Friday, May 21, 2010

Best Opportunities for Position Trades

I have found from my experience trading stocks and from researching past leading stocks that the best opportunities to enter leaders at lowest risk often come while the market indexes are still declining and many are scared to death to buy stocks.

The first and very important factor is stock selection. Selecting stocks with a combination of price momentum/relative strenght + any combination of the following: earnings momentum, sector momentum, catalyst like new product or industry shortage and/or low float/small capitalisation is the essential first step.

The second factor is timing. It is best to wait for the markets to correct for a few weeks. Even though the overall markets may sometimes still be correcting. True leading stocks form "bases" the shape of which have to be looked at within the context of the downtrend in the indexes and breakout on powerful volume when the markets bounce or on earnings announcements before the market indexes are any where close to confirming a new uptrend. This is when they should be bought whether or not the market indexes have shifted into a confirmed uptrend. The most important thing is that you have a stock with tremendous fuel showing that it wants to move higher despite the overall weakness and with a potential change in the trend in the indexes looming you have a trade with a tight stop and potential for profits in excess of 15 - 20R and sometimes even 50R+.

The third and most important factor is risk management. It is very important that you use a logical stop loss and sometimes cut losses even before your stop is hit if it turns out you are clearly wrong! The huge profit potential as outlined above means taking three or four 1 - 1.5R losses trying to get position is chump change. Because when you pile into one of these positions with your entire account you can double or even triple your account without even margin.

The fourth factor and possibly the most difficult for most people including my self is sitting with a profitable trade and sticking to a proven exit plan and not following your emotions to taking a premature exit. If you look at big winning stocks you will see that they do not move up in a straight line! The obvious implication of this is that you will have to hold onto your stock through pullbacks and consolidations. This can be very difficult especially when you are watching profits in your online account evaporate before your eyes. Yet this fourth step is vital if you are to enjoy any success with this strategy. This is why you need to throughly research your stock before buying so that you will have to conviction to hold onto it as long it does not violate any of your sell rules.

So that is the reason why I get aggresive trying to get position with stocks like APKT because I know I can easily double my account or more with the prudent use of margin. Clearly, this strategy is not for everyone. If you look at my trades. I usually end up with many more losing trades that winning trades. But a few of my winners are inordinately larger than my average loss. These are the trades that push my account to new highs.

My account is up around 35% since I started back trading in December 2009. This is with out any real big winning position trades. When I do land one or if I am lucky two of these types of trades my returns will be well past 100% - 150% for the year. These are the types or returns I am gunning for and not mediocre 20 - 25% annual returns which I am already beating!

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