Breakout Stocks: The Quest For Stock Market Gold
I find the stories about the California Gold Rush era
fascinating because at few other times across the course of
human history, could a person of modest means potentially
achieve great wealth. Though the quest for gold was not always
easy for the 49ers, and not all of them achieved wealth, once
they literally "staked their claims," each person had the same
opportunity to achieve instant riches as the next. The Gold Rush
was the great equalizer.
Finding great stock trading opportunities is, in a way, like the
49ers' quest for gold, in that anybody-- whether young or old,
rich or of modest means, male or female-- has a chance to create
wealth for him or herself. But finding a shinny nugget at the
bottom of your pan is one thing, while finding those select
stocks that have the most explosive upside potential is quite
another.
Today, I know why trading a stock just as it breaks out can lead
to explosive gains, and I know the thrill of watching a quality
stock quickly swell my portfolio, but this was not always the
case. In fact, I tried out just about every other stock trading
strategy first, because I found studying stock charts tedious
and confusing. Which stocks should I concentrate on? What should
a stock's chart look like? What moving averages should I use?
Which oscillators are the best?
You would think that as an executive at a financial television
channel, I'd have the inside track on slick ways to trade the
market, wouldn't you? After all, I regularly rubbed elbows with
some of the most influential stock market gurus on the financial
seminar circuit. There was only one thing. Each individual was
busy selling his or her own unique stock trading strategy. As I
bounced from trying one trading strategy to the next, I began to
realize that many of these techniques did not work as
predictably as I had expected.
At one point, I even turned to penny stocks thinking they were
the way to make big money in the market. After all, 5,000 shares
of a stock made you feel like a pretty big investor. But in the
end, even a $1.50 stock could become a .75 stock overnight, on
some little ripple in the company's game plan, and poof! Half
your grubstake...gone! And, since penny stocks are usually so
thinly traded, it took a "month of Sundays" just to execute a
sell order. Meanwhile you watched as your sell order
single-handedly brought the stock's value down far below what
you were hoping to get for it.
The shortcomings of many of the stock trading strategies I tried
only made me more determined to find a more predictable way to
make money in the stock market. My epiphany came while turning
the first few pages of a book on stock charts that had been sent
to our television station by the publisher. The book had been
sitting on a bookshelf in a corner of my office for some time
collecting dust. The book? Analyzing Bar Charts For Profit by
John Magee.
Magee was talking about how the field of technical analysis
developed, beginning with the early moving averages developed by
Charles Dow dating all the way back in 1884. As I read, three
things occurred to me.
1. First, some very smart people had been hot on the trail of
finding a system of using charts to anticipate stocks' movements
for a very long time.
2. Second, charts represented the only visual, factual record of
a stock's movement that was not filtered through some financial
news analyst or stock market guru.
3. Third, and most important, it actually seemed plausible to
make reasonable assumptions, based upon certain charts, as to
when a stock was nearing its greatest potential. Could I have
finally found the "holy grail" to stock profits I had been
searching for?
Of course, nothing is ever as simple as it seems at the outset,
and quite frankly, the study of charts took me far deeper into
technical analysis than I ever had intended to go. Yet somehow
the quest for a more definitive way of knowing when to buy
high-potential stocks had grabbed hold of me, and wouldn't let
go until I had some hard and fast answers.
I read every book on charting techniques I could lay my hands
on. At night, armed with my charting software, I'd download a
list of stocks and stare at their charts trying to discern what
they were telling me. William O'Neil's "How To Make Money In
Stocks" helped me to better understand the relationship between
a stock's daily price action and its volume. Slowly, after what
seemed an eternity, I began to spot the chart patterns.
Of course gaining knowledge about technical analysis is one
thing, and putting this knowledge into practice is quite
another. Here again, there was no shortcut. No abbreviated
course. No quick cure. I had to rigorously trade stocks based
upon my assumptions about a stock's chart. I'd hear seasoned
traders say this is a process that takes about four years of
frustration, elation and often, disillusionment. They weren't
kidding. Once I emerged from this "birth of fire," I had a
newfound respect for the market forces. Gone was any pretense of
cockiness or self-pride. I felt almost as if I had achieved a
kind of "warrior status."
In the end, I learned that trading stocks just as they broke out
was simply the most dependable way to make money I had ever been
exposed to. There wasn't any guarantee, there were still
surprises, and not everything worked out exactly as planned, but
when a stock's time had come to break out, there just was no
quicker way to make money.
These days, I usually begin my search for stock market gold by
scrutinizing a company's fundamentals and choosing the best of
the best. Why? Because a leading company has an established
track record for executing a successful game plan, and is less
likely to surprise you with negative news. Believe me, with all
the varying factors that you have to contend with in trading
stocks, you at least want to have your best players on the
field. Why would you want anything less than your top
quarterback in the Superbowl? The same thing applies to stocks.
Does the company have successive quarters of earnings increases?
How does the company stack up to others in terms of its
"relative strength," or price stability? Is the company in a
strong industry group? Is the stock under accumulation by mutual
fund companies?
Then I look at the stock's chart. Here's where things start to
get exciting, because breakout stocks form certain time-tested
patterns just before breaking out. "Time-tested" does not mean
foolproof, but from a cup-with-handle, double-bottom, flat base,
or other types of chart patterns, you can begin to discern the
telltale signs of pent up demand. The stock may drift sideways,
or slightly downward as if it is disinterested in going any
higher. Meanwhile, it's daily volume drops to a whisper. It's
almost as if the stock is sleepwalking. A lot of traders take
this to mean there is no interest in the stock. Nothing could be
further from the truth.
One day, the stock seems to turn on the afterburners, and you
see this explosive burst of volume that exceeds anything the
stock recently seemed capable of. You silently watch in awe as
this stock breaks through its resistance/buy point and then
heads skyward. Then, as you watch your profits mount, you sit
back in your chair and allow yourself a brief moment to reflect
on the thrill that the 49ers must have felt, because in your own
way, you've just hit paydirt. For more information visit
www.StockConfidential.com
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