Stock Picks 101 - Trading on a Stock's Popularity Wave

Douglas Newberry
 


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There are as many ways to day trade in stock market trading as there are individuals. However, there are a few easy styles everyone should try to become successful with. One of these is to trade a stock that is currently a “hot stock. ” Sometimes it seems that certain stocks are like popular kids in high school; that is, everyone wants to be their friend, at least for awhile, or at least until they screw up. So let’s see how this might play out.

To make this work you need to be plugged in to all the popular news outlets. Additionally, you need to have access to Investor Business Daily and check it regularly. You also need to check Nasdaq.com and Yahoo.com to see what’s hot and what’s not.

So, let’s say you’re watching CNBC before the market opens and you notice a certain stock being mentioned frequently in a very positive light. This is a potential setup.

Next, watch the start in the first couple of minutes of the open to see if that stock is moving up sharply. Of course, you’ll also want to check to see whether there is enough volume to support this day trade. If there is, you’re ready to decide when you’re going to jump in to try to ride the wave of the stock’s popularity. Sometimes this ride may last minutes, sometimes it may last hours, and sometimes it may even be the beginning of a new longer term trend.

With some experience you can watch the volume and get a sense of whether you should wait for a pause or pullback before entering a trade or whether you should just jump right in once a clear, strong, upward trend has been established.

Of course, finding the entry is only half the battle. It’s the easier half because you control when you actually enter the position. Once you’re in a trade, you need to start looking for an exit. Of course, you don’t always have control over the chart to see if a nice exit is easy and obvious.

So how do you get out of a position? Well, obviously if you’re day trading, you’ll be keeping your eye on the chart the whole time anyway. So here’s what you need to watch for. If you see a pullback, is it simply a shallow dip, really only a pause before the trend continues? Or is it an actual reversal, in which the price will end up going significantly below the entry price, leading to a loss? Again, a certain amount of experience will help you in these matters.

In any case, maintaining a very tight stop loss is important. Specifically, you should strongly consider exiting the trade if the price moves below the low of the day.

Now that we’ve addressed the risk in your long position, the next question is at which point should you take the profit and run? In other words, how large a percentage gain should you accept before you close out your day trade? You’ll definitely want to have studied the longer term charts to see where there might be areas of overhead resistance. Also, if a stock has had a healthy run for an hour or two and then pauses, strongly consider finding the exit. And of course, if a stock curls over and quickly reverses, you might as well take your profit, whatever it is, and call it a day.

Stock trading on news like this can be very exciting as well as profitable. So be sure to experiment with this particular style of day trading to see if it suits your temperament. You should be able to tell this by the fact that you’re enjoying the trades rather than considering them stressful. So have fun, and may you show a profit every week.

Doug Newberry is the editor of the Market Toolbox Newsletter and he also hosts The Market Toolbox “On Demand", an online radio show. This show provides investing techniques for Stock Market Trading that are both disciplined and systematic for stock traders. 30,000 stock traders and investors and more from all around the planet subscribe to the Market Toolbox newsletter.

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