The Most Essential Part of any Trade
Any one can trade a stock.
But it takes a disciplined person to trade that stock well.
One of the biggest issues facing all walks of traders is a severe lack of discipline and structure in stock buying habits. Many fail to use stop losses, or even protect gains with a simple trailing stop loss strategy. Others risk far too much.
Others fail to wait for confirmation of trend change, and buy too early.
That alone is a recipe for disaster and an empty portfolio.
Look at Facebook (FB) for example.
In late July 2018, shares plummeted from $220 to $175 on fears of slowing growth.
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Worse, after noting that it’s likely to face lower profit margins for the next two years, Facebook also reported that its average number of monthly users was 2.23 billion – which was 20 million short of expectations.
Worse yet, Facebook CFO, David Wehner, said shareholders could expect "revenue growth rates to decline by high single-digit percentages from prior quarters" for the third and fourth quarters. Revenue of $13.23 billion for the second quarter came in short of expectations as the company struggled with recent fallout.
Of course, the herd got fearful and sent the stock screaming lower.
Then again, Facebook is no stranger to bad times. It’s faced them multiple times. Yet, each time the stock marches higher from oversold conditions.
But the key to jumping in prior to a move higher is discipline and confirmation of a break higher. While we can find signs of over-extension using the lower Bollinger Bands (2,20), MACD, RSI and Williams’ %R, we need one more confirming tool – time.
Personally, I like to wait a couple of day prior to buy on an oversold move. I want to see if the move higher is sustaining itself, and holding prior a buy in. Another way to confirm if the break is real or not is with a change in volume.
Consulting volume for confirmation of breakout is essential to ensure changes in supply and demand. If the stock begins to break higher, yet there’s not a lot of volume, we have to question the validity of the move. Without it, we don’t know if the stock has simply gotten ahead of itself or if it’s actually breaking out at all. To spot a potential breakout candidate, find stocks that have a strong line of support and resistance.
Without confirmation, you will face disaster.
For example, it appeared Facebook bottomed out at $175 on July 26, 2018 with oversold RSI, MACD and Williams’ %R. Plus, it was outside its lower Band. However, those that rushed the trade and failed to wait for confirmation watched the stock sink another $5 to $6 lower to $170.
Once it hit $170, and traders saw signs of a confirmed bottom holding its own, that’s where the opportunity presented itself.
Shortly after, the stock skyrocketed from $170 to $187.
Remember, informed traders are the best traders.
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