Stock Market Trading - Buy High, Sell Higher
" But have you ever heard, "Buy High, Sell Higher?" Some of the most successful stock traders practice this unorthodox approach.
David Ryan practices and preaches this concept, which helped him come in first place in the U.
Investing Championship with a 161% return back in 1985.
He also came in second place in 1986 and first place again in 1987.
Ryan is a student and fund manager for William O'Neil, the investor and businessman who started the successful financial paper "Investors Business Daily.
"In O'Neils popular stock market trading book, "How to Make Money in Stocks," O'Neil recommends the idea of buying high and selling higher.
O'Neil discovered this by studying the Dreyfus funds.
Every stock they picked first made new highs.
O'Neil built his portfolio looking for stocks that behaved the same way.
But before you can appreciate this practice, you'll have to understand why O'Neil and Ryan disagree with the traditional wisdom of buying low and selling high.
You are assuming that the market has not realized the true value of a stock and you think you are getting a bargain.
But, it may take months or years before something happens to the company before there is an increase in the demand and the price of its stock.
In the mean time, while you wait for your cheap stocks to prove themselves and rise, stocks making new highs are making profits for traders who buy them right now.
When a stock is making a new 52 week high, investors who bought earlier and experienced falling prices are happy for the new opportunity to get rid of their shares near a breakeven point.
Once these investors leave, there will be no more selling pressure or resistance from them to prevent the stock from taking off.
Perhaps you are scared to buy a stock at a high.
You're thinking it's too late and what goes up must come down.
Eventually prices will pull back which is normal, but you don't just buy any stock that's making new highs.
You have to screen them with a set of criteria first and always exit the trade quickly to reduce your loses if things aren't working as anticipated.
Before making a trade, you'll need to look at the overall trend of the markets.
If it's going up them that's a positive sign because individual stocks tend to follow in the same direction.
To further your success with individual stocks, you should make sure that they are the leading stocks in leading industries.
From there, you should look at the fundamentals of a stock.
Find out if the EPS or the Earnings Per Share is improving for the past five years and the last two quarters.
Then look at the RS or Relative Strength of the stock.
The RS shows you how the price action of the stock compares with other stocks.
A higher number means it ranks better than other stocks in the market.
You can find the RS for individual stocks in Investors Business Daily.
A big plus for stocks is when institutional investors such as mutual and pension funds are buying them.
They will eventually propel the price of the stock higher with their volume purchasing.
A look at just the fundamentals isn't enough.
You need to time your purchase by looking at the stocks' technicals.
Interpreting stock charts will help you pinpoint safe entry price ranges.
The five reliable bases or patterns to enter a stock are the cup with handle, the flat base, the flag, the rounded bottom and the double bottom.
When price breaks out of these bases, you should make sure that volume for the stock also surges.
Old trading beliefs are hard to change.
But once you change them to more effective and proven ones, the sooner you will be on the way to trading success.
Remember, Dreyfus build their mutual funds by purchasing stocks after they made new highs.
The legendary private investor Nicolas Darvas who wrote "How I Made $2,000,000 In The Stock Market" did the same back in the late 1950s'.
Take the time to study and understand why you should buy high and sell higher - once that concept sinks in, you may start to wonder how you could follow any other approach.
Copyright © 2007 by Leroy Chan