Do you know the answer? Embarking on the journey of picking winners early can feel like discovering a secret garden. You’ve heard of these mythical “1st stage bases,” but what exactly are they? Let’s dive in.
The Allure of Early Bases
Imagine finding a gem before anyone else does. That’s what investing in stocks at their 1st stage base is like. The profit potential is enticing, with our calculations showing an average profit potential of about 15%. But, is it all smooth sailing?
And here’s the catch: with great potential comes greater volatility. The price action can be a roller coaster, with our simulated stock experiencing a volatility rate of approximately 9.65%. Buckle up; it’s going to be an exciting ride.
Why Aim for Early Bases?
So, why do we even bother with these early stages if they’re going to give us heart palpitations? The answer lies in the thrill of the hunt and the sweet taste of victory. Buying stocks from their early bases can significantly increase your profit potential. But, be warned, the path is fraught with ups and downs.
And what’s coming up next? A closer look at managing the volatility.
Navigating the Volatility
While the volatility might seem daunting, it’s all part of the game. The key is in preparation and strategy. Setting a stop-loss just a tad below your buy point can help you sleep better at night, knowing you have a safety net.
But when do you know it’s time to let go? It’s all about balance and reading the signs. If your stock drops below your safety net or if the overall market takes a dive, it might be time to reassess.
details at a glance
The upward purple arrow shows where I bought the stock. The downward purple arrow shows where I sold it.
Green Line 21-day exponential moving average line (see EMA 21 below)
Red Line 50-day simple moving average line (see SMA 50 below)
Black LIne 200-day simple moving average line (see SMA 200 below)
Opening
- Underlying: HWM
- Date: 26 Mar 2024
- Underlying Price: $67.77
- Stop Loss: $66.08
- Profit Target: $81.32
- Market Outlook: Confirmed uptrend
- RS Rating: 92
- RS line trend: U (Up)
- Industry Rank: 31 / 197
- Volume U/D Ratio: 2.3
- Institutional Ownership Trend: U (Up)
- Position risk, %: 2.48
- Position Risk to NL, %: 0.15
- Potential Profit (position), %: 19.85
- Risk to Reward Ratio: 0.12
- Position size, %: 6.06
- Why did I open this trade at that point?: “The stock is under heavy accumulation by the market and by institutions. The price action for the stock has been very tight, which makes trading less risky. Also, it was easy to take a low-risk trade – EMA 21 line was very close to the price.”
- Was it an ideal buy?: No. Price wasn’t in the buy zone.
Closing
- Date: 1 Apr 2024
- Price (close): $66.07
- Market Outlook: Confirmed uptrend
- RS Rating: 91
- RS Change: -1
- Remarks: “The position was stopped out due to a big down day with fairly big volume. I didn’t place an alarm to buy the stock back because it’s not a good sign to repurchase the stock only a few days after selling it with a loss. And earnings are coming up in less than a month.”
Results
- What went well?: “I placed the stop-loss correctly. It was reasonably below the EMA-21 line. I bought the stock when it had broken out of the first-stage base. So, there is room for the upside.”
- Cause of Error / IMPROVE: “I should have bought the stock in November 2023 when it was breaking out of its base. Then, its price was in the beginning of the 50s. Industry rank was 31 out of 197. It would be better to focus on stocks that are in the TOP 20 industries.”
- Lessons Learned: “I need a system to keep stocks that are attractive but I don’t want to buy them right now, on the radar. Some kind of calendar system or something like that. Even the stocks that are under heavy accumulation by the market and by the institutions can move against you. Maybe it would have helped more if the stock had been in an even stronger industry.”
- Position ROI, %: -3.95
- Position ROI (portfolio), %: -0.24
- Position Open Time (trading days): 3
- Position Open Time (days): 6
terms and definitions
EMA 21 Calculates the 21-period exponential moving average, highlighting short-term trends.
SMA 50 Averages the price over 50 periods, showing medium-term trends without overemphasizing recent data.
SMA 200 Averages the price over 200 periods, revealing long-term trends by treating all data equally.
Industry Rank Investor’s Business Daily’s system that ranks industries 1 to 197 based on performance. It guides us in CAN SLIM TRADING towards leading sectors.
U/D Ratio Measures stocks closing up versus down. A ratio above 1.0 indicates bullish sentiment, important in CAN SLIM TRADING.
RS Rating Ranks a stock’s performance on a 1 to 99 scale. I look for at least 85, showing strong momentum and growth potential.
RS Line Compares stock price to the market, plotted as a ratio. We seek an uptrend, indicating outperformance and strong momentum.
Volatility Measures how much a security’s price fluctuates over time. High volatility means large price changes, indicating risk and potential reward.
Institutional Ownership Trend indicates whether the stock is under accumulation or distribution by the institutions.
EPS (Earnings Per Share): A financial metric calculated by dividing a company’s net profit by the number of its outstanding shares. It indicates the amount of profit attributed to each share of stock, serving as a key indicator of a company’s profitability.
Stage 1: Basing or Bottoming Stage
Definition: A period following a stock’s decline where it starts moving sideways, forming a base. This stage signifies the easing of downward pressure and the beginning of stabilization, indicating that the stock is not in an uptrend yet but is preparing for potential future growth.
Stage 2: Advancing or Uptrend Stage
Definition: The phase in which a stock breaks out of its base on significant volume, indicating a strong buying interest and the initiation of a new uptrend. This stage is considered the most opportune time for investors to purchase the stock, as it is expected to achieve substantial gains.
Stage 3: Top or Peaking Stage
Definition: A stage characterized by the stock beginning to exhibit signs of losing momentum after its upward movement. The stock may start to move sideways with increased volatility compared to Stage 1. This suggests the stock might be reaching its peak, and the existing uptrend could be weakening.
Stage 4: Declining or Downtrend Stage
Definition: This final stage occurs when the stock breaks down from its Stage 3 pattern and enters into a downtrend, marked by a sequence of lower lows and lower highs. It signifies that selling pressure has surpassed buying interest, usually serving as a signal for investors to sell the stock to mitigate further losses.
Closing Thoughts
In conclusion, the journey of investing in stocks at their 1st stage base is not for the faint-hearted. The potential for high returns is matched by the risk of volatility. However, with careful planning and a steady nerve, the rewards can be substantial.
And remember, every investor’s journey is unique. What works for one may not work for another. The key is to stay informed, stay disciplined, and most importantly, stay in the game.
