Stock Trading Strategies

Trading Strategies:

On Twitter there are a wide range of stock traders out there. Everyone is mentioning stock symbols and their own strategies on a daily basis. This can be information overload especially for someone starting out for the first time. It’s important to try out different strategies to learn what fits your lifestyle and your personality. Below I breakdown different things to keep in mind.

Different strategies:

#1 Penny stocks – From front names like Tim Sykes, Nathan Michaud, Kroyrunner, and lx21 the penny stock strategy is not as simple as it seems. For starters they concentrate on the most active stocks at the time, whether it’s Ebola, pharmaceutical drug or a miracle company it doesn’t matter. All that matters is that there is volume and that it’s getting traded with liquidity. What makes this strategy significantly more risky than any other strategy is the trader has to be looking at the screen all day, monitoring risk, looking at level 2 (bids and ask) and usually playing with emotions all day, as that is what looking at a chart all day does. Most people that trade in stocks have full time jobs and like to dabble in the market part time. This makes this strategy difficult to implement for those reasons. Majority of the time the money is made in small time frames 1 min, 5min and 15 min charts. The positions are generally high in value and last from 30 min to couple of hours, but typically bought in the morning and sold at the end of the day (traded in the morning or end of day).  These stocks are extremely volatile and you have to know what you are doing. Holding these stocks over night (especially if they don’t close strong at the end of day) is a huge gamble. The reason is it could gap up or down significantly as a lot of profit taking traders are always around the corner and influencing price movement. What this means is if a stock closes at 2 $/share today, it could open tomorrow at 3.5 $/share or 1.2 $/share depending on the historical performance of the stock or based on the news release of the day. There are many variables at play here and this is the reason I don’t recommend new traders to start with this strategy. For active and frequent traders only.

Pros

-          Little money needed to buy a massive amount of shares – most stocks under 6$/share

-          Massive profit potential due to huge moves in stocks 2-30% a day is not uncommon.

Cons

-          Massive risk due to variables: lack of liquidity in stocks, news of the day, gap up or down overnight, being able to read level 2 bids and ask, not being able to cover shorts, etc…

-          Can’t fill orders to short usually with most brokers (only special ones).

-          Have to be in front of screen all day, usually trading fulltime.

-          Highly emotional trading (big loses), high frequency, over trading.

-          Cost in commissions can be huge if paying per share cost structure (IB).

#2 Breakouts – From front names like Dan Zanger to William O’Neal they focus on taking a position once a certain pattern is formed such as cup and handle, break of the channel, massive volume, overall market set to increase, and earnings and growth of the company being taken into consideration. This strategy is excellent but it does have its negatives. The focus is on huge big expensive stock companies for the most part, liquidity is not an issue, either is gap up or downs for the most part for this reason. The only thing to be careful of is making sure not to overpay for the stock.

Pros

-          Once you are in the position and it takes off, you can typically hold it for 2 months and not trade frequently and is ideal for someone that works full time and trades part time.

-          Big name stocks are safer in liquidity and institutional backing to limit gaps.

-          Lower risk as the breakout level is generally supported allowing smaller stop losses to be used.

Cons

-          Expensive stocks, need a lot of capital

-          Usually need market to be sold off or basing to enter positions (patience)

#3 Supply and Demand

We teach this strategy along with others. Most notable traders using this strategy are Paul Tudor Jones, Sam Seiden, and Brandon Wendell. It consists of buying after a stock sell off and selling into strength. Identifying chart patterns and using technical analysis to enter positions usually irrelevant of the news and selling at supply levels (resistance).

Pros

-          Flexible –can be used for short term or long term based on time interval on chart – from 5 min to daily and weekly charts.

-          Allows for full time career while trading part time due to bracket orders.

-          Usually trading big name stocks with liquidity not being an issue or gaps.

-          High percentage win ratio if followed properly.

Cons

-          Need great knowledge of strategy before implantation

-          Proper setting of bracket orders important for stop loss protection orders

As a recap, it is important to try all different trading styles and see which one fits you better. Education and knowledge is imperative with any strategy. At http://www.pickstockwinners.com we strive to teach our members all of the tools necessary to be successful.

Thank you,

David Ksiazek – Professional Trader

Posted in: Trades