At the heart of all successful trading is stock-picking. We can employ great strategy, have fantastic market insight and use superb money management, but, ultimately, we need good stock picks if we are going to make money. If we find the right vehicles, it will make up for many of our shortcomings and make our jobs much easier.
Finding good stocks isn't that hard. There is always something with positive news or attractive valuations. What is difficult is buying and selling them at the right time. Even if you pick great stocks, you won't make much progress if your timing is wrong.
So how do you improve your timing? You stalk stocks. Find some names you like and follow them, learn their habits. You take advantage when they are treated unfairly by the market and sell them when they become too frisky. The key is to put them on your radar and track them.
The last time I wrote about stalking stocks, I made the case for Tarena International (TEDU) , a China-based provider of professional education in the IT area. Let's look at the chart of one of my current favorites, Acacia Communications (ACIA) . This was a big winner as my Stock of the Week on May 23, when it was trading around $30. Although it is up 50% since then, I continue to believe that it has the potential to go much higher.
I still own a position in Acacia but I want to add more in a timely fashion. To do that I'm going to stalk it and wait for a setup I find appealing. I don't want to chase it now. I want to see either some basing action or a pullback. If I jump in, I will put a stop, and if that stop is taken out, I won't give up on it. I'll look to buy it again and see if my timing is better. I won't give up until there is something that convinces me that the story has changed.
Buy-and-holders will scoff at this approach and tell us that it is not possible to time stocks to any great degree. While that is true some of the time, there are enough incremental positives from aggressively trading stocks that you know that it can greatly enhance your returns.
I like to have at least five key stocks that I want to trade over the longer term. I may not own them all the time but I will keep following them and looking for the right time to enter. One of the big benefits of this approach is that it allows you to act aggressively rather than tentatively.
The right timing combined with a high level of conviction is how you produce the big returns. The best way to do that is to stalk attractive stocks.