This is the second part of a series. For the first, click here.
Finding a great stock is just the first step in a great trade. Once you identify a trade candidate, the next step is to develop a plan for trading it.
You must ask: What are the potential catalysts? What are the risks? How do market conditions impact the trade? When do I cut losses? When do I leverage up? What are the factors that are going to impact the way that this stock will trade in the weeks and months to come?
Let's take a look at a couple of examples with real stocks. The first is Inmode, Inc. (INMD) . This is a company engaged in the cosmetic surgery sector that offers unique radio frequency technology for skin treatment and a variety of other applications. It has great margins, nearly a half billion in cash on its balance sheet, and has consistently outperformed estimates. The chart is quite attractive as it is testing overhead resistance at around $40.
I am holding a position with plenty of room to add as it develops, but these are the factors that are impacting the way I manage the trade:
Overall market conditions. The biggest risk for INMD is the potential for a slowing economy to cause demand for cosmetic treatment to decline. The company has not had any issues so far, but I need to watch for recession concerns that may impact the way the stock trades. If the price weakens due to economic data, I will want to exit.
Technical action. The current chart pattern looks quite favorable and has support down to $34 or so. If it breaches that level, I will look to reduce or exit depending on overall market conditions and any news flow.
Potential catalysts. There is probably no major company-specific catalyst until the next earnings report in early 2023, but the stock is one that could attract technical buyers and growth investors. In the right market environment, this stock will attract buyers, but in the context of a bear market is much more challenging, and I will have to manage it tightly on weakness. I would be inclined to rebuy these names if a tight stop is triggered.
Another stock that I'm holding and feel optimistic about is Beyond Air (XAIR) . This is a thinly traded small cap that currently has no significant revenue. It has received Food and Drug Administration approval for its nitric oxide delivery system and is close to announcing initial contracts. There has been some substantial insider buying this past week, and it gives me a high level of confidence that it is just a matter of time before contracts are in place.
Unlike INMD, XAIR is not as likely to be impacted by the economy and overall market as much. The catalysts here are more company-specific. If there is a weakness due to overall market conditions, I would regard that as an opportunity to add shares, as the contract news is the primary issue that is going to eventually move this stock. A small cap like XAIR is often a victim of illiquidity, but that can be a good opportunity for incremental buying. XAIR is very thinly traded and often moves randomly, which offers the opportunity for short-term trading while waiting for the major news catalyst to hit.
The primary risk is that contracts do not come for a while and the bored holders dump the stock. However, given the insider buying, there should be some technical support around those levels. It will require some patience but there will be significant movement when news eventually occurs.
These are two examples of how the trading plan for a stock pick will vary depending on a variety of factors. Most stock market discussions are little more than simply identifying a stock that appears to have good fundamentals and maybe a good chart. They may be good picks, but if you really want to profit, then you have to manage these trades on a daily basis and constantly evaluate the price action in the context of the overall market.
Both of these stocks could turn out to be duds, and if that is the case, then I hope to keep losses fairly small. On the other hand, they could be big winners, and if they are, I intend to leverage up my positions quickly and maximize my returns.
Finding great stocks is the fun part of trading. Effectively trading them is the hard work that determines your level of success.
(Please note that due to factors including low market capitalization and/or insufficient public float, we consider one or both of these stocks to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)
