By Brandon Wendell, Online Trading Academy Senior Instructor and Trader Mentor
Students often ask me how they can find the stocks that are best poised to move for the following trading session, or even over several sessions for a swing trade. The answer does not only lie with the stock itself, but with the price action of the broader market. I have stated before in my classes and in past articles, the largest influence on a stock's movement is the trend strength and direction of the broad market. In fact, on average, 60% of a stock's movement is directly related to the direction of the market it belongs to.
Stocks that participate in the same trend direction as the broad market will move further and faster in their trend. Those which are moving in a trend that is counter to the market will have difficulty moving large distances and therefore, usually offer less profit potential. However, these counter-market stocks will typically turn at the same time as the broad market due to its influence.
Figure 1 However, compare this to a stock that moved in the same direction as the market. See how the moves in the trend are magnified as the market moves the stock further and faster in the trend? We are able to confirm turning points for retracements and trend continuation from both the stock and the market.
Figure 2 When looking for a trading opportunity, you should start by observing the market trend. Determine the strength of the trend and the support and resistance levels where that trend may reverse. Now that you have that information, you can begin to use your tools to screen for stocks that are moving in the same trend as the market. You will find that they will typically offer more opportunity with lower risk. If you are unsure on how to do the screening, then visit your local Online Trading Academy Center and enroll in one of our courses. Trade with the market trend and you will find that the trend is truly your friend.
Have a great day.
- Brandon Wendell bwendell@tradingacademy.com
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