Stock Trading Strategies That Work
This lesson will show you stock trading strategies that work for the best traders on Wall Street who have quit their day jobs and who now trade at home for a living.
Trading Strategies In Stock Market
The best trading strategies in the stock market are the ones that have made people into billionaires like Warren Buffett, John Paulson, and George Soros. The trading strategy that all these famous traders use is just common business sense: lots of cash and little debt.
This is a stock trading strategy that works. It will always work. You want a company with little or no debt, a lot of cash, with positive sales growth, that is in a growing demand sector, and that has pulled back on the charts and is at a level that it has repeatedly bounced off of in the past.
Now you might be think, yeah right Lance, but how do you find a stock like that? I’m going to show you exactly how to do it in this lesson.
The free stock screener we will be using is called “Finviz”. Click here to go to Finviz and create yourself a free account.
After you create a free account, click on “Screener” in the top left corner. The reason you need to create yourself an account is so that you can save your stock screen so that you don’t have to set it up all over again each time you want to use it. In the very small “Filters” tab, follow it across the screen to the right and you’ll see the small tabs “Descriptive”, “Fundamental”, “Technical”, and “All”. Click on the “All” tab.
You will see a lot of options appear. Here are the settings to put in to the screener to find the kind of stocks I mentioned above. For “Market Cap.” enter “+Micro (over $50mln)”. For “Beta” enter “Over 0.5”. For “Price” enter “Under $10”. For “Debt/Equity” enter “Low (<0.1)”. For “Average Volume” enter “Over 500K”. Finally, click on the little “Charts” tab just below the “Average Volume” setting. Your screen should look like this:
That’s it folks! The real magic is the Debt/Equity setting of “Low (<0.1)”. This will give you companies with a good amount of cash and ultra low debt, some with no debt at all!
Stock Market Strategies That Work
Another stock market strategy that works is buying a stock that is oversold. Warren Buffett bought banks in October of 2008 right after the financial collapse. He held for several years and made over 200% on most of his investments. You have heard the famous Warren Buffett quote about buying when there is blood in the streets: buy what nobody wants when nobody wants it, and sell when everybody wants it.
The market is based on emotion and human psychology. As such it often overreacts. When a market overreacts to the downside, a stock is oversold. Here is a simple step you can use in the stock screener settings above that will help you find oversold stocks that are ready to reverse and head back up the chart. At the top of Finviz put in “Oversold” for the “Signal” box, and in the lower right select “Long Lower Shadow” for the “Candlestick” box (click on the image below to enlarge):
There will be quite a few days where no stocks are returned whatsoever. That’s ok. That just means that your stock screener is working very well and that it hasn’t found any great companies whose stock is oversold and where a long lower shadow candlestick has formed for that day.
Day Trading Strategies That Work
Penny Stock Trading Strategies
The best penny stock trading strategy is to set your real-time stock screener to scan for stocks trading for less than $1 that have volume 2x or greater than the average. You can do this in ETrade Pro. In Etrade Pro click on “Tools” and select “Strategy Scanner”.
Create a custom strategy and on the Alerts tab select “Strong Volume”:
In the ratio box enter “2”. This is volume that is 2x greater than the average daily volume.
Now click on the “Filters” tab and on the Price row enter “0.01” for the minimum value and “0.99” for the maximum value:
That’s it! Now on the screener output you will see all stocks with greater than 200% of the average daily volume and that trade between $0.01 and $0.99 per share.
If you are a member of Jason Bond Picks, then you will see the Hot Penny Stock Finder screener in the live day trading chat:
The idea for screening for high volume on penny stocks is that often right before a major pump comes from penny stock promoters like Awesome Penny Stocks, insiders will front-run the stock by purchasing large amounts of the stock ahead of the promotion.
Frequently Asked Questions about Stock Trading Strategies
What are good stock trading strategies?
A good stock trading strategy has to involve picking a good stock. There are many good stock trading strategies and ways to find good stock picks. Below I will list a few of the best stock trading strategies I have learned over the years.
Best Performing Stocks Within Best Performing Sectors
Buying the best performing stocks, in the best performing sectors, is a good stock trading strategy that works.
A good time frame to use is 1 month.
On the next screen you will see a sorted list of the top performing sectors for the last 1 month:
Click on the top most sector to start drilling down into that sector. In the example above, you click on the text “Transportation – Airline”, and the next screen appears:
The sector chart on top looks sweet and you want the top stock with the highest “weighted average”. In the case above, the best stock in the airline sector is American Airlines Group (AAL).
Experience tells me that airlines are dependent on the price of oil. When oil rises, airlines go down and when oil goes down, airlines go up. The reason should be obvious, airlines are leveraged to the cost of fuel. When oil goes up, fuel costs go up and profits go down.
One last thing before adding AAL to our watch list is to chart the price of oil:
We see that the price of oil dropped a lot over the last few months and that helped airlines but look at what the price of oil has done since the start of December 2013. The higher lows and the break above the 200 day moving average line makes me say no way. With all the new shale oil production coming online in the U.S., oil should drop at some point but I’m a swing trader and so in the short term, oil looks too strong for me to chase airline stocks higher. I will go back to the sector list and pick the next best performing sector.
Djenyns posted the excellent video below on the strategy of buying strong stocks in strong sectors called Best Trading Strategy – Stan Weinstein.
Prior Day Low/High
This strategy is very simple and it works amazingly well. If a stock that has been downtrending breaks above the prior day’s high (candle over candle), you buy. If a stock that has been uptrending breaks below the prior day’s low (candle under candle), you sell.
Stockhaven posted the excellent video below on the Prior Day Low/High strategy called A must know stock trading strategy (Useful for those under the Pattern Day Trade rule).
Warren Buffett Buy Cheap Companies
Warren Buffett buys cheap companies when nobody wants them, and sells them when they become expensive and everybody wants them. How does he do it? What is a “cheap” stock?
The first fundamental analysis data the Buffett uses is the ROCE and debt. He wants companies with a high ROCE and low debt.
ROCE is calculated as follows:
The next criteria is that Buffett looks for companies with predictable earnings.
The next criteria is that he looks for profits backed by cash flow. Companies can get tricky and make profits look good but they are not actually coming from their main business. You can make sure profits are legitimate by looking at the cash flow statement to make sure that increased profits are coming from increased cash flow.
The next criteria is that he looks for businesses that are not complicated. Buffett says you should understand what you invest in. If you don’t understand the business you invest in then you are really just gambling your money.
The next criteria is that Buffett looks for a strong brand backed by pricing power. Pricing power is the ability to set and raise prices. The companies that can raise prices like that usually have a strong brand and can’t be undercut by an unknown Chinese company.
MoneyWeekVideos posted the excellent video below called How to invest like Warren Buffett.
What is arbitrage trading strategy?
An arbitrage trading strategy is taking advantage of temporary price inefficiencies.
There is no one arbitrage trading strategy but instead many different strategies that would fall into the arbitrage style of trading. Traders or trading firms that specialize in arbitrage trading are called arbitrageurs.
There is electronic communications arbitrage that takes advantage of brief differences in price quotes over different exchanges. There are also arbitrage strategies that take advantage of the pricing of derivative instruments. You may even hear of arbitrage strategies that involve the underlying stock and its futures contract. For example, ABCD stock currently trades at $20 per share with a futures contract 6 months out selling for $26. By purchasing the stock and simultaneously selling the futures contract, you can lock in a guaranteed $6 gain.
There are even bond arbitrage strategies that involve buying a corporate convertible bond (which can be converted into common shares) while simultaneously selling short the common stock of that same company that issued the bond.
Khan Academy posted the awesome video below called Arbitrage Basics.
Khan Academy also posted the excellent video below on merger arbitrage called Hedge Fund Strategies – Merger Arbitrage 1.
Investmontage posted the video below called Convertible Arbitrage Strategy.
Premarketinfo posted the awesome video below called Information Arbitrage.
What is butterfly trading strategy?
The Butterfly trading strategy is a trade that combines both bull and bear spreads in an attempt to make money off a low volatility, sideways market. Maximum profit for a long Butterfly is made when the underlying stock price remains unchanged at expiration.
A classic Butterfly consists of selling the at-the-money strike and buying the two “wings”. One of the wings is going to be in-the-money, and one of the wings is going to be out-of-the-money.
For example, suppose stock ABCD is trading at $30 in May. A long Butterfly is placed by purchasing a June $20 call for $1000, writing two June $30 calls for $350 each and buying another June $40 call for $100. The net cost to enter the position is $400, which is also the maximum that can be lost on this trade.
On expiration in June, ABCD stock is still trading at $30. The June $30 calls and the June $40 call expire worthless while the June $20 call still has an intrinsic value of $900. Subtracting the initial cost of $400, the resulting profit is $500, which is also the maximum profit possible on the trade.
Maximum loss on the trade results when the stock is trading below $20 or above $40. At $20, all the options expires worthless. Above $40, any profit from the two long calls will be offset by the loss from the two short calls. In both situations, the Butterfly position suffers maximum loss which is the initial cost of $400 to enter the trade.
Gary DeVries posted the excellent educational video below called How a butterfly spread strategy works.
OptionGenius posted the excellent video below called Butterfly Option Spread Trade Explained – Classic Butterfly Spread.
What is a Broken Wing Butterfly option strategy?
A Broken Wing Butterfly option strategy is designed to profit when a stock trades sideways or within a defined price range.
A regular Butterfly spread makes money if a stock trades sideways, and loses money if a stock breaks out, in either direction, beyond the sideways range. A Broken Wing Butterfly Spread modifies a regular Butterfly in that it totally transfers all the risk/loses into one direction. In other words you use this neutral options strategy when you think a stock will trade sideways but you are certain that if the stock should break out, it will do so only in a certain direction.
The Broken Wing Butterfly option strategy does this by buying out of the money options with a further strike price from the middle strike than the “in the money” wing. A regular Butterfly spread would have both “out of the money” and “in the money options” at an equal distance strike price from the middle strike.
Probability Of Success posted the excellent video below called How To Set Up A Broken Wing Butterfly.
What is delta trading strategy?
Delta trading, also called Delta Neutral, are trading strategies that options traders can use to make money when implied volatility declines.
Delta trading is not just one trading strategy but instead a style of options trading with many Delta Neutral strategies available.
Delta trading makes use of the metric called the Delta (greeks) which is the measure of an option’s sensitivity to changes in the price of the underlying stock.
MoneyShow.com posted the excellent video below called Delta-Neutral Option Trading Strategies.
Tradestation posted the awesome video below called Understanding and Trading Delta Neutral Strategies.
Long Straddle Is a Delta Trading Strategy
An at-the-money call option has a delta value of 0.5 and an at-the-money put option has a delta value of -0.5. Buying both the call option and put option results in a delta neutral position with 0 delta value:
Buying both the call option and put option at the same at the money strike price is a popular Delta Neutral option trading strategy, called a Long Straddle where a trader’s goal is to profit when the underlying stock moves up or down significantly.
The Long Straddle is an option strategy that profits no matter if the underlying asset goes up or down. A Long Straddle is best used when you expect a stock to have a big breakout move to either the upside or the downside very quickly. Catalysts that can cause this are things such as a pending court ruling or an FDA drug approval.
A Long Straddle works based on the premise that both call and put options have unlimited profit potential but limited loss. While one leg of the Long Straddle losses up to its limit, the other leg continues to gain as long as the underlying stock rises, resulting in an overall profit.
Khan Academy posted the excellent video below called Long Straddle.
Another Delta Neutral Trading Example
Another Delta strategy is an attempt to profit from time decay. When a position is delta neutral, having 0 delta value, it is not affected by small movements made by the underlying stock, but it is still affected by time decay as the premium value of the options involved continue to decay. An option trading position can be set up to take advantage of this time decay and one such example is the Short Straddle.
Short Straddle Is a Delta Trading Strategy
A Short Straddle, is a Delta trading strategy that profits when a stock stays still and goes sideways. This is the exact opposite of a Long Straddle which profits when the underlying stock has a big move either up or down.
Opening a Short Straddle position involves the simultaneous writing (sell to open) of a call option and a put option on the underlying asset, at the same strike price and expiration date.
The short call option allows you to profit when the underlying stock goes sideways or down. The short put option allows you to profit when the underlying stock is sideways or up. Combine them both and you will have a Short Straddle which profits when the underlying stock goes sideways or stays within a tight range.
What is a martingale trading strategy?
A martingale trading strategy is a money management strategy based on the idea that statistically speaking, you can’t lose all the time and therefore you should continually increase the amount of dollars invested after a loss.
The martingale system was originally created for gambling casinos and even betting at the race track.
Trying to win back your losses is a bad idea.
Risking more and more as you lose more is a bad idea.
The martingale trading strategy violates the golden rule of cutting your losers short. Instead, you continue to double down on losers which will eventually cause you to completely blow up your trading account and lose everything as you run out of money after a string of losing trades.
The martingale trading strategy is appealing to new investors because it makes sense when you think about it but profitable trading is often counter-intuitive.
InformedTrades posted the excellent video below called Trading The Martingale and Anti Martingale Strategies.
What is directional trading strategy?
Directional trading strategies are any trading strategies based on future direction of the broader market or stock. Any trading strategies that involve taking a long or short position are directional trading strategies. Someone not trading options is probably using a directional trading strategy.
Directional trading is a term used by options traders because, with options, it’s possible to profit off of non-directional option trades like Credit Spreads and Iron Condors.
What is momentum trading strategy?
A momentum trading strategy is the attempt to profit off of the continuation of an existing trend, in the belief that a stock in motion stays in motion.
Momentum traders use a variety of technical indicators like the volume, resistance/support levels, Bollinger Bands, MACD, and Stochastics in order to measure the momentum, hence staying power, of the current trend.
LightspeedTrader posted the fantastic video below called Momentum Trading Finding And Executing On Three Simple Patterns.
PerfectStockAlert.com posted the great video below called Breakout Momentum Trading.
What is turtle trading strategy?
The Turtle Trading strategy gets its name from the teacher Richard Dennis who referred to his students as “turtles” from a belief that he could grow good traders as quickly and efficiently as farm-grown turtles. Investopedia published this excellent article on the Turtle Trading strategy called Turtle Trading: A Market Legend
The Turtle Trading strategy is a trend-following strategy based on the idea that “the trend is your friend”.
Turtle Trading Strategy
1 – The futures contract must make a new 20 day low.
2 – The previous 20 day low must have occurred at least 4 trading sessions earlier. In other words, look for SHARP moves down.
3 – After the market falls below the previous 20 day low, place an entry buy stop 5 to 10 ticks above the previous 20 day low. This buy stop will be good for today only. In other words, you are looking for a candle over candle reversal pattern or breakout.
4 – If the trade is triggered, place an initial good-until-cancelled sell stop one tick under today’s low.
Bipin Patel posted the excellent video below called The Master Guide to Swing Trading & Trend Following.
What is a systematic trading strategy?
A systematic trading strategy, also called a mechanical trading strategy, is any trading strategy based on well defined rules. Systematic trading can be both automatic computerized HFT as well as longer term human trading so long as systematic rules are followed.
The most popular systematic trading strategies are: moving average crossovers, channel breakouts, support/resistance lines, and oscillators and cycles.
Moving average crossovers – Based on two moving averages of different lengths of time. The MACD falls into this category. When the shorter moving average breaks above the longer moving average, that’s a buy signal. When the shorter moving average breaks below the longer moving average, that’s a sell signal.
Toni Hansen posted the video below called Moving Averages – How to Use Them and Which Ones to Use.
Channel breakouts – A price channel is drawn where the support channel wall is the swing lows, and the resistance channel wall is the swing highs.
A trade signal is given when price breaks above or below the channel. The Donchian channel falls into this category. The famous Turtle Trading strategy was rumored to be based on channel breakouts.
Jeff Cartridge posted the excellent video below called Donchian Channel Breakout Trading Strategy.
Support/resistance – If a stock is below its resistance level, it will have difficulty crossing above that resistance level price. If a stock is above its support level, it will have difficulty falling below that support level price. A signal is given when price breaks above or below support/resistance.
Oscillators and cycles – Oscillators move within a range such as 0 to 100, and represent the trading range of a stock and if that stock is overbought or oversold. A few of the more popular technical indicators that fall into this category are: Relative Strength Indicator (RSI), stochastics, Williams %R, and the Rate of Change (ROC). Buy and sell signals are given depending on if the stock is overbought or oversold.
StockMarketStrategy posted the video below called How The Pro’s Trade Using Relative Strength Index (RSI) Technical Analysis.
Nextgentraders posted the great video below called How To Use The Williams % Range.
StockGoodies Chart-School posted the excellent video below called ROC – Rate of Change.
How can I trade penny stocks?
To trade penny stocks, you must understand the game. Trading penny stocks is attractive to a lot of people because they are super cheap, and they promise huge profits; however, with huge profits come huge risk.
The two dangers of penny stocks are: they are thinly traded so they can be manipulated easier, and they are often found on exchanges like the OTCBB or pink sheets where they do not have the same strict listing requirements and financial disclosure rules as stocks that are traded on the New York Stock Exchange or the NASDAQ.
Penny stock companies often hire penny stock promoters to pump/hype/market the stock. Many penny stock companies are pathetic shells with no employees and a mailbox as a physical company address. The stock is pumped so that insiders can sell their near worthless stock and make money. The profit for these penny stocks comes from the pumping of the stock and not any legitimate business or product whatsoever. With lower listing requirements it is virtually impossible to know which penny stocks are real companies with real products and sales, and which are just worthless empty shells. But there are a few things you can do to increase the odds of hitting a huge penny stock winner.
How To Trade Penny Stocks
If the penny stock company hired a penny stock promoter, that means the business model is not good enough to gain attention any other way. If a penny stock is being pumped by a penny stock promoter, there’s a good chance the chart will do a pump and dump pattern:
The free penny stock newsletters are not giving you penny stock tips out of the kindness of their heart. If you read the disclaimers that these free penny stock newsletters put at the bottom of their emails, you will see that they are being paid to pitch a stock.
There are about 80 major penny stock promoters and many own more than one promotion website/company. They are constantly changing their names because of all the bad publicity from the previous pumps they were part of. A few penny stock promoters I have personally lost money with their picks are: Stock Lock and Load, Stock Rock and Roll, Break Out Stocks, Penny Stock Locks, Surfs Up Stocks, Stock Runway, Super Hot Penny Stocks, Super Nova Stock Picks, Winning Penny Stock Picks, Penny Stock Pick Alert, Whisper From Wall Street, OTC Stock Exchange, Impressive Penny Stocks, Awesome Penny Stocks, Today’s Penny Stocks, Penny Stock Club, Penny Stock Players, 1-2-3 Stock Alerts, Penny Stock Pros, Penny Stock Circle, The Stock Scout, and MicroCap Profiler.
If you are in a penny stock and it goes up 20% or more for a few days, you should sell quickly. Many people get greedy and go for a 400% gain or more. Remember, you need to sell into the pump, before the dump. Any stock that is being pumped can have a -50% or more gap down open. Always sell quickly when you have a gain in a penny stock and don’t get greedy or “drink the Kool-Aid” hype.
Never trust penny stock company press releases, especially ones that are being pumped by a penny stock promoter. Penny stock companies work with the penny stock promoters to time and construct the content of company press releases. Remember, the penny stock company hired a promoter to push their stock up so they can raise money and stay in business. There is no reliable source of income or business model. Most penny stock pumps are scams that are created to enrich insiders.
Make Money Trading Stocks posted the video below called How to Trade Penny Stocks Using Scammers and Promotors?
In the video lesson below, I will show you how to use Finviz for swing trading and I’ll talk about a few stocks. Next, you will hear Jason Bond (JB) talk about his stock trading strategy that works. Enjoy!
The free stock screener seen in this video is called “Finviz”. Click here to go to Finviz and create yourself a free account.