Some stocks will roll back and forth within a channel, between a high and a low price. Once a stock like this is identified it should be easy to buy low and to sell high.
"Buy low, sell high!"
That is always good advice for a would-be successful investor. It is also quite useless since we never know where the highs or the lows will be.
However, with the computer tools available to us today, it is much easier to reduce the risk and to anticipate potential stock price moves. Armed with this information, stocks that roll between predictable channels can serve to fatten our bank account.
Suppose we had invested $1,000 in General Motors in 1987:
Case 1. Buy & forget about it until we sell in 1998 (11 years later):
That's not too bad.
Case 2. Work only that portion of the stock chart where it appears to move sideways (1/2/87 to 7/2/93):
1.Play inexpensive stocks. A $1 increase on a $50 stock is only a 2% gain. That same $1 increase on a $5 stock returns a whopping 20%. Understand the value of leverage with lower priced stocks and take advantage of it. Additionally, lower priced stocks roll more often than expensive stocks. 2.Select stocks from a price bar-chart that show a pattern of rolls within some channel, between a low price (bottom of the channel, called Support) and high price (top of the channel, called Resistance). 3.Select preliminary Buy and Sell signals at conservative points and estimate a rate of return:
Return(%) = (Sell Price - Buy Price)/(Buy Price) x 100
If the calculated return is less than about 10%, don't waste your time.
4.Before buying a stock at some low price, define an exit on the upside, or "When are we going to sell!" (Keep your head, don't try to beat the return you calculated in 3) We also need an exit strategy in place on the downside, that is, if the stock refuses to roll up after we buy, how low will we let the stock fall before bailing out. a. One suggestion on the downside is to put a stop-loss at 30% below where we bought in, another suggests 50%. b. William J. O'Neal, founder of the Investors Business Daily, uses 8% as his stop-loss on all his investments. He says very simply his risk is always limited at 8%. c. That is too tight with rollers since we expect more volatility than we would tolerate with a growth stock. We must find a level we are comfortable with and realize that this is an insurance measure. We can't feel bad when we bail-out at our down-side stop on a stock that stubbornly won't roll up again, and then does go back up. Discipline! 5.When a stock price is decreasing to its support level, don't buy just because it reaches your predetermined "buy" point. Wait for the price to kiss that support level and start back up. Never put a Good til Canceled (GTC) order to buy the stock as it decreases. (I've watched too many rollers just keep going down after buying when the price has reached my buy point) 6.A GTC order is okay as the stock is rising toward its sell signal. In fact, this is a good way to maintain the upside exit rule. In addition, a GTC on the upside can help us catch a momentary blip that we would miss unless we sat at the computer all day watching the stock movement. Not a very pleasing prospect. 7.Confirm the value of a rolling stock with fundamental and technical analysis before jumping in. Don't buy just because it's low-priced and appears to be on the down cycle. Look at the rich information included on the Pro-fundity(sm) Page for this purpose. Additionally, stocks that are optionable are so labelled on the Business Profiles shown on the Pro-fundity(sm) Page. 8.Common sense is an important feature in successful trading. It is our ability to look at a situation and make judgements that separates us from the animals. It also separates us from the "black box" that would suggest the computer make all our decisions: a. If a stock looks strong as it moves up to our sell point, we can chose to cancel our sell order and hold the stock as it moves beyond its resistance level. The stochastic technical indicator can help us make that decision. (See Technical Analysis) b. We can also let our better senses tell us to sell a stock if it looks weak before reaching our chosen "sell" point. The ability to do this successfully comes with experience. It is more important initially to become familiar with a set of rules to stick by and get our experience conservatively. c. Since we know that rolling stocks will go back down, we must strive to to sell the stock before it does go down. Our entry & exit rules, that is our strategy for dealing with rollers, makes it clear we bought the stock to sell at a profit. d. Use the Stochastics to guide in buy and sell decisions on good rollers. (see our Technical Analysis page). e.Rolling stocks are not eternal. Each identified rolling stock has a shelf life and will stop rolling. We cannot set our buy & sell signals with the computer and then go sit on the porch. Rather, it takes a lot of work, daily review of the status and then decisive action as we follow the rules for our strategy. 9.Other personal matters to minimize risk: a.Consider the size of the company, measured by its capitalization (There is just less risk with a larger company). b.In the same vein, higher daily volume also means less risk. If your choice is between two stocks, pick the one with higher average daily volume. 10.Gregory Witt, "Rolling Stocks" Lighthouse Publishing 1998, says he finds that fewer than 2% of all stocks are rollers. They aren't easy to find. Excerpts: a. "Most good rolling stocks settle into a rolling pattern as a result of a decline from a higher trading range. This is a powerful signal to help you spot an emerging roller." b."At any given time, I am tracking over 100 rolling stocks. I recently checked earnings on my watch list and found that only two of the 107 stocks currently on my watch list have positive earnings. I have come to accept the fact that rolling stocks are a breed of their own. They often defy the rationality of fundamentals and the all-important focus on earnings found in the rest of the market. All I can say is, if you want to make money in rolling stocks, get used to it."
Express Stocks - Tutorial