Four strategies to find trending stocks and how to know when to sell
We don’t talk about stock trading much on the blog but that doesn’t mean you can’t use it for some solid returns. Part of my job as an equity analyst was to keep a list of trending stocks for potential analysis.
Finding stock trends before the rest of the market isn’t easy but it can be a powerful part of your overall investing strategy.
The very definition of ‘trending’ means you won’t be the first investor in the stock but the methods below will help you find these hot investments early, so you can ride the returns before a quick exit.
The warning in all of this (yeah, you knew there had to be a warning) is that you absolutely must have a sell signal when investing in trending stocks. It’s going to be a different strategy compared to the buy-and-hold method we use on the blog.
Let’s look at four ways to find trending stocks and then a few sell rules you can use with the strategy.
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News Coverage Can Cause a Stock to Pop
One of the most common reasons a stock will pop higher and start trending is from news coverage around a specific event. Unfortunately, this is also the most difficult signal to watch for because it can come from anywhere.
Some of the most common types of news events that will cause a stock to trend, higher or lower include:
- Quarterly earnings and annual shareholder meetings
- Management changes
- Broad changes in the company’s industry from regulation or a supply/demand disruption
- A significant merger or acquisition, either for the company itself or within the industry
Trying to get ahead of these types of news coverage as an investor is difficult, if not impossible. You basically need to be following a specific company ahead of time. Most of the time, I used news events as validation of a trend rather than to find trending stocks in the first place.
Analyst Coverage in Trending Stocks
Analyst coverage is one of the best ways to get ahead of the rest of the market in a momentum strategy. Investment firms and brokers hire analysts to pour over all available market data to find great stocks so why not let them do the work and then ride returns higher?
There are two ways analyst coverage can cause a stock to trend higher,
- New coverage initiated on a company by an analyst
- An upgrade of a stock by an analyst
Understand here that I'm not exactly saying you should follow these analysts' recommendations or price target on a stock, only that the increased coverage or target can start a trend.
Analyst coverage has the greatest affect on stocks that aren’t already covered by a lot of other analysts. These are going to be smaller companies with a market cap between $1 billion to $3 billion and may only have one or two analysts tracking the stock.
With each analyst that starts covering a stock, it’s like free promotion the company gets in the market and the potential for more demand on the shares. The increased demand for the shares sends the price higher and puts the stock on more analysts’ screens, starting a trend that can last for months.
Besides searching for companies that are only covered by a few analysts, one of the best ways to find stocks that might get new coverage is to follow the conference schedule. The large banks like Merrill Lynch and JP Morgan regularly host conferences for each industry, for example a utilities conference or a computer software & hardware conference.
These conferences are attended by hundreds of analysts and companies present their investment case. You can get a list of companies that are presenting, or companies will also show their presentation schedule on their Investor Relations page.
Finding stocks that are thinly covered or presenting at a conference will help you find potentially trending stocks before they start higher, but you can also browse through a list of analyst upgrades or new coverage on most online investing platforms. This is going to put you a little behind the investors that have already jumped into the stock but you can still book strong returns.
Unusual Volume in a Hot Stock
One of the easiest ways to find trending stocks is to look for unusual volume in trading. Most online investing sites will clearly show the average number of shares traded in a stock on a daily basis, usually as a 20-day average.
Volume of shares traded is a strong indicator both for trending higher and lower, called a confirmation signal.
If a stock’s price is heading higher on higher-than-average volume, then that lends credibility to the trend. If a higher price is accompanied by low volume, it may not be so much that the stock is trending higher but just that there are few sellers.
You can find high-volume trend signals through most stock screeners. I usually look for stocks that are just entering a high-volume phase, looking for stocks with a 10-day average volume of at least 150% more than the longer-term average.
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Price Breakouts and other Technical Indicators for Stock Trends
Investors looking for trending stocks will usually follow a list of technical indicators, patterns in the stock price that may lead to a trend. Volume is one of the most popular of these patterns but there are a few others you might want to follow.
Breakout strategies follow a stock’s price and looks for trending signals when the price jumps above a long-term average. The most common of these is when a stock’s price breaks above the 100-day moving average. The idea here is that something is causing a surge in investor interest that could propel the stock higher.
Investors often also use the Moving Average Convergence-Divergence (MACD) to find trending stocks on a technical basis. The method compares a signal line, usually the 9-day moving average, with a MACD line of the 12-day and 26-day. When the MACD line moves above the signal line, it can point to a trend higher.
A final signal I like to use for stock trends is the Relative Strength Indicator (RSI). This is another momentum indicator and usually a good sign when a stock’s 14-day RSI moves to 55 or higher.
When to Sell Your Trending Stocks
Finding trending stocks can be hard enough, especially finding them before the rest of the market. Even more difficult still is knowing when to sell the stock to lock-in your returns before the rest of the market.
As the cliché goes, what goes up must come down and it’s no different in stocks.
Most stock trends are short-term. Even if the trend is based on solid fundamentals and a strong market that takes the stock price higher for years, a short bounce in the price may be wiped out before the shares head higher.
One of my favorite investing strategies is to combine short-term trending stocks with a longer-term strategy. When I find a trending stock, I decide whether I want to be a long-term investor or if it’s just a short-term trade.
If the company looks like a solid long-term investment, then even losing some of those short-term gains isn’t a problem. If I don’t feel like it’s a long-term investment, then I’ll use some of the sell signals below to book a quick profit.
The easiest sell signal is just to watch for a reversal of the trend that attracted you to the stock initially. If higher volume was your buy signal then you should sell as soon as daily volume starts to decline, a good sign that investor demand could be waning. This idea for sell signals works for most technical strategies.
The pop from new analyst coverage or an upgrade on a stock can last for a month or longer but I generally include a volume indicator in this one as well. Sell as soon as daily volume comes back down to the longer-term average.
Many momentum investors will place price or percentage targets for their trades in trending stocks. They will set a sell target of 5% to 10% on the shares and a stop-loss order at 2% when they buy the shares. This helps to limit their loss if they get in at the end of the trend but offers a good upside for further gains.
While there are investors that exclusively invest in momentum and trend strategies, I like to use it as only a small part of my portfolio. Finding trending stocks and following the different methods can be a lot of work so I prefer a longer-term strategy for most of my money. That doesn’t mean you can’t boost your returns with a few hot stock picks by following market and stock trends.
When to Buy and Sell in the Stock Market
There is no one-size-fits-all answer to this question, as the best time to buy and sell stocks depends on a variety of factors. However, there are some general guidelines you can follow to make the most of your investments.
One of the most important things to keep in mind when buying or selling stocks is market volatility. Volatility refers to the degree of change in stock prices over time. When the market is volatile, stock prices tend to fluctuate more, which can lead to both gains and losses.
Generally, it's wise to buy stocks when the market is stable or trending upwards, and sell them when the market is volatile or heading downwards. This way, you'll be more likely to make gains rather than losses, and can take advantage of market fluctuations without much risk.
Whether you're buying or selling stocks, another important aspect to consider is your personal goals. When setting financial goals, it's extremely important to specify when you want to achieve them.
For example, if one of your long-term goals is retiring early with $3 million in the bank, you'll need to invest more aggressively than someone who just wants an extra $20,000 for a beach vacation next year.
Once you know what type of investments you'll need to make to meet your financial goals within a given timeframe, then you can begin comparing the pros and cons of various types of investments like stocks versus bonds. This way, you can diversify your portfolio and reduce your risk while still reaching your targets.
No matter what the market conditions or your personal goals, it's always important to do your own research before making any investment decisions. Talk to financial advisors, read up on current market trends, and most importantly, remember that stock prices can go up as well as down. So always invest wisely and with caution.
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