What is a Stock to Watch?
Each week we send our Wanderer free subscribers a Wednesday Stock to Watch (STW)—while our subscribers receive these sorts of picks throughout the week. The STW is a trade setup that we think has a great looking chart and exceptional reward-to-risk. Here we'll explain what you can do with STW, and what you shouldn't do.
STW Considerations
The first thing you need to do before entering a STW trade is to determine how it fits with your current trade portfolio. If you already own two semiconductor stocks, should you be buying a third? If the S&P index is down 2% on the day, but a STW buy signal is triggering, should you still be buying?
The STW trades require a bit of personal inspection and shouldn't just be entered blindly. There are always considerations that need to be addressed. For instance, the STW is sent out before the market opens on Wednesday morning. If the market opens sharply lower and continues to drop, would it be wise to enter a new trade right then? Likely not. These trade setups need to be thought through with regard to market conditions and the other positions already in your portfolio.
There are many reasons to trade a Stock to Watch pick, you just need to decide if it is a good fit for you. The one thing you do not want to do is enter every single STW trade without regard to your portfolio or overall market conditions. If you do that you will likely find yourself overextended.
The Stock to Watch is produced in order to provide you with information and ideas for your own personal portfolio considerations.
STW Example, Straight Buy
Here is an example of a recent STW alert with a straight limit buy price:
Ford Motor Co. engages in the manufacture, distribution, and sale of automobiles.
From a fundamentals standpoint we like Ford. The new CEO came onboard and really got the company turned around and cranking out some amazing vehicles. Specifically, he seems to grasp the future of electric vehicles much better than previous CEOs. We owned this in our buy-and-hold last year from $9.70, sold half at $20.84, and finally were compelled by the charts to bail on the last half at $15.50. Now it's starting to appear that a bottom has finally been put in. This looks like a good place to own it again for the next run up.
Ticker: F
Buy @ $12.60
Stop @ $11.49
Target @ $16.50
Step one, then, is to buy F stock if the price is below $12.60 (in this example it closed the day before at $12.59). After determining if you would like to add Ford stock to your portfolio, you can simply enter an order to buy the stock at that price or below.
Step two, after you have bought the stock, you want to protect yourself in the event that the trade moves against you. You do this by setting a Sell Stop Order. If the price of the stock hits $11.49, you should exit the trade. We are very specific when setting these stop levels, which are usually just below strong support levels, that if breached tell us that the trade is wrong and probably has more downside ahead of it. We cut our losses off small.
Step three, once the trade starts moving the right direction, is to place a sell order at your target price. With some brokerages you can place a bracket order, in which you can place both the sell stop order, and the target sell order, at the same time. Other brokerages don't offer these, and in that case you'll have to first cancel your stop order, then place your sell at the target price order. Again, these levels are specifically chosen at important levels.
STW Example, Buy Stop on a Breakout
Pepsi has put in clear resistance at the $177 level, tapping it for the third time on Monday. So far it has pulled back a bit, but if it turns back up this is a very clear breakout trade once it makes a new high. We would buy this as it breaks above $178.50. For those that trade both directions, this is also a short setup currently. With that trade the stop would be at $178.50 as well. Both trades offer good reward-to-risk. Again, this is currently a short setup, but will turn very quickly into a buy setup if it makes a new high.
Ticker: PEP
Buy breakout above @ $178.50
Stop @ $174.19
Target @ $199.00
This is very similar to the other alert, but the difference is that this time you will not buy until the breakout price has been reached. So even if you can buy it currently at a lower price, you still want to wait. The reason is that this price is just above a strong level of resistance. This means that in the past this level has proven to be hard for buyers to get through. Repeated tests of a certain level builds up energy for an explosive move above it, and this is what the breakout trade tries to capture. Once that resistance level is broken, we then buy the stock, anticipating a strong rally from there.
Sizing the Trade
No trade you make should be so large that it can make a loss hard to recover from. We limit losses on our trades to 1% (this is a max, and it is usually less). Which means that a little calculation will have to be done in order to ensure you remain below that threshold. Let's use the F example from above.
We purchase the stock at $12.60 with a stop at $11.49, which equals a $1.11 drop.
$12.60 - $11.49 = $1.11 risk per share
If you are trading a $50,000 account, and we want to limit risk to 1% per trade, then we calculate that amount:
$50,000 x .01 = $500 max acceptable risk
Now with our max risk calculated we can figure out how many shares we can safely trade to stay within our risk parameters:
$500 / $1.11 = 450 shares
STW Expiration
Not all of the trades pointed out will trigger their buy price—so what do we do about those? As a very general rule, you can disregard the STW after about two weeks. In that time it is likely that market conditions have changed considerably. However, certain important levels remain on a stock's chart regardless of whether or not that level was hit right away, or a month later. With breakout trades, especially, you can often trade the same setup weeks after the initial alert was sent out.
We would encourage you to consider the date, what the stock has done in the intervening timeframe, as well as where the overall stock market indexes have gone during that time. There is no hard and fast answer to this question, but generally, after a couple of weeks, you can move on. The nice thing about the stock market is that it always presents us with new opportunities.
Summary
- Do Not Trade Every STW. Examine how it fits in your overall portfolio and whether you need more market exposure or not.
- With a straight Buy price STW you will buy the stock if the price is at or below the buy price.
- With a Breakout Buy price you will not buy the stock until the price goes above the buy price.
- Size any trades appropriately to minimize risk.
- Stick to stops. In trading, managing losses is even more important that managing winners.
- Consider the date of the alert, and market conditions, before making any trades based off of older STW lists.
Keep Up With the Wanderer Crew No Matter Where We Are
I've been trading and traveling my entire adult life. I'm currently trading from my boat in Mexico. Over the years this has gotten easier and easier to do. Drop the anchor, tether your phone data to your laptop, browse some charts, make a trade, then go have some fun. I may have started out trading in the pits of Chicago, but have thoroughly enjoyed participating in the technological revolution that has enabled me to go from a static location to roaming the world at will, while still earning a living. At Wanderer our goal is to teach others how to trade and invest in order so that they may earn themselves the freedom to choose where they want to be every day.
Ready to Learn & Explore More?
If you haven't done so already, it's a great time to subscribe. Whatever your dreams for a Wandering life include, the shortest path to finding them starts right here. You don't have to do it the hard way by learning on your own and making costly mistakes. The financial education and professional trading strategies alone are worth the cost of an annual subscription. But when you add in the guidance and advice shared by hundreds of experienced Wanderers who are already living a SELF-dependent, pretired life–now that is truly priceless.
The world is waiting. Join us and hundreds of successful Wanderers and subscribe today.
