1 Tool, 3 Steps, Huge Impact
Dear Penny Stock Millionaire,
Yesterday, I told you all about the importance of trend analysis and what its used for. Today, I’ll go over how to identify and predict trends for yourself. I’ll also share some essential trend analysis tips for day traders you can start using immediately.
There are three trend-analysis methods and tools I use to identify trends…
#1 News Catalysts
A news catalyst is any kind of event or revelation that can cause a dramatic change in the price of a stock or markets as a whole.
A news catalyst can be basically anything that a trader can interpret as good or bad news. That can include things like:
- New government legislation
- Earnings reports exceeding or falling short of expectations
- An analyst revision
- A new product announcement
- A lawsuit
- War or civil unrest
- Mergers or acquisitions
- Or even something as simple as an off-hand comment made by a CEO (think Elon Musk’s tweet about taking Tesla private at $420 a share)
A news catalyst doesn’t always have an immediate effect on a market or a stock’s fundamentals. It can either excite or rattle investors — driving a market up or down.
Different investors will assign different levels of value to news catalysts. Value investors usually completely ignore news catalysts and focus on the fundamentals of a market or company.
Momentum investors are the opposite. They make the majority of their trading decisions based on news events.
The majority of investors aren’t on either extreme but fall somewhere in the middle. A shrewd trader might focus most of their attention on fundamentals, but admit that major news events can have an effect on a particular market.
#2 Stock Screeners
One of my favorite market trend analysis tools is a stock screener.
This tool allows you to filter stocks — by sector, industry, performance, valuation, dividends, average volume, margins, income statement, and balance sheet. You can also separate out small-, mid-, or large-cap stocks.
In a nutshell, you can set your own metrics, and a stock screener will display stocks that fit your specific criteria.
Stock screeners can either be free or require a subscription, depending on which website or trading platform you’re using.
The free screeners are very useful, but paid versions often include extra features. For example, some platforms might let you screen using technical indicator data like RSI (relative strength index) values or a 200-day moving average.
Stock screeners are an excellent tool for both investors and active traders. They can identify both stocks that look primed to perform well in the long term, as well as potential setups for short-term positions.
Screeners make it easy to analyze hundreds of stocks in a very short period by efficiently weeding out those that don’t meet your requirements.
#3 Stock Indicators
Indicators are statistics that measure current market conditions and also forecast potential economic or financial trends.
We can break indicators down into two main categories: technical and economic.
These indicators are some of the main tools used in technical analysis to predict how the price of a stock will trend. They use mathematical calculations based mainly on historical trading data like price and volume.
An example of a technical indicator is the relative strength index (RSI), which determines an asset’s price momentum by comparing the size of recent gains to recent losses.
Another example is the moving average convergence-divergence (MACD), which attempts to find a trend line by looking at moving averages for a stock over different time periods.
Technical indicators are displayed in two main ways. The first is in overlays, like moving averages or Bollinger Bands©, which are plotted on top of a stock chart.
The second is as oscillators, like RSI and MACD, which are plotted above or below a stock chart.
There’s no one set method. Traders often combine multiple technical indicators to analyze stocks. You can choose from thousands of different technical-indicator combinations to find what works best for your needs.
These indicators can measure sectors of the economy or the entire economy, and can mark growth or contraction.
Examples of economic indicators include data presented by the Department of Labor or the Institute of Supply Management (ISM).
Housing and real estate are also leading economic indicators, which are measured using the NAHB/Wells Fargo Housing Market Index (HMI) and S&P/Case-Shiller Index. These both measure the market for new homes and housing price data respectively.
Other economic indicators include consumer sentiment, as well as the money supply and interest rates set by the Federal Reserve.
Alright, ready to try using trend analysis as a tool for day trading?
Check out these tips …
Don’t Trade Too Big
Always avoid taking on more risk than you can handle. That’s especially true when you add something new to your stock-trading repertoire.
Trends can reverse suddenly and wildly, leaving you in a terrible position if you’re not careful. That’s why I recommend having a stop-loss in place to help you cut losses if things take an unexpected turn.
Start small — especially while you’re new and still experimenting with trend analysis as part of your day trading.
Develop a Stock Watchlist
A stock watchlist gives you one consolidated view that shows you the overall performance of all the stocks you’re currently following.
After you use a stock screener, it’s a good idea to add any stocks that meet your criteria to your watchlist. It’s a convenient way to check on the performance of all the stocks you follow at once. The alternative? Manually look up each ticket every time you want to check on a stock.
Stock watchlists let you list all your holdings and potential purchases in one place. There’s no shortage of options — plenty of free watchlists are available. You can sort, click, drag, and drop, and more. Find and use whatever best meets your personal needs.
Stick to Your Trading Plan
I often discuss the importance of a clearly laid out trading plan.
A trading plan is all yours. It’s your set of rules that help you invest. Before you enter or exit any security, it must meet the rules that you set in advance.
Your trading plan might include your risk level, goals, entry rules, and exit rules. And there are the basics that you set for yourself, like keeping good records.
Having a trading plan can help you avoid emotional reactions to the performance of both individual stocks and the market as a whole. And it can help put your personal bias into perspective.
The Bottom Line
Trend analysis is a technique that can help you use past behavior of the market or an individual stock to predict where it might be headed in the future.
Put this tool to work for your own trades: Conduct trend analysis on your own trades and fave stocks, or use it to identify new trends.
When it comes to the stock market, there are no guarantees. But I hope this knowledge will help you tip the odds in your favor.
Editor, Penny Stock Millionaires