Posted by: eminitrader April 14, 2007
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There are so many different strategies that people use to trade, for indiividual trader it is necessary to find 1 strategy and master it. You can select few stocks and concentrate on that. Here is 1 strategy that I think is fairly easy and has a decent return.
Find stocks that had the largest 1 day % gain. Here is a link.
http://finance.yahoo.com/gainers?e=us
Once you have the stocks, narrow it down to the ones that have been beaten up ie. trading near their lows. Now you need to find 3 things:
Entry Price, Stop Price(where you'll get out if you are wrong) and Target Price. We'll use the target price to determine the risk/reward ratio and to take partial profits.
Target price will be the prevoius support before it broke down.
Stop loss will be few points below the low.
For example: A stock fell down from 16 to 8 and traded around 8 for a while, then it came down to $3. Yesterday, the stock went up 20% and closed at $3.60. Should you buy it now or wait for it to move higher before you buy or do you want the stock to come down to $3 before buying? What if it does not come down to $3? It is necessary to determine the risk/reward ratio. Here is how you do it.
Stop price = $2.85 because $3 was the previous low and if it goes down 5% from that point, we'll take our loss.
Target Price: $8 which is the previous support.
Range: $8 - $2.85 = 5.15
Now we divide the range by 4(I'll tell the reason why later).
5.15/4 = 1.30 rounded up. Now add this number to your stop loss price.
$2.85 + $1.30 = 4.15. So as long as the stock is below $4.15, it is okay to buy.
What we are looking to do is buy at a price where our risk to reward ratio is atleat 3.
What if the Target price is $5.
Range: $5 - $2.85 = $2.15.
Divide the range by 4.
2.15 / 4 = 0.55 rounded up.
Entry Price = 2.85 + 0.55 = $3.4. In this case since the actual stock went up to $3.60, wait for the price to come down to $3.40 or lower or pass on that trade.