The simplest way of making money in the markets is to have a good source of stock picks. This may sound primitive, but it is true. There are two main reasons:
- Stocks are the only investments that have the potential to easily double or more and generate a gain of some hundred percent. Other trading mediums only allow for these percentages with the hefty usage of margin, also called “bad money management”. Stocks are the way to go.
- Interestingly for even the best traders chances are only slightly above fifty-fifty, meaning any gain gets statistically compensated by a loss. Perhaps many smaller losses wipe out fewer larger gains or the other way round, but the outcome is that the average trader just breaks even. It has to be like this, otherwise everybody could profit – but from whom? If this is true for professional traders and fund managers, it should be also true for the amateur…
It seems to be difficult to find a promising stock situation. So, build upon the shoulders of others and let them do at least the hard work of preselection, if not more.
From here on there are generally two ways to go. Small stocks and large stocks. For small stocks we have recently created a specific site to outline our trading system for penny stocks in more detail.
We could divide this even more, say, in three parts and name ETFs additionally, but to make it simple we assume that ETFs behave like bigger stocks. More theoretical considerations about trading systems based on stock picks can be found in our blog.
Large stocks and ETFs
Mostly stock picks get associated with investing and not trading. Pick a larger stock and buy it and then hold it. We think that is exactly the wrong way. If stock picking is investing, then this is probably true for smaller stocks. Trading smaller stocks can be done simply by jumping into new activity, rising prices and volume, and then holding them until the first severe pull back occurs. If the trading rules are simple, it must be investing.
Dealing with larger stocks is more difficult. For one, undervaluations occur less often and the relative difference to the real value is much smaller. That is simply the consequence of the many analysts, fund managers and other savvy investors following the stock. If a smaller undervaluation leaves less potential for the stock picker, then the trading part is more important than with small stocks.
In the futures and Forex markets the situation is even worse, simply because of the small number of trading alternatives. There is almost nothing to pick from. Markets are far more efficient there and trading competition is fierce.
That’s were momotrade.com enters the scene. We offer stock picks for the active trader. That means, you have to know how to trade them. Our trading philosophy divides both investing parts. Selecting the right situation, picking a stock, is one thing and choosing the right trading method for it the other.
So, a good idea for finding promising stocks may be to read our trend alert blog for stock pickers and to subscribe to it right here.
Smaller stocks have many beauties. Here are the main ones:
- They have the potential not only for a hundred percent gain but for a tenfold explosion – or more. Small stocks often get forgotten and then neglected. They have to be picked up again. Trading small stocks is literally stock picking.
- There are many of them, which is a reason to expect many potential chances. It is also a reason why so many small stocks often get forgotten, out of sight, and then, when some news shows up, suddenly appear to be drastically undervalued.
- If any, then it is a smaller stock that moves independently of the whole market and gives the trader a chance for true diversification. This is why picking smaller stocks can also enrich a portfolio of larger stocks and ETFs.
- Trading is much less tricky than with big stocks. Detect a fallen angel with new trading activity and buy it after checking the fundamental side. The latter is of course the problem. But the typical waiting for the right entry spot is superfluous for small cap stocks. Just buy them if there is the pattern for explosive potential. Selling isn’t much harder. A wide trailing stop loss may look simplistic but will do it. Important is the selection and the general timing of the buy.
Finally, here it comes, our main recommendation for a really truthful stock picker. Note, that this is not a magician. These stock picks have possibly huge potential, not the guarantee of a win-to-lose ratio far above fifty percent. That is neither possible nor necessary. Important in the small cap markets is that a stock picking source deserves some trust. Then the statistical math of huge possible gains and much smaller possible losses will do what it ought to do, namely making you rich…
Yes, that’s it, a gem in the mud of WS.