Finding good stocks is only half the battle in trading; it's what you do after you buy them that will determine your success. You might choose mediocre stocks, but if you deal with them correctly, you can still produce exceptional gains.
The best traders develop a plan of attack for extracting the best gains from a stock while limiting risk. They don't just make a single buy and a sale, they manage the trade in various ways.
The process of planning is more important than the actual plans. We can never be ready for every development but if we spend time contemplating what can happen, we will be better able to react as conditions change.
Most people never really think strategically about how to take advantage of the inevitable volatility. They take comfort in the belief that they own a "good" stock and don't worry much about it until they are forced to. They react emotionally and squander the benefits that are created by the swings that will occur
Here are two stocks I'm currently in that are good examples of chase trades and trading-range stocks, and my plans are for them.
The first is biopharma Sarepta Therapeutics (SRPT) . This is what I call a "chase" trade. The stock had a surprise Food and Drug Administration approval this week of a controversial treatment and shares blasted higher. Many traders figured they missed the move and were not willing to chase a stock like this, but typically the market does not fully recognize the true value of something like this immediately. Analysts move incrementally in upgrading their targets and estimates tend to move higher over time.
The key to a trade like this is to get your foot in the door. It is better not to be too price sensitive at first. Just establish the position, put it on your screen and start looking for ways to build the position. I'll typically add on strong closes after a big bar on the chart, and SRPT has an additional opportunity for entry on a secondary offering at $59.75 on Friday.
Stocks like SRPT can be quite volatile, so it is important to control your position size so that you aren't shaken out by normal swings. If you are in too big, too fast then a pullback that may be a good opportunity to add may cause you to panic instead.
I expect SRPT to dip sooner or later and form support levels, but for now I'll continue to make incremental buys with a plan of adding further should it dip.
The second stock I'm trading is Aratana Therapeutics (PETX) , which develops drugs for use in veterinary medicine. The company has a strong pipeline and it is moving from development stage to generating revenue.
PETX is a good example of a trading-range stock. It has been bouncing around in a tight range since early August as traders jostle for position. Those trying to anticipate a breakout are flushed out when it doesn't hold in early September. The stock constantly tests support and resistance.
Ultimately, I'm looking for this stock to break out of a range and trend higher as it rolls out its products. The key is to be patient and to take advantage of the trading-range volatility, buying at the lows and then flipping while maintaining a core position.
May goal is to watch carefully for a potential breakout and add aggressively as a new closing high seems apparent. I'll take bigger size than normal and flip into the momentum if I can catch it right.
Every stock has a unique personality that requires its own strategy. The important thing is to have a plan even if you don't stick with it.
--Charts by TCNet