4 Tips to Trade Medical Cannabis
Yesterday I left off talking about The Farm Bill. Were you surprised to learn that farming has a lot to do with medical marijuana?
Picking up where we left off, I believe The Farm Bill will likely have a huge effect on CBD production in the U.S.
You can expect to see a lot of activity from companies and products related to this sector …
There’s still that legal grey area around marijuana, and that’s led to a lot of interest in companies in the medical marijuana sector. Traders are waiting and watching to see what happens next.
So far — based on speculation alone — many companies are experiencing big time growth in short periods. So, for instance, it’s not unusual for a stock to gain 30% or more in a day.
More and more states are green-lighting medical marijuana, which will increase the production of products and services related to these stocks.
Right now, most medical marijuana stocks are based in Canada and found on exchanges like the OTC market.
But now that CBD production will likely increase stateside, you’ll probably see more companies emerging on the major exchanges.
In short: There’s still a lot of uncertainty in the medical marijuana stock sector, but this can add up to great opportunities for traders.
How I’d Trade Medical Marijuana Stocks in 2019
So, by now you probably realize that this sector is worth watching.
But how do you buy cannabis stocks? It’s not always as simple as making a selection and executing a market order …
Here are tips to help you make the most intelligent trades:
#1 Stock Screener
Hands down, the best way to find potential medical marijuana stocks to invest in is by using a stock screener.
A stock screener is a platform where you can filter stocks by criteria that you set up. It’s the first step in creating a strong watchlist, which should be the basis of all of your trades.
My favorite is StocksToTrade. It has the best tools and allows you to execute trades right from the platform.
For example, you might start by filtering on the top gainers for the day, then filter by volume and float. Within that list, especially these days, you’ll probably see a few medical marijuana stocks.
You can use various methods filter down from there (here’s how to make the most of a stock screener).
#2 News Catalysts
What is a catalyst? That’s easy. Basically, it’s any company news that could affect the price of a particular stock. Some news catalysts might include:
Earnings reports: Soon after the end of each quarter, public companies are obligated to release a quarterly earnings report. They have a limited time period in which they need to release them: That’s called earnings season.
A lot can happen to a stock’s price based on the earnings reports. If the company performs higher than anticipated, it can drive up the stock price. Sometimes it’s short lived. Sometimes it lasts longer.
But if the company doesn’t meet earnings expectations, it can have the opposite effect and bring the security price down. By staying on top of the release dates you can better position yourself for successful trades.
Big contracts: This is particularly relevant with medical marijuana stocks right now as seemingly everyone wants to get in on the action …
An example might be a big company, such as Coca-Cola, looking into a CBD producer for a potential partnership to create a CBD-infused beverage. A contract like this could really move stock prices — so stay on top of the news!
Notable new hires: A change in personnel can affect a company’s stock price. If a beloved and high-performing CEO steps down, the uncertainty of what will happen next could bring the stock price down.
On the other hand, look at a company that has poor earnings. If they decide to sack their CFO and find a hotshot replacement, that could have a positive effect on the stock price.
Policy changes: Sometimes, policy changes or regulation can affect the stock price. Medical marijuana stocks are a perfect example right now. The recent CBD policy changes could help stock gain bigtime in the coming weeks and months.
#3 Patterns and Indicators
For the most effective research, a good trader typically relies on a mix of fundamental analysis and technical analysis.
Fundamental analysis covers news catalysts, earnings reports, and an in-depth look at the company overall.
Technical analysis is all about the charts. And as my Trading Challenge students know, I’m all about charts.
Even if a stock has amazing fundamentals, you must back it up with the price action on the chart.
I like to look for clean, easily identifiable patterns in stocks. I don’t like surprises, so I try to find charts that follow what looks to be a reliable and easy-to-follow trajectory.
When a chart is clean, then so is my mind as I enter a trade. While history never repeats itself exactly, it’s usually pretty close. Close enough — at least I hope — to help me profit.
Nobody can be right all of the time, but this method has helped me be right enough of the time. My win rate (check it out on Profit.ly, where I document each and every trade) is about 70%.
I like to look for tickers that are making very clean highs and higher lows for several days in a row or a stock that’s exploding after a big news catalyst.
#4 Volume and Volatility
Before you learn how to invest in marijuana penny stocks, you’ve got to have a good understanding of volume and volatility.
In general, penny stocks will be more volatile than higher-priced stocks. That’s because the companies are typically smaller, less established. They’re generally not as reliable as large-cap companies.
This is particularly important for marijuana penny stocks because they have a double whammy of volatility.
Not only are low priced marijuana stocks subject to the same volatility as most low-priced stocks, but they’re also in an emerging sector that hasn’t been proven yet.
Lots of volatility can mean the potential for profit — but it can also mean the potential for big losses.
This volatility is in part why it’s so important to look at the volume around a given stock. A good volume (I’d throw out at least 1 million shares daily as a good starting point) can be a good indication that there are buyers and sellers actively trading this stock.
This means there’s good liquidity. It increases the likelihood of an easy entry and exit from a position if you choose to trade.
If there’s not enough volume, be wary! It could mean you won’t be able to exit your position when you want.
And nobody likes being stuck in a trade.
Before I let you go completely we need to go over some of the risks you need to consider before investing in this sector.
Let’s take a little break and jump back into the discussion on Monday morning.
— Tim Sykes
Editor, Penny Stock Millionaires