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Category: Articles » Internet & Online Businesses » Affiliate Programs » Article » Article Code

How To Buy Stocks That Are Hot With No Effort

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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.

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