There are 5 main elements I look for in stocks to determine if the stock can be a good trade.
A good trade for me is a stock that is set up for a big move in a relatively short time.
The short time period is essential as well because I’m looking to grow my account fast.
And that won’t happen with slow moving stocks that only make gains over a longer time period.
After taking profits at the end of the big move I can use that to buy the next strong stock and keep compounding my profits into a bigger account.
1. The Trend Is Your Friend
The majority of the stocks follow the overall stock market trend.
This is a simple matter of mathemathics because if the majority of the stocks are moving in one direction the overall trend is in that same direction.
Which is also true the other way around.
So the stocks that I’m interested in are already in a longer uptrend. This is a strong sign and show that the wind is in the back of the stock helping it higher.
2. Improving Fundamentals
Even though my main focus is technical analysis I only trade stocks of companies that have great fundamentals.
Real superperformance stocks are almost always power by great underlying fundamentals.
The numbers I focus on are the company’s earnings, sales and margins. Only the companies that show a sustainable high growth rate in these numbers are worth my money.
That improvement in fundamentals is shown even before the stock is breaking out.
During it’s superperformance phase the fundamentals of the company keep on improving further.
3. Some Sort Of Catalyst
When a company that is growing there sales and earnings steadily and is trading in an uptrend is setting up for a break out into superperformance there is always some sort of catalyst that power the break out.
A catalyst can be almost anything that gives some sort of new energy to a company and stock.
It is not always clear to determine what the catalyst for a break-out is. But by doing your homework you should be able to find out what powers the big move.
In the case of a smaller and not so well-known company and stock a catalyst can often help to get it’s name in the media which helps attracting institutional investors in the stock.
4. Opportunity To Buy
If a stock is setting itself up for a big move you still need to find a proper entry point where you can buy it.
That entry point is the exact moment where you have a optimal risk versus reward.
If you time it incorrectly you can easily be stopped out during a natural correction of the stock. Or you are buying late and missing a lot of potential profits.
Most superperformance stocks offer at least one good opportunity to get in it for the real move happens. Some offer even multiple entry points in case you missed the first one.
5. Determining My Selling Points
Before I buy any stock I already have my sell plan in place. I calculate my exact position size based on the risk I’m willing to take in a trade.
During this calculation I also determine where I place my stop loss in case the stocks is going against me.
This is critical to become a consistent trader because you need to protect your account at all times. And even though all signs are on green for a stock to make a superperformance move, sometimes the market just disagrees and it turns around against you.
In that case you don’t wan’t to get trapped in a losing position.
Besides my stop loss I also have determined at what price levels I’ll be taking some of my profits of the table.
By doing this before entering a trade I can leave my emotions out of those decisions the best.
Anytime I don’t do it and find myself in a trade without a solid trading plan I start rationalizing what is happening and why I should stay in it or get out early before the real move happens.
Using these five key elements is a great starting point for me to focus on the right stocks and trading them properly. I’ve learned these from Mark Minervini in his first book Trade Like A Stock Market Wizard.
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