In the previous post I explained how you can gain an edge by trading during market extremes. Doing this not only helps you defeat the stock chasing, FOMO (fear of missing out) mentality, but it allows you to be strategic, since you are not jumping at a stock on every small piece of news you see.
Now, let us figure out how we can spot these market extremes, so we can find trading opportunities.Follow a limited universe of stocks. As I had mentioned earlier, my universe of stocks is very limited. I would say it is less than 20 stocks. These are all blue chip type stocks, which are well established companies have been around for a while and will be around for a while. The volume of shares traded on these stocks is over 1 million a day, which prevents manipulation (like what happens with pink sheets and penny stocks)
Further, being an engineer, these are the companies which I read about all the time anyway. So, what works for me is creating a universe of stocks which I enjoy following and reading about. I will never trade a gas & oil company, because I have no interest in it and I am totally against fossil fuels anyway.
How does this help? If I showed you a random person on the street and asked you, if they have gained weight or lost weight, would you know that? No, because you don’t know them and don’t follow them on a daily basis (unless you are a stalker
:)) But if I ask you the same question about your spouse, you will know instantly if they are “over-extended” towards any side of the spectrum. The same thing applies with stocks. I intuitively know that the stock has gone up or down too much because I am so familiar with their “personality” because I read about them everyday. Sorry, there is no shortcut for this. If you are not passionate about something, then don’t get into it please! Once a stock shows up on my radar like this, it is time to confirm if my gut feeling is right. And we do it with technical analysis.
Now, would be a great time for you to open an excel sheet and start putting in the stocks you trade the most. You can use my watchlist when I publish it, but I highly recommend that you create your own. These will be stocks which you love to talk about when you meet friends or go out to a party. Maybe you want to save taxes and only want to trade ETFs. Or, maybe you are a woman, and watch Forever 21 like a hawk. That should go in your watchlist (By the way, they just declared bankruptcy)
In the next post, I will cover how to combine technical analysis with your gut feel to spot trading opportunities.To be continued….