When market action is difficult it causes many traders and investors to become depressed and to want to give up on the market completely. My response is different. The worse the market action becomes, the more positive I become because I know it eventually will produce a new crop of great opportunities. It is easier to cultivate that attitude if you have taken timely defensive steps and have plenty of cash on hand, but that is a different issue.
In the years I have been trading, the market cycle has repeated itself many times. Stocks always eventually succumb to various excesses and ugly corrections occur. Near the ultimate lows, there are predictions of doom and gloom and many market players never want to buy another stock again after the losses they have suffered. Inevitably the market eventually starts to recover and some great money-making opportunities appear.
One of the most pleasurable tasks we face as traders is the search for new opportunities as this cycle develops. There are few things more satisfying for a trader than finding a stock that appears to have great promise and is developing a favorable technical pattern.
So how do we go about finding our next great trade?
Market conditions will dictate the details of the approach to a great degree. The opportunities in an up-trending market near its highs are much different than a down-trending market searching for support. It is necessary to adapt to the various markets we experience. Some traders have a hard time doing this as they have fairly narrow styles. Many momentum traders will simply stand aside in weaker markets and wait for conditions to change. Those with a bearish inclination will struggle in bull markets.
One of the best ways to find new opportunities is to read as much as possible. Publications such as Investor's Business Daily and Barron's always have some stock ideas. Websites such as Realmoney.com and SharkInvesting.com will provide a steady stream of stock picks. However, these are always just suggestions that must be researched further and, in my cases, the stocks may not even suit your style. Don't try to reinvent yourself just because there is a stock pick that sounds intriguing.
My process in looking for stock picks typically begins with the charts. I am constantly scanning 6,000 to 7,000 charts each day to see what is making unusual moves on increased volume. Just as in physics, stocks in motion tend to stay in motion. It is pretty easy to come up with a good list of interesting stocks simply by making a list of those that have made substantial recent moves.
Another approach is to look for themes. The market always has hot groups and sectors. It might be cannabis or solar energy or biotechnology or banks or precious metals. There is always some group that is seeing a higher level of interest, and within each group there will be some that have not been fully discovered.
Once you identify some interesting stocks to consider it is time to do some research. I don't find it productive to research fundamentals like an analyst, but I do like to understand the story so that I can figure if there are potential catalysts. I'll find out what the analysts are saying, look at revenue and earnings growth and review recent press releases.
Oftentimes the fundamental research can lead to a false sense of security. This is one of the biggest dangers that market players face in their hunt for stocks. They feel that because they have spent much time evaluating and researching a stock that risk is diminished. They become emotionally attached and their trading discipline is compromised.
Nonetheless, the research is important because it helps to better navigate the price action. Once you have a stock on the radar and understand what moves it, the next step is to look for a promising technical setup. The confluence of positive technical action with a positive fundamental situation within the context of overall market conditions is what leads to great stock performance. That is the ultimate goal when hunting for stocks.
The hunt for the next great trade is endless. I engage in it every day and find it not only challenging but also highly entertaining. The great thing about the stock market is that there is always a new opportunity on the horizon. As long as we have capital, we have the potential to produce great returns.
Do you have a methodology for finding new stock picks? One downfall of many investors is that they never find new ideas so they simply stick with what they know. That can work, but buy-and-hold investing works best when you are in the best stocks. Even Warren Buffett discards the majority of his stocks before he finds those that payoff over the very long term.
Think about how you are going to find your next money-making opportunities. They are out there. You just have to start looking for them.