Filtering the Spec Stocks of X
The market has been very bullish on speculative stocks lately and X has been a great source of trading ideas for these types of stocks. Scrolling through the posts, we need to analyse the stock codes for ourselves, avoid the pump and dump stocks and create a trading strategy for finding the ones likely to return good trading profits.
Trading the speculative end of the market hasn’t always been my preference. In the past, most stocks I traded were classified more as small caps than speculative. Thanks to the X platform, I have found stock opportunities in the lower priced end of the market meeting my trade criteria. Some of the stock prices were only a few cents or just over 10 cents. It turns out, a plan for trading smallcap/midcap stocks, plus a couple of tweaks, may also be applied to trading the speculative stocks too.
Features of a Speculative Stock
· Often a stock with a market cap of between $50 million and $300 million
· Higher in volatility by nature
· Risky to trade e.g sudden percentage moves up of 30% are made just as easily as a sudden drop of 30% in one day
· On the upside, when these speculative stocks rally, they make those type of rocket returns all traders crave, in only a short period of time.
Positions are opened and closed within a few days to a few weeks.
Below are some of the rules I follow for selecting and managing a speculative stock trade based on technical analysis.
Most Important Rule
Trading is trading. It is not an investment so if the stock turns against us, we don’t want to fall into the trap of keeping the trade open based only on good fundamentals. Switching strategy midway is not advisable.
Liquidity
Checking the volume of trading on a stock is important for getting into and out of a trade. A daily trading volume of millions of shares is a good sign of liquidity.
I tend to look for a daily volume of around 500 000 as the minimum despite the number being on the lower end of volume levels. It depends on how much capital you are planning to allocate to the trade.
Position Sizing
The initial amount of risk for a position is 1% of total capital, that is the initial loss if the trade moves against us.
Charts to Avoid
Price spiking suddenly out of a long period of compression is not a stock we like to trade. It looks similar to a pump and dump scheme. The price doesn’t trend up for long and sells down quickly as interest in the stock declines.
Charts with too many spikes suggest a choppy market with fluctuations in both directions. The following chart does not look like an easy chart to trend trade.
Trade from the Daily Chart
Keeping an eye on volatility is better done at the lower timeframes. My preference is the daily chart over the weekly chart for monitoring price. Anything can happen over 24 hours and we don’t want to wait until the end of the week before taking any action.
On the daily chart of Sun Silver – SS1, a past trade opportunity presented itself as price broke out and closed above the downward sloping trendline in an attempt to end the previous sell off by traders.
Ensuring the GMMA is in an uptrend order is the first criteria for making it onto a short-list of stocks to trade.
Trend
Establishing the direction correctly is one of the most important starting points. The stock must be in an uptrend. Using the GMMA indicator helps us see this more clearly.
On the chart of SS1, the short-term GMMA is above the long-term GMMA in a GMMA uptrend order. The dip in price was unable to break the uptrend as price bounced off the lower edge of the long-term GMMA at around 0.72.
The long-term GMMA represents the investors who were steadily buying as indicated by the widely spaced moving average lines. It formed a stable foundation, increasing the probability of a bounce occurring.
A position on SS1 was opened.
🎯 Target Profit 0.97
❇️ Entry at 0.81 as marked by arrow (see chart below)
🛑 Stop Loss at ATR 0.66
Monitoring Price
Checking the price of the stock at the end of each day is the minimum requirement. We may wish to check intraday movements too given the time. Sometimes good intraday opportunities for profit taking appear, triggered from news announcements, moving price up by double digits. Good momentum means price may move up beyond our target price resulting in unexpected higher gains.
Monitoring the Stop Loss
Knowing where to cut your losses if you’re wrong is important for preserving capital. For most trades I like to use the ATR – Average True Range stop loss indicator. Once a trade moves into profit the ATR becomes a trailing profit stop, moving up as price moves up.
Holding onto a speculative stock in the hope of a future recovery is not ideal. Losses may become larger or capital becomes tied up in a position, reducing the capital available for other trading opportunities.
Monitoring Profit
In a bullish market, momentum may continue and we may prefer to hold on for higher price moves. In a more cautious or bearish environment it may be better to close the position at the target profit price.
Sometimes a stock may not reach our target and start to fall away. It’s often a decision of either
1. Taking the profit after having given back some of it as price fell
2. Stopping out on a trailing profit stop loss with a profit
Holding out for higher price movements prolongs trading risk. Keep in mind the time in the market as a risk factor.
In order to carefully monitor any trade sitting in good profits, I created a basic profit tracking spreadsheet. The highest closing price of each profitable stock is recorded then compared to future closing prices. This record is updated daily and helps keep track of price more closely.
Where a future closing price (CP) is lower than the highest closing price by a predetermined percentage, the spreadsheet calculates and notifies the course of action for a particular trade.
As an example, this is a section of my profit tracking spreadsheet.
For the trade on SS1, the position was closed on achieving the target profit. The exit is marked by the yellow star at 0.99, a little over the original target price of 0.97.
A trader deciding to hold the SS1 trade past the target profit has the opportunity of taking profit at the highest closing price on this chart of 1.08. This involves a little luck and good timing.
A trader who stops out when price closes under the ATR trailing profit line, stops out at 0.91 or lower.
A trader holding all the way down to 0.755 gives back all the profit.
Stocks mentioned on X are a great way of finding new stocks. Combining a proven strategy with strict risk management helps turn speculative hype into a more calculated approach for getting into and out of a profitable trade.