Growth stocks have one severe advantage for trend traders. They have a trend with a reason behind it. Of course, every trend has its reasons, but for growth stocks the reason for their trend is obvious and analyzable. Trend trading seems to be so easy, but in reality many trends flatten out, flutter or reverse in the moment the proud trend trader is in the market.
Growth stocks are different here. A company with the right product at the right time has probably the greatest inertia there is in the market. It grows. The inertia only gets beaten by the gravity of death candidates sinking into oblivion.
Shouldn’t that mean that we all had to become short traders? In hindsight often the smoothest trends get produced by stock companies in a death spiral. Sure, but the short trader’s maximal gain is limited to hundred percent. Depending on how low you get in, your risk can be many times that.
Better bet on secular growth and eventually hit your ten bagger. How to do it? There are various ways and judging a company’s growth is an art, not a science, on its own. By the way, Penny Stock Alerts aims to be an artist. But for the scope of this article we are concentrating on the technical trading aspects.
One idea to trade a growth stock is to time the entry by the index of the stock market it belongs to. The reason is that the index modulates the longterm trend of most growth stocks most of the time. There are exceptions like strong thrusts, for instance driven by positive news, but generally downmoves of the whole market get mirrored even by the uptrending stocks.
Trend trading means having a tight stop, at least for the discretionary trading system and near the entry spot. If you are stopped out, chances are that the trend came to an end. Simple. This tight stop is otherwise a problem. Many times the trend trader will get stopped out by an index-induced adverse move.
That is where the index timing idea comes in. Instead of looking at growth stocks individually, just have a basket of your favorite stocks. They should be in a longterm trend, somewhere near a longterm high. At least they should demonstrate some relative strength compared to the whole market. Of course, they should also have rising revenues, an interesting new product and so on.
Growth trading becomes index trading of your growth basket now. Have a working system for swing trading shorter trends, possible an automated one, and simply distribute your trading capital evenly onto your basket stocks on a long signal. Instead of following the next short signal of the above system go fully into cash.
Perfect for the beach trader enjoying his basket of delicious fruits while watching the white crests running down the shore.