How quickly you trade in and out of stocks has nothing to do with how profitable you are as a trader. It's about being disciplined and knowing what metric to use at the right time, and then putting that knowledge to work. To make you a better trader, here are 5 tips you are going to love.
Relative Strength Index (RSI): The Relative Strength Index or RSI is one of the best tools for buying into a stock at a good entry price. The RSI moves between 0 and 100. The RSI signals that a stock is overbought when it is above 70 and oversold when it is below 30. New traders have a tendency to chase stocks or buy high after an upward move has already begun. Never chase a stock higher. Instead, only buy a stock when it is oversold on the RSI. If you control your emotions and learn to master this technique, you will greatly improve your entries and your profits on a winning trade.
Find the catalyst: What is the story behind a stock that is likely to attract more buyers? Think of the catalyst as the rocket fuel that will make the share price go up. The company should have a website with recent news stories, that's where you will find the catalyst. Examples of catalysts might be: stronger than expected earnings, upgrades, positive news from the FDA, signing of a new deal, opening a new manufacturing plant, a company buyout, and a share buy back. The best way to get good at being able to spot a catalyst is to get a list of the top performing stocks for the day. What news item caused the stock to explode? Answer that and you will have identified the catalyst.
High beta: Look for stocks with a beta score greater than 1. The greater the beta score the better. How much a stock moves when the larger market moves is what beta tells you. You want a stock that can really move. It is unlikely that you will be able to buy a stock like Yahoo or Google and experience a 50% move or more in the stock over a 6 month period. Lower beta stocks are perfect for a more defensive, long term hold. But these stocks can not move up enough if you are a swing trader.
Sell on a stock offering: Sometimes a company will give shares to creditors when they need to raise cash. Stock offerings to raise cash are hated by existing investors. A stock will usually go down quickly on a stock offering announcement. A stock offering raises the number of outstanding shares. It is sort of like what happens to the U.S. dollar when the Treasury prints too much money. The more money that is printed the lower the value of existing dollars in circulation. This dilution also happens with a stock. The more the outstanding shares are increased, the more the stock value of every existing share in circulation is diluted. You want to be a shareholder in a company that is good enough at what they do and thus they have enough money from sales, to pay the bills. It is a red flag when a company has to issue more shares to pay the bills. You must sell a stock quickly if the company announces a share offering to raise cash. Do not try and hold on to the stock and wait it out. Often times a share offering is the last step before a bankruptcy filing.
Understand seasonality: Know what are yearly seasonal trends that have a tendency to occur every year. The most important seasonal trend is the best 6 months of the year and the worst 6 months of the year. The best 6 months of the year is from November to April. The months from May to October are the worst 6 months of the year. When the market hits a yearly low sometime between September and November, you want to starting buying stocks. When the market hits a high sometime between April and May, you want to sell your stocks and move to the sidelines and the safety of cash. This yearly seasonal pattern does not hold true every year. Nothing is certain when it comes to investing in the stock market. We can only deal in likely outcomes. The best 6 months and the worst 6 months takes place more often than not and so we seek to go with the greater probability. Between April and September, you should trade more defensively.
Relative Strength Index (RSI): The Relative Strength Index or RSI is one of the best tools for buying into a stock at a good entry price. The RSI moves between 0 and 100. The RSI signals that a stock is overbought when it is above 70 and oversold when it is below 30. New traders have a tendency to chase stocks or buy high after an upward move has already begun. Never chase a stock higher. Instead, only buy a stock when it is oversold on the RSI. If you control your emotions and learn to master this technique, you will greatly improve your entries and your profits on a winning trade.
Find the catalyst: What is the story behind a stock that is likely to attract more buyers? Think of the catalyst as the rocket fuel that will make the share price go up. The company should have a website with recent news stories, that's where you will find the catalyst. Examples of catalysts might be: stronger than expected earnings, upgrades, positive news from the FDA, signing of a new deal, opening a new manufacturing plant, a company buyout, and a share buy back. The best way to get good at being able to spot a catalyst is to get a list of the top performing stocks for the day. What news item caused the stock to explode? Answer that and you will have identified the catalyst.
High beta: Look for stocks with a beta score greater than 1. The greater the beta score the better. How much a stock moves when the larger market moves is what beta tells you. You want a stock that can really move. It is unlikely that you will be able to buy a stock like Yahoo or Google and experience a 50% move or more in the stock over a 6 month period. Lower beta stocks are perfect for a more defensive, long term hold. But these stocks can not move up enough if you are a swing trader.
Sell on a stock offering: Sometimes a company will give shares to creditors when they need to raise cash. Stock offerings to raise cash are hated by existing investors. A stock will usually go down quickly on a stock offering announcement. A stock offering raises the number of outstanding shares. It is sort of like what happens to the U.S. dollar when the Treasury prints too much money. The more money that is printed the lower the value of existing dollars in circulation. This dilution also happens with a stock. The more the outstanding shares are increased, the more the stock value of every existing share in circulation is diluted. You want to be a shareholder in a company that is good enough at what they do and thus they have enough money from sales, to pay the bills. It is a red flag when a company has to issue more shares to pay the bills. You must sell a stock quickly if the company announces a share offering to raise cash. Do not try and hold on to the stock and wait it out. Often times a share offering is the last step before a bankruptcy filing.
Understand seasonality: Know what are yearly seasonal trends that have a tendency to occur every year. The most important seasonal trend is the best 6 months of the year and the worst 6 months of the year. The best 6 months of the year is from November to April. The months from May to October are the worst 6 months of the year. When the market hits a yearly low sometime between September and November, you want to starting buying stocks. When the market hits a high sometime between April and May, you want to sell your stocks and move to the sidelines and the safety of cash. This yearly seasonal pattern does not hold true every year. Nothing is certain when it comes to investing in the stock market. We can only deal in likely outcomes. The best 6 months and the worst 6 months takes place more often than not and so we seek to go with the greater probability. Between April and September, you should trade more defensively.
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