One reason many people fail at trading is not that they don't know how to trade or are undisciplined. They fail because they are incapable of producing a steady flow of good trading ideas.
If you just stick with the same old names every day, then you are an investor and not a trader. Outsize gains require outsize efforts.
The single greatest thing about the stock market is that every day there are new opportunities if we look hard enough. As long as we have capital to trade there will be the potential to make money. People in other businesses are constantly struggling to find ways to produce revenue while traders are often overwhelmed with so many choices that it becomes confusing.
Trading opportunities are largely a function of trading style. It is your appetite for risk that will drive your choices.
For example, many traders tend to stick to a small number of big-cap stocks. They feel comfortable with these names as they are well-known, very liquid and aren't likely to move too erratically. There will be some movement in the high-beta technology names such as Apple Inc. AAPL and Netflix Inc. NFLX and you don't need to do any real research to trade them. Of course, this sort of trading comes at the cost of big gains. If you are trading liquid big-cap names you are likely looking at daily gains of 1%to 3% at the most if you are lucky.
My personal preference is to focus on smaller stocks that make bigger moves. I run scans of the market each day and there are always dozens of stocks that are moving 5% or more. On Thursday my scan showed about 30 stocks with moves of 10% or more. Just like in physics, stocks in motion tend to stay in motion, so these names are ripe as potential trades.
There are a number of approaches to finding new trading ideas and many of them can be combined to gain a greater edge.
- News. News creates movement, and movement is what trading is all about. Trading on news is not as simple as betting on the outcome of an earnings report. It is the movement after the news that presents the big opportunities.
In recent weeks biotechnology names such as Aurinia Pharmaceuticals (AUPH) and Axome Therapeutics (AXSM) have been good examples. Both stocks made big moves on positive drug study results, but you didn't need to be holding them for the news to find some good trading opportunities. The increased volatility created by the events produces reverberations that are continuing and will create more opportunities down the road.
The same thing often happens with earnings news. It is the reactions after the news that creates the best odds for good trades, rather than betting on the news itself, that offers opportunity. Every quarter there are stocks that digest their earnings news and then set up for another opportunity as traders start to anticipate what will happen when they report again.
- Themes. Some of the best trading comes from recognizing themes. Recently, biotechnology, semiconductors and even banks have been rampaging. In the past, groups such as cannabis, solar energy, bulk shipping, oil and precious metals have gained sudden interest and offered opportunities in a variety of stocks
Right now one theme that I'm working on is the January Effect, when stocks that have been sold to harvest tax losses rebound once the selling pressure ends. There are always these sorts of themes if you understand market dynamics.
- Chart patterns. Every day I review hundreds of charts looking for unusual volume and interesting patterns and setups. Charts tell us that something is going on even when there isn't any news. The main value of charts is that they help us find stocks that have better chances of movement in the near term.
Charts are often given too much value as predictive tools, but they do help us to focus on names that are likely to garner interest form other traders. Finding those stocks before the herd of other traders discovers them leads to good results.
If you want to develop a long list of good stock ideas it requires constant vigilance and good organization. It is easy to feel overwhelmed with all the information we receive each day, so it is necessary to filter out the clutter and focus on the best sources of ideas. No matter how diligent you are, you will miss out on many good opportunities. It just isn't possible to catch them all, so don't beat yourself up about it.
I watch a long list of stocks that I think have potential positive catalysts and then wait for technical conditions to tell me that the time is right to start buying. One easy mistake to make is to jump into a stock too aggressive too fast. Just because it may be a good idea down the road at some point doesn't mean you buy it immediately. Take a token position so you stay focused and then wait patiently for the price action to develop.
Finding great new ideas is one of the most pleasurable aspects of trading, but it is easy to forgo prudent risk control when you think you have an edge. There is always bad luck and good luck when we trade and we need to make sure the bad luck doesn't impair our capital.
In the year ahead I plan on putting more effort into offering specific trading ideas along with insights into how to effectively trade. I'll hope you'll join me.