trend trading stock, trading strategy

Last weekend I took a look at some relative risks between a few simple strategies. The most common strategy for the retail trader simply is a stock purchase with the belief that it will go up in price. As I mentioned in the last article, buying stock can be a fairly risky proposition since the investor could theoretically lose the whole investment. That relatively high risk does not mean an investor should not buy stock, it just means she should be aware of the risk and take some measures to reduce the complete risk. There are many ways to do that. One can set an alert and act to exit if the stock drops to a predetermined price, or a stop or trailing stop can be set. The investor could also buy protective puts. Whatever the decision, the specific exit strategy needs to be set before the position is entered. I'll write more on this subject in a later article.

One of the most frequently asked questions I get is how do you find a stock to buy. There are many factors to consider. While I consider myself primarily a technical trader, I also check fundamentals before entering most plays. If I am looking for a stock to buy, I want it to be moving in a bullish fashion. That means moving up on a longer term or a shorter term chart or both. If the stock is near some exit like a moving average or a trend line or a horizontal price support, I consider it worthy of further exploration. I like to see a potential reward to risk ratio of 2.5:1. I also prefer the stock be in a strong sector in a neutral to bullish market. If the technical entry looks decent, I'll check fundamentals. I am looking for a company that has a positive P/E, reasonable institutional support, that trades a minimum number of shares per day, and which has a debt picture that is not out of line with other stocks in the same sector. I also look at earnings to see how they are progressing (or not). Once the above checks are completed, I'll look at some of the other technical indicators I use like MACD as well as some other proprietary combinations before finally pulling the trigger.

As I look at various stocks that I like, I'll put them on watchlist(s) that I can check on a daily basis to see if I find an entry I like. I also place alerts so that when stocks on these lists hit a specific technical level I am informed and can decide whether to act. I also have developed certain proprietary scans that I use depending upon the type of trade I am seeking. Overall, I find that most retail traders look at far too many stocks. A list of no more than 100 is probably more than enough for a day as long as you are regularly eliminating those candidates that are no longer within a reasonable range and adding a few that are in the area. Such a scan might include all stocks that are optionable, have a minimum daily average volume over 300,000, have earnings that have increased quarter over quarter, a P/E that does not exceed 35, are priced between $15 and $50, and have recently crossed above some moving average (e.g. 25 day or whatever suits your time frame). Such a scan will drastically reduce the universe of stocks with which you are dealing and can, of course, be refined to suit your own needs.

Good Trading!
Bill Kraft

Mr. Kraft's past articles are posted on our website for your review.

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