A common question asked by someone new to the stock market is what are some good stocks? The fact of the matter is that good stocks to own are not necessarily good stocks to trade. In fact, good stocks to trade are often stocks whose prices are falling rapidly or bouncing up and down chaotically. Volatility in any form is a common denominator of all good stocks to trade. There are good stocks to trade one time if you anticipate a buyout, takeover attempt or announcement of a major new and profitable product. And there are good stocks to trade over the long term because their values fluctuate predictably according to the economy, interest rates or supply and demand of underlying commodities. Here are a few thoughts about good stocks to trade starting with using technical analysis clues.
Following the Market and Individual Stocks
The comedian Woody Allen once commented that ninety percent of life is just showing up. The same applies to trading stocks. When a once-popular stock starts to fall in price it is too late to make a profit if you hear about it the next week or even the next day. Paying attention is crucial. But which stocks do you watch? You can screen for stock volatility or even pay for an alert service that gives you a heads up when a favorite stock starts to move. Getting in on time is important to making a profit on any good stocks to trade.
Up and Down and Up Again
Consumer products companies not only maintain their value during a recession their stock prices often go up. This is because money flows out of other stocks and gets parked in these companies until the market in general starts to improve. Then, when things start to improve these same companies may see a price decrease because investors are pulling money out of consumer products and back into stocks that they believe will go up as the recession improves. The point is that good stocks to trade are those that predictably rise and fall according to the economy. Another group of somewhat predictable stocks are utility companies. These stocks do not vary a lot in price except when interest rates change. The high dividends paid by utilities are a surrogate for bonds. When interest rates go up the utility stock dividend does not change. Rather the price of the stock goes down to a point where the dividend yield is comparable to bond yields. These stocks can be purchased as interest rates start to fall and sold short when rates start to rise.
Volatile Stocks
Stocks that continually jump up and down in price cause ulcers if you own them. But volatile stocks can be profitable for the technical trader. Trading stock options can be a profitable way to trade in volatile markets. Buying calls or puts on a stock gives the trade the right to purchase in the case of a call or sell in the case of a put no matter how high or low the stock price goes. In purchasing options the trader limits his risk to the premium paid for the options contract. He can also leverage his trading capital as he does not need to buy the stock in question but only an option.
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