It’s always a challenge to know when the right time to press it is and when it’s time to go to cash and sit on the sidelines.
This is more of an art I’ve learned, but I’ve come up with 3 easy things to watch:
1) Avoid holding stocks through earnings events.
- Earnings events are extremely volatile and sometimes, it’s hard to pick a direction. A stock could beat earnings estimates, raise guidance and still sell off based on a nuance, such as something the company said on the conference call. Heck, some traders and investors might use a good earnings report as a sign to get out of their position.The same goes for when a stock misses earnings estimates and lowers guidance – it could still go up because the market might think it’s “cheap” if the stock gaps down.
It’s just gambling if you’re holding stocks into an earnings event.
2) Don’t try to pick a bottom on a falling stock, wait for the hourly chart to reverse course.
- Ever heard the saying, “Don’t catch a falling knife”? Well, if you’re trying to buy a stock that’s dropping or pick a bottom arbitrarily, chances are you’ll experience trades that lead to a lot of pain. It’s impossible to try to pick tops and bottoms.That said, after countless hours of painstaking research and tens of thousands of trades, I’ve found a pattern that has a high probability of multiplying my money. If I’m trying to buy a weak stock, I won’t get in until I see my “money pattern”.
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3) When volatility is dropping (watch VXX) then it is a good signal to buy stocks.
- Now, we won’t get into all the math behind VIX and VXX, but this is one exchange-traded product that’s a good indicator of when to buy stocks. If VXX – an exchange-traded note (ETN) that tracks the volatility index – is dropping, the market sentiment may be bullish. That’s when I’ll look for my pattern, and if it’s there – I’ll look to buy call options. Even though we’re stock specific, we don’t completely ignore what the market is doing.
By just taking into account these 3 factors when trading, I’ve been able to consistently grind out five-figure trades – sometimes in less than a week.