Regardless of your experience or knowledge in trading stocks I am willing to guarantee that everyone has been in a situation where they purchased a stock at the top of its range only to watch it fall. It's one of the most costly mistakes that an investor can make and in this volatile market it's even more costly than ever before. Purchasing a stock at the top of its range, in this market, can damage your portfolio because the markets are so volatile and have the ability to change direction in a matter of minutes. Therefore I am going to discuss this problem and hopefully give short-term investors a better perspective on how to trade various stocks during this volatile market.
I consider myself to be a value investor who purchases stocks based on fundamentals, However, I've always had an interest in short-term trading and enjoy finding patterns that return consistent gains. As a short-term trader this market is proven to be very difficult and because of fear within the market there are many investors who are settling for loss, and investing not to lose money rather than to gain money. I believe this trend can come to an end, and that there is money to be made in this market. Because when the market moves with such high volatility it creates opportunity for large gains in a short period of time, regardless of its direction.
To capitalize on the short-term value within the market you must be able to identify trends, and know when stocks are trading too high or when it's presenting value. I believe that knowing when to buy a stock is the single most important aspect of investing. Because even if you purchase a company that is growing at a rapid rate you may not return high gains if you purchased the stock too high. And for short-term investors this fact is even more important, because when you trade day-to-day or week-to-week the purchase price is even more critical to your overall return. However, the purchase price and trend can change depending on what stock you are buying, which is why I separate stocks into three categories, and I believe that each should be traded differently for short-term gains.
- Low volatility and consistently priced stocks is the first category. It consists of stocks that have a long history of stability that pay a hefty dividend and provide its investors gains through yield. I believe these stocks are the easiest to trade short-term and provide guaranteed gains, although not as large.
- Falling stocks that are fundamentally sound is another category. This group consists of stocks that have fallen primarily because of high volatility but still have fundamental growth. These stocks are by far the highest risk yet present the most potential upside.
- Stocks that trend higher regardless of market headlines. These provide slow consistent gains with fundamentals and optimism among investors being the driving force that pushes the stock higher. Yet because this category consists of slow growth it makes the initial purchase price even more critical to returning the largest potential gains.
The three categories are what I use to return gains in this market regardless of its loss or gain. I believe that by better understanding the meaning of each trend and how to play the trend it will change your perception of loss within the market, and allow you to welcome the fear and panic that the market often provides. Below are five stocks in the first category of low volatility consistently priced stocks. And over the next few days I will cover the remaining two categories and teach you the best way to return gains by using, what I consider, to be the best stocks in this market.
During the last two years AT&T (T) has traded in a consistently tight range. It typically trades between $26 and $30 with a few pops along the way. However, over the last four months the stocks pattern has become much more volatile yet continues to stay within its two year range. The stock will often trade to $29.20 and will then reverse to under $27.50. I believe these two points are important and can serve as good points of entry for short-term investors hoping to capitalize on quick gains. I've owned T ever since 2009 when I purchased the stock near its low of the recession and have been capitalizing on a strong yield ever since. I believe this is a trend for both short and long-term investors, because although I've owned the stock for nearly three years I will use the bottom level of its resistance to purchase additional shares. And since I know this stock will reverse once reaching $27.50 I believe it's a safe trend to capitalize on additional gains during this period of volatility.
Johnson & Johnson (JNJ) is much better for short-term gains than AT&T because it fluctuates quite often with a $3 range. If you look at the last four months on the two year chart you will notice that JNJ has been much more volatile during this period of time. The stock's fell in a range between $61.50 and $63.50 on seven occasion, only to rise above $64.50 on 11 occasions. The stock's traded in this range on a weekly basis and if purchased around $62 it would return a gain of 4% quite often. Much like AT&T this trend could provide investors the opportunity to purchase additional shares at a lower price, but for short-term investors it provides a stable trend and the security of knowing that if it falls it will always rise and return gains. Therefore I suggest waiting and buying the stock when it drops and is trading between $61.50 and $63.50, but making sure to sell the stock after it trades above $64.50.
Procter & Gamble's (PG) stock is practically trading at the same price as it was five years ago, and its only gains have been the result of a 3.27 yield. Yet despite the fact that its stock hasn't returned gains it still trades with significant price action and because of its consistency makes it a good short-term trade. During the last four months the stock's dropped below $62 on four occasions and then traded to $64, soon after dropping below $62. The trend doesn't occur often but I believe it's a trend that investors should watch for and a stock that should be purchased as it drops below $62. This stock requires patience and a lack of greed; because it will often drop below this range and trade above $64, however by simply buying the stock when it drops to $62 you can rest assure that it will return at least 5% to a price of $65, if you sell at this level. I believe the trend will repeat itself in the near future and that those who are patient can capitalize on the gains that it will provide.
Microsoft (MSFT) has lost some of its appeal over the last few years but for short-term gains it's a solid pick. Much like the others on this list, its volatility has increased during the last four months, however its trend's remained the same over the last year. In fact, MSFT has traded in a similar range for the last 10 years trading between $23 and $30. The level at which I purchase MSFT is $23.70; I've found that every time the stock trends below $23.70 it almost immediately reverses to trade past $27.50. And although its range is much larger, I feel comfortable with this level and have experienced a large amount of success by playing these two prices. As I said this trend's been consistent for many years, and the 16% return from buying at $23.70 and selling at $27.50 is simply too large to ignore in this market where there are few guarantees.
I believe the most important point to remember when trading for short-term gains, in stocks with minimal movement, is to be patient and take profits. With each of the stocks that I've mentioned -- every time the purchase price has been reached its regained to its sell price in less than three months -- and usually much sooner. There is no time limit on selling stocks if your goal is short-term gains. And investors who try to make money in a day, week, or any other set time usually end up selling for a loss. The key is to look at the chart and understand when the market believes that a stock is worth buying. And with each of the stocks that I've listed, the price in which investors begin to buy is obvious. In this market I've been very successful by simply identifying purchase points, based on previous trends, and selling once the stock reaches a level of previous resistance. I could care less if I sell and the stock increases by another 20% or if I buy and the stock declines by another 20%. Because I know that these particular stocks follow a specific trend, with small pops and drops along the way, and that if I simply allow enough time for the trend to run its course that it will always return decent gains.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.