Three Steps to Winning Stock Trades

Three Steps to Winning Stock Trades.

In this post, we will examine the most common mistakes investors and traders make and then suggest three steps to winning stock trades. Consistency will result from the repetitive use of this workflow.

Over the past 30 years as an investor/trader, I’ve noticed the most common theme of discussion remains, how can I increase my probabilities of winning stock trades? When is the right time to get into the market as an investor?

Successful Traders and Investors Do This First

Start by asking, how much can I lose if I am wrong? Successful traders have a game plan and watch list that accounts for stop losses, targets and observations gleaned from doing their homework ahead of time. Professional traders don’t start by imagining riches and wealth on every trade. On the contrary, most new traders see investing and trading as an ATM. If you’re doing this, break the habit before it becomes a problem.

As a preface, its important to note we need to step back and look at the basics of trading and investing. So many new traders have tons of useless information swirling around in their heads. In short, they have information overload, which leads to trading paralysis during the trading day. Keep these concepts in mind, as we attempt to make things simple.

Step One: Is the Index Bullish or Bearish?

First, we need to watch the markets that we trade most often. This might seem obvious to some, but if you don’t consider this step, your winning stock trades have a higher probability of failure. Therefore, if price action in the index is bullish, we can assume most stocks therein will be bullish. We call this the Top Down Approach to Investing and Winning Stock Trades. Some say “a rising tide, floats all boats.”

Start with the indices, then drill down into the sectors, then look at the individual industry groups and finally check individual stocks to find the next winning stock trades.

Price is King – Winning Stock Trades

What does this mean? Price is King, because each candle tells a story. Multiple bullish candles tell us someone is buying. Larger candles, more buyers. You can have all the bells and whistles, multiple proprietary indicators and oscillators, but they are all built on price. No buyer and price goes nowhere. Conversely, when you have tons of sellers or overhead supply, price will drop until buyers overwhelm the sellers. Demand outstrips supply.. Focus on price, as all of your indicators are based on it, the auction between buyer and seller. Understand this first.

Before proceeding to step two, we need to consider where price action is headed. Simple enough, yet we see so many traders ignoring this concept. If you want to increase your probabilities in a bullish trade, price must be above the 9/20ema. You can use any moving average, just make sure price is above and trending bullish. So, if price is above an ascending 9/20ema we are bullish and look for support on any pullback to the rising moving averages. If price is below a descending 9/20ema, we will have a bearish bias and look for rejection at the overhead moving averages.

We do this every day via our LIVESTREAM BROADCAST during market hours, so consider joining us as we trade real-time, not in hindsight.

Step Two: Pay Attention to Sector and Industry Group Performance

If the price action in your index of choice is above its short term moving averages, then we move along to the sectors and industry groups looking for the next winning stock picks trading above their 9/20ema.

July Seasonality – Bullish for Tech Stocks

The technology sector turned on July 07, in what appeared to be candle number two of a Morning Star Doji pattern. If candle three was a large bullish body candle, we would have additional confirmation that seasonality was kicking in high gear. One nuance worth repeating, always look for confirmation in your decisions. Eliminate your opinion, as only price matters. More on that later.

At first glance, this XLK sector chart was very bearish. Price was trading below the 9/20ema. MACD and RSI were heading lower. Also note VBP on the left side of the chart (histogram) exhibited significant resistance overhead. Price needed to get above these levels as well.

Morning Star Doji setting up, stochastic is in the green zone with price below 9/20ema.

We noted in the weekend video newsletter, prior to July 4th; technology stocks were entering the seasonally strongest month of the year. Members had a high probability of winning stock trades in tech due to this seasonality. This was prior to the start of the week, not in hindsight. That said, price action was still below the 9/20ema, so we had to await confirmation, namely price needed to emerge above the moving averages.

The following week, on July 11, during the market session we broadcast that price was moving above the 9/20ema. Our watch list was populated with winning stock trades and high probability setups, so we watched as industry group after industry group in the tech sector followed through with the Nasdaq-100 and the technology sector (XLK). Also, note stochastic was in green zone in the prior chart, while three days later, stochastic confirmed our bias, in the chart below. In addition, MACD is turning (a function of price) and RSI is rising through 50, an added bonus. Since price is king, these two were confirming we would likely see a follow through.

Follow through as price moves above the 9/20ema

Step Three: Drill down into the sectors and industry groups, for the next winning stock trades.

Facebook (FB) exhibited all of the criteria heretofore outlined. Index > Sector > Industry Group > Stocks above the 9/20ema. In addition, Facebook turned the Friday prior to the Nasdaq-100 and XLK sector, as it transmitted bullish price action. In short, price closed just above its 9/20ema to finish the week strong. Note stochastic turned higher from the green zone on Wednesday, the day NDX and XLK printed the potential Morning Star Doji.

Facebook turning back above its 9/20ema stochastic confirming

Facebook was on our watch list for the week, as it printed another large body bullish candle. We noted in the weekend video newsletter that it closed above the 9/20ema on Friday. On Monday, as Facebook continued higher, late in our daily broadcast we exclaimed, “if tomorrow is a bullish day like today, we will have a three white soldiers pattern.” And, thats exactly what happened. Following all three steps led to a profitable trade.

Facebook followed through on the 9/20ema cross gaining more than 20 points in the process.