NOTE: The strategies discussed are for educational and informative purposes only. It is not intended to be investment advice.
Not every trade is a smart trade. Sometimes FOMO (Fear of Missing Out) can get the better of the average trader and lead to a losing trade. Also, it is possible that a simple 30-second delay in the execution of a trade can be the difference between profitability and loss. In this article, I will discuss some of the strategies that I use to help me recognize opportunities to yield highly probable outcomes for my trades.
Playing News Events
You may have heard this saying before. “Buy the rumor, sell the news.” This mantra is very applicable to the world of trading. The stock market is very event-driven. When news comes out about a particular company that could potentially affect the stock’s underlying value a lot of volatility can be generated. A good trader can capitalize on that volatility and ride the wave up or down depending on the news event. Let’s use an Apple press conference as an example. Apple tends to have several press conferences throughout the year. During these conferences, they tend to announce new products, software updates, and release dates. Anticipation for these new innovations can cause the value of the company to grow and lead to potential opportunities. Since Apple is a major part of several indexes including the Dow Jones and S&P 500 this type of event has the potential to sway the direction of the general market.
Playing a Breakout/Momentum
Stocks that trade around a specific range can breakout due to many forms of positive news. Some catalysts for a breakout include analyst price increase, earnings run-up, and buyout/merges. For example, a stock that breaks its 52 Week high on an uptrend is primed for a breakout. Since nobody really knows the true value of the company once it passes its ATH(All-Time High) it can cause a massive surge in both price and demand. Volume is personally my biggest indicator for a stock. Volume is commonly represented as the number of shares that changed hands during a given period of time. You can expect stocks with a large amount of volume to move accordingly in the direction that they are trending.
Some questions I like to ask myself are: What’s driving the company up? How’s the volume looking? What’s the value of the option premium? To play momentum it is beneficial to use TA (Technical Analysis) to aid in your research. Being early when playing a momentum-based play is key. Stocks that are oversold can have large breakouts given the correct market conditions. Leveraging indicators such as the RSI(Relative Strength Index), EMA (Estimated Moving Average), and MACD (Moving Average Convergence Divergence)
DraftKings (DKNG) Breakout Example
To help further illustrate a momentum/breakout play I’m going to use DraftKings(DKNG) as an example. Here I’ve used the one hour chart to help illustrate the breakout. This breakout was caused by the return of the NFL. The NFL played there first season game during this week and they are the number one sport in terms of sports betting. This was a huge catalyst for several sports betting stocks including DKNG. The runup began on September 8th. This is 2 days before the first NFL game was played on September 10th. During this time window, we can clearly see DKNG trending upwards on the hourly chart. The MACD remained above the signal and the RSI was not too high. To take advantage of an event like this one could have entered into a position the week of the event and rode the wave. I personally took advantage of the momentum and purchased shares for my long term portfolio.
As long as the outcome is income then you’re winning. Being able to recognize opportunities when they present themselves is a key trait for being a good trader. Not every trade is valid. Experience is honestly the best teacher when it comes to trading. There is at least one extraordinary event in the market a month. The more opportunities you see, the easier you’ll recognize them on the fly.
