A new quarter starts today, and for me, that means a new window of opportunity.
Now, if you know anything about me, then you know I like to keep my trading simple. After all, it doesn’t get as easy the Horizon Line.
However, if you think I was able to make $324,041.49 in trading profits in 2019 from just my ability to read charts…
(I made$50K in profits on a $100K account since launching Freedom Trader last month! Not a member of the service? Click here to join now)
…then you’re wrong.
You see, there are tons of “great looking charts” out there… but that doesn’t mean a stock is going to move in the direction you want it to…when you want it to…
That’s why I trade momentum stocks that have catalysts.
Make no mistake about it. If you learn how to trade catalysts, then you can make a lot of money in the stock market.
But before you learn how to dissect SEC filings and press releases, it’s essential that you understand the basics first.
For example, there are a few necessary pieces of information that every trader should know about the stock they’re trading, it could mean the difference between winning big or having a devastating loss.
Table of Contents
How to Build A Strong Trading Foundation
Now, a lot of traders just like to focus on price action and news… they tend to ignore important facts like fundamentals and statistics.
For example, some important factors that can affect a stock include:
– Sectors and industries that are in play.
– Average trading volume.
– Market cap.
So why’s it so important?
Not everyone is looking at charts and there are actually fundamentals that can move stocks. Think about it like this, even if a stock has bearish pattern… what happens if it announces a deal with a large company?
The stock will probably go up.
That said, even if you’re focused on charts… there are some basic fundamentals to take into account.
Spotting Sector Moves Can Lead You to Profits
Stocks tend to move in cycles… especially with momentum stocks, and if you can spot which sectors or industries are going to be hot… then you can potentially pull massive profits.
We’ve seen cannabis stocks hot… as well as Bitcoin stocks.
For example, recently… we’ve seen Bitcoin run up… and there have been some related stocks that have been following that price action.
Well, when an entire sector is moving… it helps to keep a basket of stocks that can move on the radar.
One simple way to find these stocks is to look for a corresponding exchange-traded fund (ETF). For example, one ETF that could be affected by Bitcoin is the Amplify Transformational Data Sharing ETF (BLOK), which tracks blockchain stocks.
If you go to the fund’s homepage, you can see the holdings.
One stock that you could’ve spotted was Overstock.com Inc (OSTK)… this stock has moved with Bitcoin before.
But it’s not just about finding the stocks, you’re going to have to look deeper at the fundamentals and see whether it’s liquid enough for you to trade.
Now, you can do this for other sectors that you think could be hot. For example, if you think cannabis stocks can run… you could look to ETFs like YOLO or MJ… then find a basket of stocks you like.
The next important factor to understand is liquidity or average daily trading volume.
Focus on the Fundamentals
One thing that some traders seem to ignore is volume.
They’ll see a bullish pattern… buy the stock… only to end up losing money on the trade…
… or worse… it’s hard for them to get out of it because the spread is too wide.
Well, that all has to do with volume.
For the most part, if you’re just starting out, you want to find stocks that have an average daily volume of at least 1M shares traded per day.
If you’re trying to trade momentum stocks for the breakout… then you’ll need some volume behind it.
Well, when a stock is moving higher, and there’s heavy volume… what that signals is that there is heavy demand for it. In other words, there are a lot of buyers in it.
For example, check out this daily chart in Workhorse Group Inc. (WKHS).
Notice the move higher and there’s some heavy volume. Basically, you can look for the pattern and then see whether a stock has above-average trading volume that day.
One way to do this if you’re looking to trade a stock is to see how much volume it’s already traded for the day, then look at Yahoo Finance or Finviz and compare that to the average trading volume.
For example, let’s say you’re looking to trade OSTK… it trades on average around 2.60M shares, according to Finviz.
Now, if you were looking to buy the stock for a bounce… you would look at the volume.
So if you look at the volume bars… OSTK has more or less been having some heavy volume and moving higher… that means the stock is liquid and the bid-ask spreads will be around a penny.
You also want to avoid trading stocks with low volume.
You see, if there’s not a lot of people trading a stock, there will be a wide bid-ask spread. In other words, if you trade stocks that aren’t heavily traded… there’s going to be a lot of slippage.
Not only that, when a stock is illiquid… it could be extremely hard to get out there may be no demand for the stock… and you probably don’t want to pay the spread because it could be as wide as 50 cents.
Now, another factor that can affect a stock is the amount of floating shares it has.
Stock Structure is Important and It Could Uncover Opportunities
If you don’t know what floating shares, or float, is… then listen up because it’s extremely important when you’re trading momentum stocks.
Now, floating shares is simply the amount available for us to trade.
Think about the float as the supply.
The lower the supply… the faster a stock can move up.
For example, let’s say a stock announces news and is hot… and a lot of traders want to buy it… but the float is low.
What do you think will happen to the stock?
Well, that’s when you see crazy moves in stocks.
Now, we actually see companies change their float often.
The stock had around 78.66M floating shares before it actually changed the floating shares.
HEB announced a 1-44 reverse stock split… and that essentially brings the floating shares down to just 2M floating shares.
In other words, this brings the price up by a multiple of 44… but reduces its float and shares outstanding.
Additionally, the market capitalization (or the market value of the company doesn’t change).
With such a low supply now… all it takes is a little demand for the stock to move.
Now, remember when we talked about volume?
You should compare the volume traded to the actual float as well. For example, HEB had around 2M floating shares… and it actually traded nearly 50% of its float the day the news was announced…
… and over 50% the day after.
Another factor to note is market capitalization… basically, it’s easier for a small cap stock to double than for a mega-cap to double.
Think about it like this… how often do you see a stock with a market cap of $10B+ double in just one day?
It’s really rare, and if it does… it’s probably because there was an acquisition or merger.
However, when you have stocks with market caps of say $500M… it’s pretty easy for them to double if they get good news.
For example, check out this chart from Finviz in NovaBay Pharmaceuticals (NBY).
The company actually announced that one of its products would be made available on Amazon without a prescription… and that caused the stock to spike up from $0.32 to a high of $3.60 the day the news was released.
Now, if you look at the day the news was announced (the big white candle)… the stock traded over 50M shares… while its float is only 7.46M and its average volume was around 2.55M.
That said, if you were looking to trade NBY that day… liquidity wasn’t going to be an issue.
As you can see, price action isn’t the only thing you need to focus on when you’re trading stocks… factors like sector moves, trading volume, and float matter.
And that’s just the basics. In a future lesson I’ll share more stuff to look at that can help you gain an edge in your trades.
However, if you want to learn about my edge, then I encourage you to watch this video explaining the strategies and techniques I used to score over $300K in trading profits over the first-half of 2019.
[Ed. Note: Jason Bond runs
JasonBondPicks.com and is a swing trader of small-cap stocks. In 2015 he earned a 180% return on his money. Then in 2016 he turned a $100,000 account into $430,000! Discover How He Did It]
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