How I Adjust To The Times
The
major indices all closed positive today and near their highs.
It was a nice turnaround from a poor start this morning.
Volume was higher than yesterday, but nothing exciting.
The S&P 500 tested lasted week’s
lows before bouncing off them to move higher. The
Nasdaq came within about 10 points of last
week’s lows. What’s it all mean?
Nothing. We’re still in a
choppy, range-bound environment. For
people who are trying to trade with the trend, there is none — in the short
term anyway. Until we break out of recent
ranges, it will continue to be tricky on both the long and short side of the
market.
 
 
Last night I decided to run
some statistics on the overall market. Anyone
who checks stock prices in the newspaper will have noticed that the stock tables
seem to keep shrinking as the bear market wears on.
When I daytraded back in the late 90s, I would only look at stocks that
traded above $30/share. There was also a
time in my career where I would only consider intermediate-term trades in stocks
that were at least $12/share. I suspect
many people that follow strict CANSLIM criteria still only consider stocks above
$10-$12/share.
I included all the stocks in
the NYSE, NASDAQ, & AMEX markets in my search, and here’s what I found:
82% of stocks are now trading
below $30/share
51% of stocks are now trading
below $12/share
46% of stocks are now trading
below $10/share
While trading in lower-priced
stocks can be difficult for short-term traders, intermediate-term traders are
just looking for percentage moves, not point moves.
If you are an intermediate-term trader, and you only look at stocks above
$12/share, you are eliminating half of the market right off the bat.
I’m not suggesting you should
all of a sudden start trading in $2 and $3 stocks, but you may want to lower the
bar a little bit to adjust to the times. If
you are concerned about being stopped out for a big loss on a relatively small
point move, then start off by playing with smaller position sizes.Let’s assume you have a
$100,000 account. If you decided each
position would normally be 8% of your portfolio, then on a $12 stock, you would
buy about between 600-700 shares. ($8000
allocation / $12 share price = 666 shares)Â
This is really the maximum number of shares that you would hold for any
stock, since $12 is your minimum share price.
Now, let’s say you expand your list of potential candidates so that you begin
looking at stocks that are as low as $8/share. Rather
than take on the full 8% position, just use the 600-700 share limit that you
would have had with your $12 stocks. That
way, each little movement in price isn’t as frightening.
This is just one way that you can adjust your allocation size when trading lower
priced stocks. It would also allow you to
still trade in your comfort zone.
Feel free to email me with any questions or comments.
Good Trading,