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Every investor who tries their hand at Wall Street is looking for the next stock that will double. However, so few investors are successful in finding a winning stock, let alone holding one. Though legendary investors such as Jesse Livermore, Paul Tudor Jones, and Warren Buffett have differing strategies, they share a common thought process about how to make big money in the stock market.
Jesse Livermore once said, “Those who can both be right and sit tight are uncommon.”
In an interview with Tony Robbins, Paul Tudor Jones said he shoots for a risk-to-reward ratio of 5:1. “Five to one means I’m risking one dollar to make 5.”
Buffett proclaimed that “The stock market is a device to transfer money from the impatient to the patient.”
Though the advice of running winners may sound evident on the surface, in practice, it is a different story for most investors. How can investors find the next big winner, and more importantly, how can they fight the human emotions of hope, fear, and greed and ride these winners?
Identify a stock in an uptrend: All else equal, it is easier to latch onto an already strong stock than it is to catch a bottom in a weak stock. Stocks like Apple ((AAPL - Free Report) ), Amazon ((AMZN - Free Report) ), or Monster ((MNST - Free Report) ) that doubled years ago went onto double several more times. In other words, strength begets strength.
Image Source: Zacks Investment Research
Pictured: MNST is up nearly 140,000% since inception!
Use moving averages: Moving averages can help you in various ways. For example, a bullish “golden cross” occurs when the “faster” 50-day moving average crosses above the “slower” 200-day moving average from below – signaling a bullish trend change. Nvidia ((NVDA - Free Report) ), the current market leader, triggered this signal earlier this year.
Image Source: Zacks Investment Research
Beyond getting you into the stock, the 50-day moving average can help you to stay in the stock for the bulk of a move. The 50-day moving average is an area where institutional investors like to “reload on stock”. Thus, the strongest trends are contained within the 50-day moving average. If you can buy a stock above the 50-day moving average and hold until your average cost is below the moving average, you put yourself in a position for success. A good recent example is Elf Beauty ((ELF - Free Report) ).
Image Source: Zacks Investment Research
Pictured: ELF has hugged the 50-day moving average for months.
Look for stocks with Zacks Rankings of 3 or better: The Zacks Rank grades stocks based on earnings estimates. Year-over-year, the stocks with rising earnings estimates have significantly outperformed the S&P 500 Index. By combining technicals and fundamentals, you begin to stack the odds in your favor.
Hone your entry points: It is much easier to hang onto a stock if you purchased it correctly. When entering a stock, there is no need to complicate the process. Find an up-trending stock that is consolidating and pulling back to the 50-day moving average. Buy as it breaks out of the consolidation – preferably on heavy volume. A real-time example of a stock trying to do this is Salesforece ((CRM - Free Report) ).
Image Source: Zacks Investment Research
Pictured: CRM is breaking out of a classic bull flag as turnover picks up. The
Manage your risk: Anyone who has invested in the stock market for more than a few days knows that you will not always pick winners. Legendary investor Ed Seykota once warned,“If you can’t take a small loss, sooner or later, you will take the mother of all losses.” Though taking losses is not something investors often talk about, it is a critical part of surviving over the long term and finding investing success. The good news is that if you keep your losses tight and run your winners, you can achieve great success with a hit rate of 40% or even lower.
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Finding the Next Double (5 Factors to Consider)
Every investor who tries their hand at Wall Street is looking for the next stock that will double. However, so few investors are successful in finding a winning stock, let alone holding one. Though legendary investors such as Jesse Livermore, Paul Tudor Jones, and Warren Buffett have differing strategies, they share a common thought process about how to make big money in the stock market.
Jesse Livermore once said, “Those who can both be right and sit tight are uncommon.”
In an interview with Tony Robbins, Paul Tudor Jones said he shoots for a risk-to-reward ratio of 5:1. “Five to one means I’m risking one dollar to make 5.”
Buffett proclaimed that “The stock market is a device to transfer money from the impatient to the patient.”
Though the advice of running winners may sound evident on the surface, in practice, it is a different story for most investors. How can investors find the next big winner, and more importantly, how can they fight the human emotions of hope, fear, and greed and ride these winners?
Identify a stock in an uptrend: All else equal, it is easier to latch onto an already strong stock than it is to catch a bottom in a weak stock. Stocks like Apple ((AAPL - Free Report) ), Amazon ((AMZN - Free Report) ), or Monster ((MNST - Free Report) ) that doubled years ago went onto double several more times. In other words, strength begets strength.
Image Source: Zacks Investment Research
Pictured: MNST is up nearly 140,000% since inception!
Use moving averages: Moving averages can help you in various ways. For example, a bullish “golden cross” occurs when the “faster” 50-day moving average crosses above the “slower” 200-day moving average from below – signaling a bullish trend change. Nvidia ((NVDA - Free Report) ), the current market leader, triggered this signal earlier this year.
Image Source: Zacks Investment Research
Beyond getting you into the stock, the 50-day moving average can help you to stay in the stock for the bulk of a move. The 50-day moving average is an area where institutional investors like to “reload on stock”. Thus, the strongest trends are contained within the 50-day moving average. If you can buy a stock above the 50-day moving average and hold until your average cost is below the moving average, you put yourself in a position for success. A good recent example is Elf Beauty ((ELF - Free Report) ).
Image Source: Zacks Investment Research
Pictured: ELF has hugged the 50-day moving average for months.
Look for stocks with Zacks Rankings of 3 or better: The Zacks Rank grades stocks based on earnings estimates. Year-over-year, the stocks with rising earnings estimates have significantly outperformed the S&P 500 Index. By combining technicals and fundamentals, you begin to stack the odds in your favor.
Hone your entry points: It is much easier to hang onto a stock if you purchased it correctly. When entering a stock, there is no need to complicate the process. Find an up-trending stock that is consolidating and pulling back to the 50-day moving average. Buy as it breaks out of the consolidation – preferably on heavy volume. A real-time example of a stock trying to do this is Salesforece ((CRM - Free Report) ).
Image Source: Zacks Investment Research
Pictured: CRM is breaking out of a classic bull flag as turnover picks up. The
Manage your risk: Anyone who has invested in the stock market for more than a few days knows that you will not always pick winners. Legendary investor Ed Seykota once warned,“If you can’t take a small loss, sooner or later, you will take the mother of all losses.” Though taking losses is not something investors often talk about, it is a critical part of surviving over the long term and finding investing success. The good news is that if you keep your losses tight and run your winners, you can achieve great success with a hit rate of 40% or even lower.