Stock traders have to constantly adjust to a changing market. Trying to master the art of executing a profitable trade is challenging. The most famous investors who have ever lived all have something in common: techniques that they use over and over again. Below is some of my favorite investing bits of wisdom that I have learned over time.
Moving averages, 50 and 200 day: When the 50 day moving average crosses above the 200 day moving average, it is a buy signal. Traders call this a Resurrection Cross. When the 50 day moving average crosses below the 200 day moving average, it is a sell signal. Traders call this a Death Cross. This signal is incredibly accurate and one you should always be on alert for. Keep in mind that this tip is more for long term, buy and hold investors because these moving average signals involving the 50 and 200 day moving average take months to happen on the chart.
Find the catalyst: What is the story behind a stock that is likely to attract more buyers? The catalyst is the engine that will drive a stock higher. You will find the catalyst in the news or press release section of company's website. 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. Go to Finviz to get the best performing stocks for that day, then start going through the news of each. You will get good at spotting the catalyst with this technique. What news item caused the stock to explode? Answer that and you will have identified the catalyst.
Choose the right online broker: A hundred options and choices for day traders is not something a buy and hold investor needs. You can go with a broker like OptionsHouse which has low per trade fees with a trading platform geared towards research. If you are a day trader, you want to go with an online broker like E-Trade. E-Trade offers E-Trade Pro with level II quotes, minute by minute charts, and real-time stock screeners. If you want to specialize in shorting penny stocks, then Interactive Brokers is going to work better for you than Scottrade or E-Trade. Interactive Brokers will allow you to short stocks under $5 where Scottrade and E-Trade will not.
Get out of the trade when there is a stock offering: A stock offering is when a company needs to raise cash, they offer shares to creditors in exchange for money. Stock offerings to raise cash are hated by existing investors. A stock offering usually causes a stock to drop quickly. 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. The same thing 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. Anytime a company has to issue shares in order to raise the money needed to keep the company in business, it is a huge warning sign. 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.
Market capitalization: Market capitalization or market cap is calculated by taking the amount of outstanding shares and multiplying it by the price of the stock. Small cap stocks with a market cap between $200 million and $2 billion are more likely to experience earnings growth than larger companies with a market cap between $450 billion to $150 billion. Think sales growth. There is a greater chance that a small company can double their sales year over year than it is for a larger company like UPS to double their earnings or sales. Most large cap companies started out as small cap companies. Smaller companies are often in the growth phase of the business and product life cycle. If you are trying to grow a small amount of money as quickly as possible, trading in and out of risky small cap stocks is the way to go. However, if you are looking to preserve capital with a buy and hold investment style, you will want to invest in large cap stocks that pay dividends.
Moving averages, 50 and 200 day: When the 50 day moving average crosses above the 200 day moving average, it is a buy signal. Traders call this a Resurrection Cross. When the 50 day moving average crosses below the 200 day moving average, it is a sell signal. Traders call this a Death Cross. This signal is incredibly accurate and one you should always be on alert for. Keep in mind that this tip is more for long term, buy and hold investors because these moving average signals involving the 50 and 200 day moving average take months to happen on the chart.
Find the catalyst: What is the story behind a stock that is likely to attract more buyers? The catalyst is the engine that will drive a stock higher. You will find the catalyst in the news or press release section of company's website. 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. Go to Finviz to get the best performing stocks for that day, then start going through the news of each. You will get good at spotting the catalyst with this technique. What news item caused the stock to explode? Answer that and you will have identified the catalyst.
Choose the right online broker: A hundred options and choices for day traders is not something a buy and hold investor needs. You can go with a broker like OptionsHouse which has low per trade fees with a trading platform geared towards research. If you are a day trader, you want to go with an online broker like E-Trade. E-Trade offers E-Trade Pro with level II quotes, minute by minute charts, and real-time stock screeners. If you want to specialize in shorting penny stocks, then Interactive Brokers is going to work better for you than Scottrade or E-Trade. Interactive Brokers will allow you to short stocks under $5 where Scottrade and E-Trade will not.
Get out of the trade when there is a stock offering: A stock offering is when a company needs to raise cash, they offer shares to creditors in exchange for money. Stock offerings to raise cash are hated by existing investors. A stock offering usually causes a stock to drop quickly. 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. The same thing 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. Anytime a company has to issue shares in order to raise the money needed to keep the company in business, it is a huge warning sign. 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.
Market capitalization: Market capitalization or market cap is calculated by taking the amount of outstanding shares and multiplying it by the price of the stock. Small cap stocks with a market cap between $200 million and $2 billion are more likely to experience earnings growth than larger companies with a market cap between $450 billion to $150 billion. Think sales growth. There is a greater chance that a small company can double their sales year over year than it is for a larger company like UPS to double their earnings or sales. Most large cap companies started out as small cap companies. Smaller companies are often in the growth phase of the business and product life cycle. If you are trying to grow a small amount of money as quickly as possible, trading in and out of risky small cap stocks is the way to go. However, if you are looking to preserve capital with a buy and hold investment style, you will want to invest in large cap stocks that pay dividends.
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