In the article last weekend, I discussed some considerations
traders may want to ponder when deciding upon a vehicle to trade. We
looked at the idea of using ETFs to trade whole markets or sectors as
opposed to trading single stocks and noted the probable differences in
relative volatilities among those choices as well as certain comparative
risk issues. In this article, I am going to focus on some ideas related
to choosing individual stocks to trade.
Undoubtedly there are a myriad of ways to select a stock to trade.
We may have heard someone touting a particular stock at a cocktail
party, or we may have received a cold call from a broker, or gotten a
recommendation from our own broker. We may subscribe to a service or we
might have some scan or scans of our own.
While we might establish some ranking of the various ways to select
a stock, each has at least some merit. Although my general experience
with cocktail party or barbershop tips is that they are rarely to be
followed, there are times when they might put us onto something good.
The problem with many of those is that it is already late in the move;
perhaps too late to jump on board. One of the major problems I have
with broker suggestions is that they are often completely unrelated to
what I would consider to be a good entry, i.e. one that has a palatable
reward to risk ratio. The other problem I have with many brokers and
their advice is that they may call and say to buy, but it is a much
rarer case when they call to suggest it is time to exit.
I edit three alert subscription services, Trend Trader, Option
Trader, and $10 Trader. My publisher adds Success Trader, a Covered
Call Service, and a Dividend Service. In the case of my own services, I
am usually actually making the play I discuss in the alert shortly after
I send the alert to subscribers and I send additional alerts when I
place a stop loss order, exit the trade, or, in the case of Option
Trader, when I adjust the trade. The idea with these services is
definitely not to recommend a trade, but rather to draw the subscribers'
attention to a particular vehicle and show how I may utilize specific
strategies. The simple fact that I am making a specific trade, alone, is
not a sufficient reason for someone else to make the same trade. Their
goals, risk tolerance, available cash, etc. are likely to be different
from my own situation so they need to make their own analysis in light
of their own personal circumstances and plan.
The key for traders, in using any of these methods of selection,
including their own scans, is to recognize that it is just a beginning.
A trader must then make an analysis and decisions on his own about
whether the candidate fits their plan. As I discuss in detail "Trade Your Way to Wealth" , once a candidate is identified the trader, among
other things, must determine for himself or herself whether there is a
sufficient reward to risk ratio, what their exit strategy will be if an
entry is made, where a first target may lie, what capital to invest, how
risk will be managed, and what strategy to employ. In "Smart Investors Money Machine" , for example, I discuss a variety of strategies that
might be considered, all of which are specifically designed to create a
regular cash flow (sometimes weekly, sometimes monthly, or maybe
quarterly). Other strategies discussed in "Trade Your Way to Wealth"
may be used to attempt to capture gains in up, down, or sideways moves.
The point is that merely selecting a candidate, whether through a tip,
an advisory service, or one's own selection methodology is only a first
step in identifying a trade. The successful trader makes several other
very important decisions before ever pulling the trigger.
When I'm asked how I find a specific stock to trade I often reply
that is one of the least of my worries. My first concern always is
where will my initial exit be in the event I am mistaken on direction.
Once the initial exit and exit strategy are determined, I want to see
where the first level of potential reward appears to be. Those factors
are more critical for me than what stock I use. I should hasten to add
that though I am aware of fundamentals when trading, technicals form the
discipline for my trades and I try to let them control my actions.
Good Trading!
Bill Kraft
Success Trading Group -- by Success Trading Team
Our Success Trading service delivers quality trading ideas for the elite investor that has the financial wherewithal and market nimbleness to profit on small moves in a stock's price. Become a member and you will be provided with email and/or PDA alerts intended to provide you with the opportunity to make many, many profitable trades.
Here is a play from the Success Trading Group:
Verizon Communications Inc. (VZ)
Our Success Trading Group scored another winning trade this week when we closed out a position in U.S. Bancorp (Ticker: USB). We like Verizon (Ticker: VZ) at its current price for a new trade position.
Have a great weekend and we'll trade next week.
Success Trading Group Team
