Warren Buffet buys companies at discounts and rides them to glory… He’s done it for decades…and made a fortune.
However, that approach has never worked for me. You see, I do something completely different. A strategy which has made me a multimillionaire over the last few years… I BUY HIGH AND SELL HIGHER
You probably heard the saying, ‘the trend is your friend.’ So, why do most people assume that doesn’t work when a stock is breaking out to new highs…
Just the other day, I grabbed calls on ZS after it already gapped up double digits on earnings.
Some may argue that trades like this aren’t common…
However, if you look around, opportunities like this have been popping up more frequently…
Just take a look at the runs that Crowdstrike (CRWD) and Square (SQ).
What exactly does this setup look like?
And why can it be so darn profitable?
Keeping with momentum
Most of us learned about momentum in physics class. Newton’s first law – objects in motion stay in motion unless acted upon by an outside force
Surprisingly, this applied to price charts as well…although we call them trends.
The question most traders ask is why would a stock’s momentum keep up at all-time highs? Wouldn’t that act as resistance?
Actually, it does act as resistance. But, support and resistance aren’t immovable objects. They’re just levels where the probability of price stopping is higher.
What most people don’t realize is as a stock consolidates underneath one of these support levels, it winds up to make a move.
For those of you that don’t like the idea of stock energy, think of all the shorts and profit orders at the all-time high. Over time, people look at their positions and say, ‘meh, close enough’ and exit the trade.
Eventually, the orders get eaten up, weakening the resistance levels.
Check out this 78-minute chart for Wayfair (W) as an example.
W 78-Minute Chart
Inside those two white lines is a consolidation area for the stock. At the top, you have the recent highs (not the all-time highs, but since it had been so long since the all-time highs, it works in this case).
Notice how it tried three separate times to break through those levels. However, each selloff became weaker and weaker. That’s a signal buyers keep stepping in to support the stock.
So, once the sellers took a step back, the buyers took over and pushed the stock to new highs.
Using short float for an edge
I like to give myself as much of a chance at success as possible. One way to do that is to trade stocks with a high short float.
Short float is the number of shares outstanding that traders sold short (bet against the stock) out of the total number of shares available to trade.
When traders short a stock they borrow on margin from their broker. As stocks rise, so do their losses.
Eventually, a broker steps up and tells the trader to close their positions, known as a margin call.. To do that, the trader has to buy the stock back.
As one trader buys back the stock, it forces price higher. That creates a cascade of margin calls that compound known as a ‘short squeeze.’
Short squeezes are stronger when there is a high short-float. By preselecting these stocks, I set myself up for a bigger payout when I do win.
Options make the whole thing work
The last piece of the puzzle are options. By trading options, I’m able to gain leverage but manage my risk.
Here’s how it works.
Say I’m playing a trade on the Wayfair chart above. I expect it to bust through to new highs so I buy a call option that costs me $5. Trading my TPS Setups as long as I have, I know that I can expect double or more on the trade.
WIth my TPS setup, I have a timing component to help me avoid a lot of time decay on my option. So, if I stop out, I still get about 50% of the option’s value back.
Now think about that. If I lose I lose 50%. But if I win, I get double or more. That means even if I win 50% of the time, I’ll still come out ahead.
Want to see it in action?
There’s no better place to catch this kind of trading than in my LottoX service. I put together TPS setups all the time to give traders a bevy of plays to choose from.
Even if you’ve never traded options before, this service is designed to help educate you into becoming a proficient options trader.
And right now, you can catch a replay of my recent LottoX event where I lay out everything in detail, explaining what the service entails and what you get as a member.