. . . . . . Mostly on Momentum Trading. . . .
Your Question:
Let say I look at 2 stocks, stock A and stock B, and must decide which one to play on Monday. Both have same strength, momentum, sector, trend line, etc..., the only differences are 4 factors: share price, market cap, average volume, and shares outstanding. So, assuming others being equal, how significant are those 4 factors in deciding which stock to play. How do you evaluate those factors, if any.
Mozoneman, when faced with a decision between playing 2 stocks. . . I first look for which has a developing story. . . if a stock is receiving momentum prior to pending news. . .it is pretty compelling. Then I look at the public float. . not the outstanding. . .but how many shares are being traded publicly. This gives me a rule by which I measure volume. You say they both have the same strength and momentum. . . but if both traded 300k and stock A has a float of 50 million. . . while stock B has a float of 4 million. . . guess which one I'm going with? Whenever you start seeing a stock trading above 10% of its float . . .and the trade rate is remaining strong. . .in other words it wasn't called in a chat room. . .where it spikes up then spikes down. . . it is worth watching. . .maybe playing.
The share price should never be of concern, unless you are determining valuation. A single share of Berkshire Hathaway is over $50,000. . .but it is still very much undervalued. Whereas a share in Boston Market is about .07 cents and might be still considered overvalued.
And if all things are equal, then share price is of no consequence. In fact, in the current market a stock at $100 seems to have an easier time going to $200 than many $4 stocks have of reaching $8. Most of our gains. . .even doubles. . .the past week have been from the higher fliers. . .AETH more than doubled. . .INSP, ETEK, GLW, etc. have been hot! The high-fliers in general, have been paying off handsomely over the past few years. . .500%. . .1000% or more. . . . and easily better than any other play in the markets [including penny stocks]. . . .and some, you just have to buy over $100 to get in. . . but if price is a concern to you. . . then simply buy fewer shares.
It is always helpful to trade in round lots [100 shares of typical stocks]. . . because if something happens and you must dump them in pre-market or after hours. . . you can. But even if you must buy just 20 shares of a $100 stock. . .if the momentum is there, or it is in a hot sector. . .it may still be a far better play [especially if it is a sector leader] than trying to find an unknown stock in the same sector at $20 and buying 100 shares. While the $20 stock languishes in obscurity, the $100 stock is often getting mentioned on CNBC.
So Friday morning when I saw human genome biotechs heating up again, I immediately started buying the leaders. . .CRA, PDLI and HGSI [chose to pass on MLNM]. . . because I know these will rise fastest. . .I had no concern with share price, avg. volume, market cap, etc. . . I did watch volume compared to float. . .that was helpful in determining the size of my positions for that day. . .in other words if there are two stocks both up 4%, both have traded 300k shares. . .Stock A has traded less than 1% of their float. . . while Stock B has traded 12% of their float. . . guess which one I'm going with heavily? The odds are then in my favor that Stock B will begin to rise at a faster percentage rate than stock A.
Now I also bought GENE to hedge my bet. . .going along with the sector leaders. . .according to historical charts GENE tends to make similar percentage gains as the leaders when the sector gets hot. . . however, it was selling at a share price of about a quarter of the others. . . so buying a similar amount of shares puts less money at risk, while stretching out the play to include more stocks. . .another way to lower risk. . . and gets me one more lottery ticket, should it get news or something and begin to fly at the right time.
And that is another reason why we tend to buy baskets of sector stocks. . .as opposed to selecting just one.
Anything you can do to reduce the risk in a play, contributes to the chances that you will come out a winner.
Now to further answer your question, I look at market cap when comparing stocks in a sector. . . but only when measured against the last quarter's and year's revenues and net income. . . .and against the PE Ratio. . . in fact, when I call a stock up to see its chart. . . I see the market cap and PE ratio together. . . so I get an instant "feel" for valuation. . .I also have the volume, money flow and float together. . . I would like to add 30-day volume to that, but QCharts "upgraded" their software and now I can't figure out how to modify my charts. . . I may have to dump them for a competitor just because of that.
Average volume is helpful in judging momentum in a smaller or lessor known stock. . . especially to see if it is moving ahead of news. . .or making other judgments pertaining to momentum.
So to finish answering your question. . . those are not the criteria I use. . . there are others. . .but if ever in doubt upon which to play. . . stock A or stock B. . . with all things being equal with regard to momentum. . . and there is no sign that either stock is being pump and dumped from a chat room somewhere. . . .then for me the choice is simple.
By playing BOTH stocks, I reduce my risk by one of them releasing bad news and increase my odds of coming out a winner should one of them get a CNBC mention or some other pump that sends it skyward. Now you have to watch them both. . .but I much prefer splitting momentum money in two and get half the returns. . . than to play one, while watching the other pay off.
The momentum game should not be about chasing momentum. . .because it already implies that you are late to the party. . .and being in the right place at the right time is unpredictable. But rather the biggest and best payoffs from momentum plays that I have had, come from finding a gem [low float, compelling story, hot sector, etc], buying it cheap and large, [especially on pending news]. . .and letting it sit there and do nothing until that news is released. . . so when the momentum finally hits it. . . rather than looking to enter and doing last minute DD. . . I'm looking for an exit strategy. I'm watching the door. . .or even selling into the buying depending on the percentage gain, float and volume rate. . .so on that day, I am concerned with one thing. . . getting out high. . .with gradual sells as the price rises.
[I absolutely NEVER try to get out at the high of the day. . . that is a suckers play. . . and can't be done without having really fast equipment and direct execution. You generally come out better by selling on the way up than on the way down. . . reduce position as it rises. . .increase position as it falls, provided volume rate and momentum remain strong. . .or story has not been concluded. . .or news released.]
I keep a close eye on TA to give clues to resistance levels. . .which might influence my exit points. . . On Friday, when I saw GLW having trouble with $200 again, that was my cue to sell. . . I am confident I'll get my shares back cheaper. . . I am now more interested in buying GLW at $205 clear of that resistance. . . or I can wait for it to dip back down toward $170. . . which is what I suspect. . .
I will often buy a daytrading position on the day of strong momentum. . .just so that I start thinking like a daytrader that day. . . and NOT as a long term investor or even position trader.
It is more important to me to come out with my profits. . . than it is to "hope" a stock higher. You can't ever ignore the fact that as stocks move higher. . .they pull back. . . so sell into those sharp peaks. . .and buy up the sharp dips. . . and never never start to "believe" in a company on momentum day.
It is good to hold over shares for the following day. . .and if momentum continues at the same volume rate. . . then you have a head start toward playing the momentum. . . by buying further dips and selling more peaks. . . in essence averaging up. . . but if momentum dries up the next day. . . then selling those last positions is wise. . .
But the most important thing to do at ALL times. . . is "RE-EVALUATE!" Before buying back those shares a few days later when the price drops. . . you have to ask yourself how long it will be before such a scenario happens again on that particular stock. . . and act accordingly. . .if your answer is 6 months. . then perhaps buying back right away isn't the best way to play it.
Other important factors. . .
. . . never confuse a long-term investment with a short-term trade. . .
. . . never buy a stock on momentum, then justify why it should be held long-term. . .losers do that.
. . . never be afraid to sell, for fear of missing "the big one" . . . fortunes are made slowly, steadily and through discipline.
. . . never let anyone change your exit strategy. . . . plan your trades and trade your plans.
. . . never be a "blind-sheep" or merely play "follow-the-leader". . . no matter WHO it is or WHAT they claim they have done. . . .long or short. . . call your own plays . . .set your own targets. . make your own exit strategy. . .
. . . do your own due diligence. . .when a story changes. . .re-evaluate as though you had never played the stock before.
. . . never change strategies in the middle of a play. Re-Evaluate, then play your original strategy out. . . before starting a new one. . . .
. . . there is nothing wrong with buying a stock back several dollars higher after allowing yourself time to re-evaluate the play. . . . . . . . [I do it nearly every day. . .and often it can cost me some fairly big gains. . . but I prefer reducing the risk. . . and taking a lower payout. . . than holding through a panic sell . . . anyday!]
. . . play as aggressively as the market. . . some days that means zero trades. . . other days, like this past week, it means trading ferociously.
. . . Never lose track of which hat you are wearing. . . if you are wearing an investor hat. . .then invest. . .if you are position trading then stay with it. . . if you are playing momentum or anomalies, then stay focused on your style.
. . . if you are Hybrid Trading. . .then you need to keep track of each of your positions and make separate exit strategies for each one. Don't fudge!
. . . never overtrade on a slow day. . .some days there simply is no momentum. . . .take up a hobby instead.
. . . "ProfitOften!". . . that is the key to success in Momentum Trading.
Rande Is |
