Growth stocks are at the core of the stock market. They are the final legitimation of the stock markets and they are or should be central to wise investor’s operations. But are they also for traders so important? From day trading to arbitrage, there are all sorts of trading styles possible, so why just concentrate on growth stocks?
The answer is simple and great traders like Jesse Livermore knew them since a century. The real money is made with the sitting, by which Livermore meant that holding the right stock at the right time for an enlarged period of time yields the biggest possible gains. Trading in and out is compensating gains with equal losses, or worse.
On the other hand, stocks that are thought to be in a growth phase often disappoint. It can’t be different. The market is willing to pay high earning or revenue multiples for the anticipated potential and the slightest deviation from the optimistic growth path results in large drops of the stock price.
If it were different, all growth stocks would have to go straight up for years. That would be anticipable, which in turn would cause an immediate price jump to the final value. Reality is in the middle of these extremes. Chances that the growth hopes will become true are just that, probabilities somewhere in the middle of certainty of success and certainty of failure.
Growth stories are therefore often fiction tales. Otherwise investing in them would be too easy. This is the cross road were traders and investors meet. Instead of just putting your money at work and then starting to hope, the better method is to trade. Trend trading means applying a stop loss strategy. If you can enter the best growth phase of a company while at the same time limiting your losses with all those attempts that you also had to made but that didn’t work out, you have a growth trading system.
So, the basic idea is to just try often and have a few big winners and many smaller losers. Perhaps that could be improved? What if the many small losers are more a mixture of small winners and losers?
A working system for growth stocks is to use swing trading for the entry phase and then switch the trading method to growth investing, the Jesse Livermore system, the sitting. This combination has another advantage. For traders who like to have the fun there is still enough to trade. Just swing trade the many growth stock opportunities. If one goes strongly ahead and climbs to new highs, it is time to turn off the swing trading mode and turn on the buy and hold system. That’s probably the best way to trade growth stocks.
The swing trading itself could be changed to a dual mode. Let an automated swing trading system do the actual trading with generating buy and sell signals. Switch the trading mode as explained at the links above.
The progressive investor’s job is then to search for and select promising trading and investing candidates. Stocks that are in a longterm trend and whose fundamentals are also on the rise. The company behind the stock should have a single product that at its best is something new, so that it could become a product of the future. Last but not least, the company should be a leader in its field.