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STRATEGIES


Start Small And Win Big

10/25/11 09:18:20 AM
by Billy Williams

The bulls are trying to find their legs but don't jump in completely. Start with small positions and you could win big.

Security:   SPX, ISRG, PRGO
Position:   Buy

The market has continued to act bullish, the consequence of which is that equities are exhibiting bullish behavior themselves. Individual stocks tend to move in tandem with the rest of the market, which explains current behavior on the part of the majority of the stock's price action. If trade volume continues to be positive, you can expect the majority of stocks as well as the overall market itself to begin the attempt to make new higher highs and higher lows in their respective price action and signal a trend reversal in the bulls' favor.

This reversal in price is still tentative at this point, but in trading, there are no guarantees. Remember, trading is a business of odds, and therefore, it is not predictable. See Figure 1.


FIGURE 1: S&P 500. Support held as the SPX bounced upward and broke through its uptrend line, only to face another test at its 200-day simple moving average.
Graphic provided by: www.freestockcharts.com.
 
One thing that can put the odds in your favor is your focus on vehicle selection. Many beginning traders come to the market with just enough knowledge to be a danger to themselves and their capital. It can also be a blessing for more experienced traders who lie in wait for their poorly executed trades to pick them off, in large part because they don't understand the market or the stocks they are trying to apply their trading approach to. No strategy can sustain itself if it is being put to use in a market that it is incompatible with.

Concentrate most of your time and effort looking for stocks that are the most compatible with your trading approach within the context of the current market. Now, the market is in transition from bearish to bullish, with the bulls trying to find their legs. See Figure 2.


FIGURE 2: ISRG. ISRG is a strong stock leader that has gapped up and broken through to new all-time highs. Stocks like these have been resilient in the down market and are likely to lead the market higher as it turns upward.
Graphic provided by: www.freestockcharts.com.
 
Spend most of your time looking for reliable trends in the strongest-performing stocks where low-risk, high-probability trades are forming.

Currently, the ripest fruit among stocks for trading is going to be the stocks that have weathered the recent downturn and maintained their price near or at their all-time highs or, at least, their 52-week price highs. These stocks tend to also exhibit the highest resiliency in large part because they have the highest level of relative strength. This is important because, in trading the market, you want to buy strength and sell weakness, which is another way of saying that "the trend is your friend" because buying tends to beget more buying, and selling tends to beget more selling. See Figure 3.


FIGURE 3: PRGO. PRGO has been making higher highs and higher lows in its price action and recently has broken higher to new highs, as the overall market is trading higher as well.
Graphic provided by: www.freestockcharts.com.
 
In addition, start with small positions to test the conviction of the market's current price movement. If that movement fails to follow through, you get out with a minor loss. However, if it does follow through to the upside, you can add to the position by scaling in during pullbacks or when price rises higher as it sets new higher highs and higher lows in its price action.

For beginners, this is critical because no one comes to the market and trades in a full sprint without crashing violently and ending up broke. Start small and walk before you learn to run and you will put the odds on your side that you will gain consistent winners as well as the occasional home run and earn your bones as you become a full-fledged professional speculator.




Billy Williams

Billy Williams has been trading the markets for 22 years, specializing in momentum trading with stocks and options. You can read his commentary at www.StockOptionSystem.com where you can get a free report "Fundamental Trading Keys For The Aspiring Trader".

Company: StockOptionSystem.com
Website: www.StockOptionSystem.com
E-mail address: stockoptionsystem.com@gmail.com

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