What 25,000 Trades Taught Me About Finding Real Stock Micro-Trends

Trend watching is big business. “Influencers” try to start trends or at least jump on them early. Day traders are just as passionate about spotting trends, but our timeframe is very much shorter, as in which stocks will take off today.

Some traders don’t focus on trends: They’re known as “counter-trend” traders. These folks will do fundamental analysis by scrutinizing financial reports and may conclude that a stock is in for a beating, so they short it. Others will wait for a stock to drop low enough that they conclude it’s a bargain and should soon turn around. They hope.

I’m the opposite — I’m a momentum trader who wants to see that trend already rolling before I jump in. I focus on technical analysis. On any given day, there is no shortage of potentially trending stocks; social media and trading chat rooms are full of tips. We know that most of them never pan out. So what have I learned after taking more than 25,000 trades about how to identify stock trends worth my while? I have three parts to my answer.

1. Pay attention to the conditions that make stocks ripe for significant trending

Sports teams will scrutinize “film” about their upcoming opponent in a playoff game, looking for their habits and quirks. In a sense, I do the same thing with stocks.

Take “former runners” for example. These are stocks that in the past have experienced massive momentum, ripping up 300%, 400% or more in a very short time. I make note of these stocks because they made an impression on many traders’ minds: Some traders made money and want to do that again; others didn’t hop on the bandwagon soon enough, have FOMO now, and want to be extra ready this time around. Either way, the result is that former runners are highly susceptible to breaking news.

I will also make note of stocks that were the subject of recent IPOs or reverse stock splits. In the latter case, a stock might exchange two shares at $3 for one share at $6. This drastically reduces the number of available shares and sometimes results in ripe conditions for a profit.

2. Know how a hot stock takes off, and whether it meets my criteria

I pay huge attention to “news catalysts” every morning. These are announcements of new drugs being approved by the FDA, major acquisitions and activist investors taking a big stake in a company, among other news. It doesn’t matter how fast I am at the keyboard: By the time I’ve read this news, programmed traders on Wall Street have already placed their trades microseconds after the news hit. This is known as an “algo spike”.

As the name implies, often these stocks will spike and then pull back. While this is happening, I’ll be reviewing whether the stock meets my other criteria for buying. One of those is the stock price. I usually prefer to trade stocks that cost between $3.00 and $20.00 per share. Sure, Tesla may have regular news catalysts and plenty of trader attention worldwide, but it’s much harder for a share that costs $350 to move as quickly as one costing $3.50.

I also want to see a stock that’s up at least 30% over yesterday’s close. I’m a momentum trader, and 30% is a minimum, given how some stocks will rip up hundreds of percent in a trading session. Then I want to see today’s volume be up at least 500% over the average — another sign of momentum. Finally, I look for stocks with fewer than 10 million shares available to trade. These criteria are all quick to calculate, which is fortunate because that’s important for my third stage:

3. Be completely ready to take advantage of the right opportunity

Professional day trading is not about fast gaming reflexes; it’s about having the knowledge and emotional readiness to act quickly, effectively and decisively. A stock needs to meet my criteria, but as odd as it sounds, I have to meet some criteria as well:

• I must be thoroughly familiar with my trading platform and all the commands I’ll need to trade, including buying and selling full and partial positions, setting stop losses and making adjustments on the fly.
• I must know my maximum size per trade, maximum loss per trade and maximum loss per day, and be able to calculate the profit/loss ratio for any trade I’m about to take.
• I’ve got to be refreshed on my personal “guardrails” that I’ve learned the hard way and that help to minimize “red days” and avoid disasters.
• I need to watch for my favorite trading patterns to begin to appear. These come from long experience, and have names like “Bull Flag”, “Flat-Top Breakout” and “ABCD”, among many others.
• I have a suite of technical indicators that I’ve tested over time. Early in my career, I had 20 indicators on my screen and found that they reliably sent a message of confusion. I therefore have honed the list to just a handful of moving averages and other indicators that really do help me to confirm what I’m seeing in a stock’s behavior.
• Finally — if I’ve done all this careful preparation — I’m able to confidently take a trade almost the instant that stock crosses my trigger. And what if the stock doesn’t then behave the way I expect? I’m just as quick to get partially or fully out of that position.

Some days, I allow myself just a little basking if I’ve traded within my guardrails and done well. Other days, I’ll acknowledge that things didn’t work out, in which case there’s one last thing to do before shutting down my workstation: learn from what went wrong and how I should trade differently tomorrow.

Beating myself up is time wasted; preparing to do better tomorrow, with a new crop of trending stocks, is time well spent.