Intraday Weakness and the Power of Patience
Buying stocks on intraday weakness takes more than a method. It takes a trader willing to wait for stocks to “come to them” before striking.
It is surprising how often patience leads to success. The batter who is patient enough to wait for his pitch tends to do better than the batter who swings at everything that crosses (or comes close to) the plate. And the fighter who waits for his opponent to lower his guard or overcommit with a punch before countering tends to win far more fights than the fighter who simply plows into his opponent swinging wildly. Patience may not be its own reward. But many of the biggest rewards do indeed come to those who wait.
And it is no different when it comes to trading. One of the keys to short-term trading success that we have learned through our research is that buying stocks on intraday weakness makes it easier to enter long positions when those stocks are at their lowest. This is why we encourage traders looking to buy on weakness to use limit orders below the stock’s most recent close.
For some traders who came of age in the last decade, this might seem strange. The “buy high, sell higher” mantra of that grew out of the roaring bull market in the second half of the 1990s encouraged a virtual generation of traders to look to buy above a market rather than below it.
Although this can be a legitimate strategy for many traders, it is neither the best strategy for all traders nor is it necessarily the most winning one over time. Buying above a market means that a trader will always be paying up to enter a position. That trader will then need the market to move still higher just to begin making any sort of profit. For stocks with a great deal of momentum, this approach can certainly be successful. But when trading in this fashion with stocks that do not have a great deal of momentum behind them, or stocks that breakout and then fail, traders can be left in a problematic situation of having their trades become almost instant losers.
For long-term stock traders, trend traders and the like, this “instant loser” syndrome is merely the price of doing business. These traders are willing to take initial drawdowns in the hope of outsized gains down the line. But for short-term stock traders, who have a window of approximately 5-8 days in which trades need to show a profit or be “fired,” the initial drawdowns can consume both precious time and money that they can ill-afford.
This is one of the reasons why we recommend buying on intraday weakness. In doing so, a trader maximizes the likelihood of buying a stock when it is at or near its lowest levels, so that all that is left for the stock to do is bounce or otherwise resume its ascent.
Does this mean that traders will miss out on stocks that move low, but not low enough to trigger a limit entry order located below the previous close? Yes. But over time, the gains from stocks that do “come in” will more than make up for any “opportunity cost” expended by not chasing stocks higher. Our approach to trading does indeed require patience to allow stocks to “come to you.” But, over the long term, trade in and trade out, we are confident that traders who adopt this approach–or even just trade a portion of their portfolio in this fashion while trading the rest with whatever methods they are currently using–will be glad they did so.
In addition to trading above their 200-day moving averages, all of the stocks in today’s report have Short Term PowerRatings of 8. This means that all four belong to that category of stocks that have outperformed the average stock by more than 8 to 1 after five days. I have also listed the 2-period Relative Strength Index (RSI) values for each stock so that traders can see just how oversold some of these opportunities truly are.
Rick’s Caberet International
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RICK |
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PowerRating). RSI(2) 9.21
Petroleum Development
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PETD |
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PowerRating). RSI(2) 7.99
Questcor Pharmaceuticals
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PowerRating). RSI(2) 9.73
Geoeye
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PowerRating). RSI(2) 2.48
Want to learn the difference between amateurs and professionals when it comes to knowing what stocks to trade, when those stocks should be traded and how? Our special Free Report, “5 Secrets to Short Term Stock Trading Success” will clue you in to the fundamental factors that drive short-term stock price movement and how traders can best take advantage of those moves–in up markets or down. Click here to get your copy of “5 Secrets to Short Term Stock Trading Success” — or call us today at 888-484-8220.
David Penn is Senior Editor at TradingMarkets.com.