Focus on stocks that can double your money.
As the market improves you should be focusing on stocks that can double your money.
I was having a talk tonight with some of my mentors at TraderLion and a question came up about how to narrow down a universe list of a couple of hundred stocks into a focus list consisting of 10 or fewer names.
The answer was simple and resonated deeply: Focus on stocks that can double your money.
While this seems obvious in theory, the practical application of this mindset is a little more ambiguous and open to interpretation.
Here’s how you can make this mindset a reality when trading:
1. When you first look at a chart, glance to the left.
What does the price action tell you? Where are the next large liquidity zones? Is the stock trading near or at 52-week or all time highs?
Asking yourself these questions will lead you directly to the answer of whether or not a stock can double from its current price.
Here is an example:
This stock went up +173% in only two months when the market rallied from early July to early October. Clearly, this is a stock that can double. With this in mind, we can then look at the weekly chart to see the upcoming pockets of supply that the stock may run into.
The $40 range is where prior all-time highs were, so we can imagine a rally from $30 to $40 would require some pause as profit-taking occurs. But if and when the stock gets through this level it should have the potential to double…
2. Pay close attention to the price/volume patterns.
The strongest stocks find support at their 10 and 20 exponential moving averages as they begin to fly up in price.
They also show incredibly strong accumulation signatures, whether this is in the form of pocket pivots, high-volume gap-ups, or massive volume breakouts to new highs.
As you go through your lists, ask yourself if the stock is showing any of these characteristics. If they are, keep them on your lists. If they aren’t, don’t be afraid to discard them. At the end of the day, it’s your hard-earned money on the line – make sure what you’re trading is the cream of the crop.
To be a successful trader, especially at the beginning of a new market cycle, you must be focused on the names that can double your money.
Example of a name where it will be hard to double your money:
We can see based on the volume profile that a rally to the mid $40’s will likely be met with some selling if this name can continue higher from the mid $35s right now. While this was a trade I was focused on last week, it isn’t one that is going to generate the type of returns of over 100% based on the current structure.
One of the best parts about trading is that one little mindset shift can change the way you see and approach the market. This is exactly what has happened tonight, and I felt compelled to share this mindset shift with you.
To resume, here are the 3 steps you can follow to identify if the stocks you are watching can double:
Look to the left.
Look for specific price and volume patterns.
Study charts that have trouble doubling and master those characteristics.
I’d love to hear feedback about how this mindset can fit into your trading styles going forwards.
Talk to you guys later this week,
After doing this exercise with my entire universe list, I ended up deleting deleted half of the names and narrowed down my focus list into the following 7 names:
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