The Hunt for the Next Great Trade

 | Mar 17, 2018 | 10:00 AM EDT
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nvda

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amzn

One of the most enjoyable tasks in trading is the hunt for new ideas. There are few things as satisfying as finding that hidden gem that becomes your next great trade.

Hunting for good ideas isn't just a pleasant task, it is at the heart of trading greatness.

In studies done by Dean Keith Simonton of creative geniuses, he found that they tended to immerse themselves in many diverse ideas and projects and that they had extraordinary productivity. They were successful because they were constantly looking for new ideas and produced so many ideas that some were bound to work well. You can read more about this study here.

There are many ways to approach the task of ideal generation. It will depend much on your particular style but don't let that hold you back. It is very important to keep an open mind and consider things that you normally don't.

I find that I tend to have an inherent bias against the well know big cap Action Alerts PLUS holding names like NVIDA (NVDA) , Amazon (AMZN) , etc. because they seem too obvious. I don't feel I have any edge but there clearly is money to made picking the right big cap names can produce great results and it is probably the better approach for investors that have longer term time frames. The process of finding these stocks isn't as complicated. It may take a lot of study to find the ones that will perform the best but the universe of such of stocks is small and can be reviewed in a systematic way. The FAANG names have been performing great for years and it doesn't take any effort to identify them but as a source of idea generation they need to be studied in a different way.

If you are a more aggressive trader and are willing to take higher risks the hunt for the smaller names, that move 10% or more in a very short time frame, is a very appealing area. It is usually the stocks that you have never heard of or know little about that tend to product outsized gains in a short time frame. Buying what you know is comfortable but it is the unknown that has the better chance of outsized returns.

So how do you find these unknown names that make the big moves?

Sites like RealMoney.com and Sharkinvesting.com will offer up a steady diet of ideas for you to consider. I try to post several new ideas every day. Simply maintaining a watch list of these stocks and following them over time will keep you busy but the process of finding picks yourself produces additional insights and will help you improve your trading.

Typically when I am looking for new ideas I start with the charts. I run scanning software that will produce a list of stocks that have made big moves on unusual volume. I will add other considerations like relative strength and support levels as I refine my results.

This scanning of charts will give me a rough list to consider. The next step is to quickly look at a chart of each of these stocks. There may be a 100 or more, but I can quickly eliminate a good number with a glance at the chart. They may be extended, too thin, have too much overhead or any number of other flaws.

Once the list is whittled down then the digging into some details occurs. I want to know something about the context of the stock. Why is it moving? Does it have some significant news? Is it in a strong sector? What is the story that explains the chart?

Some traders will completely ignore fundamentals. Their thinking is that the price action is the best proof of value. There is always someone that has superior knowledge about a stock and their conviction will be reflected in the charts. That fails quite often but I can't compete on a fundamental basis with the big boys, so I don't waste too much time with spread sheets, balance sheets, income statements and earnings projections. I like to see big growth compared to the PE Ratio but that is the sort of information that is already discounted and provides little advantage.

Sometimes the best research isn't financial statement analysis but understanding the products and the technology. This is especially so in sectors like biotechnology where the current numbers can be quite meaningless.

One you have narrowed down your candidates the next step is the stalking process. I like to make an initial buy and put it on the screen quickly, so I can follow it more closely. I want to develop a feel for a stock that I plan on being aggressive with. You don't always have the time to do so but I find it empowering to approach a stock on an incremental basis rather than to jump in with both feet right off the bat.

The best traders succeed because they are always looking for new ideas and produce a lot of them. The great thing about the stock market is that there always is something great right around the corner. We just need to find it.

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