Non-professional traders — traders who work full-time jobs and trade part-time — are confronted with the daunting task of balancing work, family and trading. For these traders, it’s not just about knowing the fundamentals or properly evaluating a price pattern, it’s about evaluating a price pattern while grading papers, studying for a Master’s degree, putting together a presentation for work or taking care of sick kids. Trading is a challenge. It’s even more of a challenge when you can’t give it your full attention.
For non-professional traders, whether in pursuit of profit or the intellectual challenge, the vagaries of everyday life often are as responsible for poor performance as faulty analysis or risk control. Of course, most of us are not professional traders, so managing trades successfully and controlling risk in a part-time trading environment are necessities. However, the failure of part-time traders to adjust their expectations — and, indeed, the very way they approach the markets — has left generations of aspiring traders with frustration, hopelessness and empty bank accounts.
The answer is simple, however. You can’t aspire to the best trading technique you discover, no holds barred. Call it a compromise, but the truth is you must build your trading approach around a method that takes your logistical realities into account. Luckily, you can do so while keeping the potential for strong returns and manageable risk.
First principles
The demands of working full-time, coupled with those of family life, force sacrifices in the pursuit of developing a workable trading plan. For most, that means that short-term trading — trading on a time frame as short as a matter of minutes to as long as three days — is not practical. Yet, many will try to juggle staring at a computer monitor, watching every tick, while a baby cries in the background and lunch is cooking on the stove.
Both Warren Buffett, legendary value investor, and Ed Seykota, a famed trend trader highlighted in Jack Schwager’s book “Market Wizards,” say they don’t obsess over every little price movement. In fact, both of them claim not to have a computer in their office despite having millions or billions of dollars active in the markets. Each has a working methodology free of mental and emotional baggage to distract them from the business at hand.
One way to support this type of mental detachment is to seek the strongest stocks available — those poised to move with the force and velocity of a high-powered freight train. You want a juggernaut that won’t be knocked off course and all you have to do is latch on and ride the momentum higher. Ideally, you will seek positions that potentially can run for months or years.
The answer lies in identifying stocks that meet a strict assortment of fundamental and technical requirements, as well as critical short-term price setups.
All of our trade candidates must be filtered using broad, long-term analysis. You do not have time to take major risks. In the context of this strategy, your positions must be built on a foundation of fundamental strength. “Making the grade,” (below) lists the set of fundamental criteria for filtering stocks for a Juggernaut Surge.
The technical criteria are much simpler; there are two key factors to validate a potential entry:
- Price must be at a one-year high (preferably an all-time high).
- The previous eight weeks have seen a price surge of at least 50%.
Price surges within a confined period tell us that a stock is under heavy accumulation and is likely to rise. This is especially true if the company fundamentally is sound.
Autozone met all of our fundamental criteria when it began a surge in late 2008 to make an all-time high and touch off a juggernaut surge (see “Power surge,” below). Sometimes patience is needed as these are rare and long-term set-ups.
These sudden price surges are a simple result of supply and demand forces. If demand is high, then limited availability results in a frenzy of buying as the stock’s volume begins to spike higher and the stock goes on to new all-time highs. This buying frenzy is the result of institutional sponsorship where large banks and mutual funds take interest in a given stock.
When a stock’s price is low, many mutual funds or investment houses won’t invest in it because their investment mandate may preclude the consideration of low-priced issues or their particular value model has not yet identified the company as sound. However, in the ideal scenario, once one of the major players begins accumulating shares, it creates a domino effect. The higher the price, the more buying criteria it meets, resulting in a cascade of buying. This buying feeds upon itself, and a legion of buyers carries the stock upward.
The golden key to this scenario is the strong initial surge in price value on the weekly and monthly time frames. That is the catalyst to setting off the chain reaction. That 50% (or greater) rise within an eight-week week period is critical.
In terms of actual entry, your buy order should be centered around the stock’s upward movement on the weekly charts but tightly focused on price movement that trades past the former price high. Typically, a stock pulls back before resuming its upward momentum, so you want to enter the stock with a buy order just above the former price high. As a stock gathers strength and trades upward through this previously seen level, the buy order will be triggered.
Once filled, manage the trade by using an adjustable stop-loss order. Only you can define your risk based on your personal tolerance and account size, but there’s no need to get complicated. Generally, placing the stop just underneath price lows or some reasonable variation of the stock’s average-true range (a technical measure of volatility available in nearly all charting programs) is effective.
Fortunately, this strategy can be implemented in as little as 10 to 30 minutes a day. If you are a manual trader, begin by flipping through weekly or monthly price charts and looking for any strong price movement. Once you spot a setup in play, analyze the company’s fundamentals and price history according to our fundamental criteria. Once a quality stock is identified, let the stock’s price prove itself by hitting your buy order. If it doesn’t, then you simply step aside and move on to the next setup. Alternatively, some charting packages can scan the market for specific fundamental conditions, as well as the price surge itself.
Also, it’s worth noting that if the price surge occurs anywhere on the timeline — at the bottom of the stock’s price low or while price is a period of expansion — then the setup condition still applies. You just have to wait for it to make a one-year or all-time price high before taking a position.
Embrace the surge
While this trading approach is effective, it is not common. You must be patient and adhere to the price surge of 50% or greater within an eight-week time frame because that is fundamental to everything that follows. The design of the setup is to allow yourself the opportunity to enter price trends on a larger scale — a scale that is easier to manage and profitable.
This system is not designed to identify tops or bottoms, and you won’t get many trades over the course of a year, but when you do the potential is enormous. However, if you ignore the setup conditions, then the only thing setting up is the likelihood of substandard performance and frustration.
Many traders come to the market with a small stake and big dreams but no working plan for effective action. But using a smart approach to build your account without sacrificing the realities of work and family can allow you to take advantage of the stock market’s own dynamics and potentially have the best of all worlds.
