I know
There are thousands of companies to invest in and you do not have to know what all of them do to be successful. I like to look at stocks who are popular (trade with lots of volume), whose business models understand (I know how they make most of their money), and who are in an industry that is currently experiencing growth. Stock’s prices, just like the market, are cyclical. There will be times when their stock is climbing and other times when it is declining. I like to take advantage when these price trends reverse their course. This leads to the next topic of charting patterns.
- Charting Patterns
The approach I use to select stocks first involves looking for charting patterns that predict a breakout in price such as channels and wedges. These patterns will indicate that a stock has been trading in a certain downward range and a breakout is expected if it breaks the trend.
Downward Channel Price Breakout.
Wedge Pattern, Could See Price Breakout with IPI.
As I stated before, I looked for stocks who are popular and trade with a lot of volume. These are your Disneys, Apples, Facebook, NFLX, Google, Twitters. The key is that I want there to be great positive volume on the breakout of the charting pattern.
This breakout with positive volume greatly increases your chances of success. This volume should be more than the average over a month period. Monitor volume from that point on to see how long the trend will continue. If the stock is continuing to move up with above average volume, the trend is likely to continue. If the stock is moving up with below average volume, the trend is like to reverse to taper off.
Lastly, I look for stocks that are oversold with no real news behind the reason for their decline. Some news might come out that is extremely harmful and impactful to the stock. In these cases, I prefer to avoid the stock because of the negative PR. I like to find stocks that have declined naturally and are due for a reversal. These prices will often be found with the charting patterns that I mentioned previously. You can also look at a stocks 52-week average as a good indication of how oversold it is for the time period.
**If you are trading options, the contracts on these stocks should be CHEAP since the stock is oversold. ALWAYS look for cheap option contracts on these stocks***
In order to get into a trade, I need ALL of these things to occur! If one part does not line up, such as poor volume on a wedge breakout, then I WILL NOT place an order for the trade. You have to learn to be picky and never chase something that you think has already taken off. There will always be something else to play in the future. My best trades have occurred when all of these factors lined up.
Homework: Screen for stocks at finviz.com for the wedge and channel patterns with great volume. Look through the companies and see if there is any you recognize. From there, analyze their charts to see if they are on the verge of a price breakout.