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How To Buy Stocks That Are Hot With No Effort
By David Jenyns
Even traders want to be trendy when they buy stocks. Many traders make trades
because of public opinion, not because the trade itself makes sense. When a
particular stock seems popular, they rush in so they don't feel they've missed
an opportunity. As a result they end up buying at a price point where the trade
can't possibly work out. You should always avoid the emotion of the HOT stock.
Here's an example of what not to do when you buy stocks: Let's say you've
been following a particular stock which is in a HOT sector, and it just
announced a stock split. The stock is now at $18, and you calculate it could get
to $25 or more by the time of the split. The market is currently bullish, and it
looks like a great trade.
The problem is that the stock has been rising for the past four days. It
started at $12, but you didn't notice it until it hit $18, and it's still
rising. The stock split is a month away, and you know it's likely to fall in
price somewhat between now and the split. Still, everyone is talking about this
stock. What if it continues to rise and becomes the next blockbuster? You become
afraid that if you don't make a trade you'll miss a great opportunity. (And
besides, you want to be able to tell people that you hold a position in this
stock, because it makes you seem smart.) So you buy 1,000 shares at $18.50.
During the next two weeks, the stock goes to $19, then levels off, loses
momentum, and drifts down to $17. Then a couple of leading NASDAQ companies give
earnings warnings, the market drops, and the stock slides to $15, triggering the
stop you'd set at $16 on half your holdings. The stock trades in that range for
a week, and then begins to rise slightly going into the split. Your plan is to
sell a day or two after the split. The stock rises a little beyond $20.50 by the
second day after the split, and then the volume dries up and you sell it for a
$2 profit. But since you stopped out of half your shares at $16, you lost $2.50
per share on that half, with a net loss of $.50 on 500 shares. What went wrong?
What went wrong was that you didn't let the stock come to you. Instead, you
chased it as its price rose, knowing perfectly well that, following the stock
split trend, it would probably pull back before running up again. It was more
likely to pull back than it was to continue on an uninterrupted run to $25, and
you knew that if you bought at $18 or higher you were probably paying too much.
You ignored what you knew was more likely in favor of what might happen.
You should have given the stock a chance to come to you, at a price you felt
was reasonable. If the stock had pulled a surprise and never gotten down to
where you thought it would, that would be okay. There were many other stocks to
trade, and some of them would have come down to your price. You didn't have to
own this particular stock.
What was the right way to play this particular scenario? When the market is
bullish, it's very likely for a stock to rise when a split is announced, drift
down after a few days' rally, and then begin to rise again a week or so before
the split. If that's the trend and there's no solid reason to think the stock
will rise immediately, wait a few days for the stock to drift down and stabilize
before buying it. If you had done so in this case, you could have bought it at
$16.50 and then sold it for $20.50 for a $4.00 profit on the entire 1,000
shares.
If you had a solid reason to think the stock might continue to rally, you
could have bought half the total number of shares you wanted at a price that
might have turned out to be too high, and waited for a lower price to buy the
other half. If it had turned out to be too high, it would only have reduced your
profit. (No stock goes up or down in a straight line. Wait for a pullback before
buying.)
There is a good way and a bad way to buy stocks or trade a HOT stock. The
good way requires discipline and careful market evaluation. The bad way is to
trade from your feelings. As you can see from this example, it's always more
profitable to trade the good way. About the Author -=-=-==-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=- David Jenyns is recognized as the leading expert when it comes to designing profitable trading systems.
Discover the "secret formula" of trading that anyone can use to consistently generate BIG profits from the market by downloading your FREE copy of David's new Ultimate Trading Systems course.
Click Here To Download ==> Trading Systems http://www.ultimate-trading-systems.com -=-=-==-=-=-=-==-=-=-=-=-=-=-=-=-=-=-=-
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