Just a quick stream of consciousness type of post for tonight. Talking about character traits that define strong stocks, here are a few questions that come to mind when I try to determine if a specific stock is indeed strong:
- Does the stock ‘act right’?
- Does the stock meet my expectations?
- Does buying pullbacks get rewarded?
- Does the stock make it easy for market participants on the sidelines to enter?
I could go on and on but that should be enough for starters. Let’s go through each of the points listed above.
Does the stock act right? This can easily be affirmed if a stock respects basic technical rules. If it forms a bullish flag it should break out without having the tendency to trap traders. Support should be respected and a stock should bounce off those levels without instilling too much doubt into those holding a position.
Does the stock meet my expectations? Whenever you buy stocks you typically have very specific expectations as far as future performance is concerned. Being flexible and not letting your opinions guide your trading decisions is the way to go. But that’s another story. So whenever a stock meets or ideally exceeds your expectations it is a sign of strength. Strong stocks tend to be extremely resilient and move way higher than you would typically expect.
Does buying pullbacks get rewarded? If you buy at support you typically act in a way most technicians would describe as sound trading. Strong stocks tend to reward this kind of behavior.
Does the stock make it easy for market participants on the sidelines to enter? Windows of opportunity tend to close very fast with strong stocks. The more difficult it is to enter the stronger the buying pressure. Smart money typically doesn’t wait when an opportunity for a good entry presents itself.
Although this is very simple and basic stuff, it is important to constantly ask yourself these questions. Stay focused and be objective when it comes to analyzing the behavior of each of your portfolio positions. This is something I addressed in the past when talking about ‘assuming full responsibility‘. Sometimes it is really simple:
Sometimes you can observe a great deal just by looking. – Yogi Berra
Or, as one of the best traders ever pointed out:
Be right and sit tight. – Jesse Livermore
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