People are always on the hunt for new ways to improve their trading and figure out how to pick winning stocks…
And there are hundreds of different market analysis tools to choose from that’ll help us learn how to pick winning stocks and better analyze the market in general.
Each week, I get a ton of emails from around the world advertising new and improved technical indicators and trading tools to help you increase the percentage and size of your winning trades, and decrease the number and size of losers.
How to Pick Winning Trades: Why Some Indicators Don’t Improve Results
About 10 years ago, I was working with a professional fund manager who had a Ph.D in statistics and was a true computer wizard.
We worked together on different software programs that gave us the ability to backtest hundreds of different indicators and tactics.
The tests were exhaustive and involved three decades of market prices. But the results were based on pure math, so there was no bias or human emotion involved in manipulating the results.
The Results Are In
The results surprised us more than you could ever imagine…
Things we thought would work did not. And things we thought would not work actually performed better than we imagined.
While I can’t divulge everything we discovered, I can give you a few bits that’ll show you how to pick winning trades, and improve the percentage and size of your winners.
Volume and Price
One of the biggest and most interesting discoveries was the relationship between volume and price.
We wanted to see what type of impact volume had on the price of stocks.
The results proved that a volume increase without any type of news or fundamental reports stimulating the stock or its sector resulted in 78% of the stocks experiencing large price changes within two trading days of the volume spike.
You may think that’s not that surprising because when stocks see a sharp increase in volume, prices usually move one way or another.
But this isn’t the most exciting part of the test results…
The best part is that out of that number, eight of 10 stocks remained at the new price level… while only two stocks fell back to the previous level after five trading days.
This means when volume drastically increases and stocks begin moving without any outside news that could explain the move, they either continue to move, or stay at that new price level for about a week.
When testing sharp volume increases accompanied by news directly impacting the stock or its sector, the stock experienced a dramatic price change about 85% of the time.
But only three of 10 stocks remained at their new price levels, while seven stocks went back to their previous levels.
This showed us that when prices move either up or down on earnings or other related information, the stock has already moved and will reverse direction quickly back to previous price levels.
How to Use This Data
We learned that entering stocks because news is driving up prices is not a smart idea. Because by the time the news breaks, a great majority of the stocks have already moved either up or down…
And will be moving back to the previous price level in less than five trading days.
The more exciting part of the test was learning that a sharp volume increase without any type of news or reports related to that stock or its sector was a great time to enter in the direction of the move.
That’s because the odds are 20% or less that the stock will move against you in a big way within the next five trading days.
How Much Volume Is Enough?
The test that was used in our study required at least a 75% increase in volume over the average of the past five trading days.
So if your stock’s average daily volume is about 1 million shares, you would look for that to spike to 1.75 million shares. The entry would occur at the end of the day on a Market-on-Close order, and the position should be held for five days.
The exit would occur at the end of the trading session on day 5.
How This Information Can Help You Pick Winning Trades
When volume is used the right way, it can be one of the best stock market analysis tools in the world of trading.
When volume is rising sharply and stocks begin moving, the first thing you want to see is if there’s any news that could be causing the sharp volume increase.
If there’s no fundamental news causing the sharp rise, the odds are in your favor that any significant change in the price of the stock is meaningful and real.
If you notice a sharp increase in volume and there is a fundamental reason behind it, odds are strong that the move is temporary… Or it may be already coming to an end, and will most likely reverse within the next trading week.
I hope that helps!
All of the best,
Senior Strategist, WealthPress