Buying a trending stock can be a fast way to get a phenomenal return, but it also carries considerable risk. Buying with a tight stop loss can be an effective approach to mitigate potential losses, but it may also deprive you the opportunity to hold through a big run. Following a lot of different factors can give you more to consider than just the current trading price when deciding when to buy and how long to hold. Here are some ways that you can be strategic about maximizing returns with trending stocks.
Don’t Skip Due Diligence
Attention on forums or a sudden influx of volume based on fluffy PR can’t be the primary factors that influence whether you decide to make a buy and when you opt to sell or average down. Review the fundamentals of the companies that you’re most interested in.
It’s especially important to review daily charts and how a ticker is trading over short intervals intraday with live stock charts. Signs of manipulation may be a warning sign that it’s time to take profits before things go south.
You can get significantly greater returns by purchasing call options for a trending stock. The farther out the option expires, the more it will cost. By buying options that don’t expire too far into the future, you can generate several times what you would have accumulated just by holding the equity.
Watch for Squeezes
One reason that trending stocks are targeted by online trading groups and forums is an unreasonable volume of short interest. Many fantastic stocks with great growth potential get attacked by big block buyers.
Resourceful and somewhat dubious shorts interest holders use algorithms on the bid and ask board to drive shares lower by trading them back and forth lower than their current share value. Resultantly, many long-term holders give out because of stop loss triggers. If an equity has overwhelming short interest and it has been beaten down well below its intrinsic value, it may become a trending stock or even a meme “stonk” as bulls coordinate a short squeeze.
Monitor Short Interest Fluctuation
Shorts can overpower coordinated short squeezes if they can bring a lot of ammunition onto the order book. Watch the daily short volume and how many days are left to cover. Also, be particularly wary during the third week of the month when put options will be expiring.
Once you’re holding a trending stock, monitor how the short volume changes day over day. If you notice that it’s slowly dwindling down, the stock may have room to run. If you see that the volume is steadily increasing day over day, it might signify that the bears are going to take hold of the share price’s direction.
When you use informational resources to watch the activity of a trending stock closely, you can hang on to it until the ideal time to sell. Be sure to make use of the right tools so that you can avert unnecessary losses or settling for less than a trending stock can get you.
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