Trading any high flying momentum stock is a risky venture. You either have momentum on your side and life is beautiful or you're deep in the hole and can't look at your portfolio anymore.
Today's installment from the series, 'Trading Lessons From A Hedge Fund Trader' will focus on Tesla Motors Inc TSLA as per our reader's request for research, available here at BehindWallStreet.com.
This article is also dedicated to Reginald, a former colleague from Mapleridge Capital. He told me he was short Tesla Motors Inc TSLA so I'm going to share with him and all my readers on how to trade high beta momentum stocks.
Lesson #1
Don't rely on the fundamentals when you're trading a momentum stock
Tesla Motors Inc TSLA has an EPS (earning per share) of -$2.09 but sports a market cap of $22 billion. Should a company have that type of valuation when it will be lucky to sell 22,000 cars this year?
This is a story of a potential hyper growth company that sells a sexy product.
If you are going to trade Tesla Motors Inc TSLA based on fundamentals then you will have your shirt handed to you.
When the valuations don't make any sense then you must look towards the technical situation for guidance on the stock.
Why?
Trying to predict future sales of a hot new product is next to impossible. Consumer's desires are constantly changing and we are dealing with emotional big ticket purchases. Big ticket purchases require a strong economy and with all the talks of a government shutdown, this adds even more uncertainty to the equation.
I have to admit, they make a damn fine looking car.
Lesson #2
Don't trade countertrend to the momentum and never try to call a top or bottom
Today's installment from the series, 'Trading Lessons From A Hedge Fund Trader' will focus on Tesla Motors Inc TSLA as per our reader's request for research, available here at BehindWallStreet.com.
This article is also dedicated to Reginald, a former colleague from Mapleridge Capital. He told me he was short Tesla Motors Inc TSLA so I'm going to share with him and all my readers on how to trade high beta momentum stocks.
Lesson #1
Don't rely on the fundamentals when you're trading a momentum stock
Tesla Motors Inc TSLA has an EPS (earning per share) of -$2.09 but sports a market cap of $22 billion. Should a company have that type of valuation when it will be lucky to sell 22,000 cars this year?
This is a story of a potential hyper growth company that sells a sexy product.
If you are going to trade Tesla Motors Inc TSLA based on fundamentals then you will have your shirt handed to you.
When the valuations don't make any sense then you must look towards the technical situation for guidance on the stock.
Why?
Trying to predict future sales of a hot new product is next to impossible. Consumer's desires are constantly changing and we are dealing with emotional big ticket purchases. Big ticket purchases require a strong economy and with all the talks of a government shutdown, this adds even more uncertainty to the equation.
I have to admit, they make a damn fine looking car.
Lesson #2
Don't trade countertrend to the momentum and never try to call a top or bottom
Tesla Motors Inc TSLA gapped up to $40 in April 2013 and has been off to the races almost reaching $200 just recently.
The average trader will look at this chart and think to themselves, 'there's no way this stock can go any higher'. Don't fall for that trap unless you want to lose a lot of money.
Calling the top on this stock, or any high flying momentum stock that is IN PLAY is not the way to effectively trade a momentum stock.
Lesson #3
Trade in the direction of the Moving Average
It doesn't really matter what period you use for your moving average because it will be going up for Tesla Motors Inc TSLA.
Try a 50 period moving average and change the time period of the chart from daily to 2hrs, then try 1hr, then try 30mins. I want you to see how the look of the moving average changes.
Using a moving average is very simple so I encourage everyone to start using them. It takes out a lot of the guess work on trying to see the direction of the market. As you already know, the moving average really lags the price action on the chart. I still encourage you to use the moving average because it's a simple filtering tool that will allow you to mostly take trades in the direction of the moving average.
The average trader will look at this chart and think to themselves, 'there's no way this stock can go any higher'. Don't fall for that trap unless you want to lose a lot of money.
Calling the top on this stock, or any high flying momentum stock that is IN PLAY is not the way to effectively trade a momentum stock.
Lesson #3
Trade in the direction of the Moving Average
It doesn't really matter what period you use for your moving average because it will be going up for Tesla Motors Inc TSLA.
Try a 50 period moving average and change the time period of the chart from daily to 2hrs, then try 1hr, then try 30mins. I want you to see how the look of the moving average changes.
Using a moving average is very simple so I encourage everyone to start using them. It takes out a lot of the guess work on trying to see the direction of the market. As you already know, the moving average really lags the price action on the chart. I still encourage you to use the moving average because it's a simple filtering tool that will allow you to mostly take trades in the direction of the moving average.
Lesson #4
Learn how to read the volume on the stock
The volume shows the life force of the stock. The stock price will drift in the direction of the path of least direction. So when the momentum stock is bullish then that stock will drift upwards until it hits an opposing force. That force will be represented by selling pressure and you will see that in surges in volume on the down days.
Those down days on heavy volume will have a typical ORB (opening range breakout) and ATR (average true range) expansion day but that is a story for another day.
Start looking at the volume patterns. You will notice that a strong stock will go UP on light volume and will have a really strong UP day on heavy up volume. You will notice that the same stock requires a lot of volume to push it down.
When the stock starts going down on light volume then that's a clue that we are near a top.
Why? It all goes back to the path of least resistance. When something is strong, it will go up until it runs into a selling force strong enough to halt the advance.
When something is weak, it will go down until buyers step in to halt the advance.
Conclusion
Stop thinking about calling market tops and bottoms because it will cost you a lot of money and mental capital in the long run.
Change your mindset and think about trying to identify the path of least resistance.
The path of least resistance for Tesla Motors Inc TSLA is still to the upside and the proof can be found in October.
It took 7 days to go from $195 to $162 and only 4 days to get back to $188.
Plus we bounced off the 50 day moving average on the lowest volume days for October. Heavy volume selling to go down in October and light volume buying to go up means the stock is super strong.
Bargain hunters stepped in and forced the stock back up
Use the 4 techniques from today's article and start trading in the direction of the easy money.
Now you have 4 simple tactics to use when trading a momentum stock and knowing is half the battle.
For information regarding stocks we do like, check out our Flagship and ETF Newsletter.
This is a cursory look at Tesla Motors Inc TSLA. and we are not making any specific buy or sell recommendation but merely voicing our opinion of the current situation. Each individual investor must conduct their own due diligence of both the company, the market sector as well as their own financial situation and risk parameters.
By Joel Laceda - October 15, 2013 BehindWallStreet.com
Learn how to read the volume on the stock
The volume shows the life force of the stock. The stock price will drift in the direction of the path of least direction. So when the momentum stock is bullish then that stock will drift upwards until it hits an opposing force. That force will be represented by selling pressure and you will see that in surges in volume on the down days.
Those down days on heavy volume will have a typical ORB (opening range breakout) and ATR (average true range) expansion day but that is a story for another day.
Start looking at the volume patterns. You will notice that a strong stock will go UP on light volume and will have a really strong UP day on heavy up volume. You will notice that the same stock requires a lot of volume to push it down.
When the stock starts going down on light volume then that's a clue that we are near a top.
Why? It all goes back to the path of least resistance. When something is strong, it will go up until it runs into a selling force strong enough to halt the advance.
When something is weak, it will go down until buyers step in to halt the advance.
Conclusion
Stop thinking about calling market tops and bottoms because it will cost you a lot of money and mental capital in the long run.
Change your mindset and think about trying to identify the path of least resistance.
The path of least resistance for Tesla Motors Inc TSLA is still to the upside and the proof can be found in October.
It took 7 days to go from $195 to $162 and only 4 days to get back to $188.
Plus we bounced off the 50 day moving average on the lowest volume days for October. Heavy volume selling to go down in October and light volume buying to go up means the stock is super strong.
Bargain hunters stepped in and forced the stock back up
Use the 4 techniques from today's article and start trading in the direction of the easy money.
Now you have 4 simple tactics to use when trading a momentum stock and knowing is half the battle.
For information regarding stocks we do like, check out our Flagship and ETF Newsletter.
This is a cursory look at Tesla Motors Inc TSLA. and we are not making any specific buy or sell recommendation but merely voicing our opinion of the current situation. Each individual investor must conduct their own due diligence of both the company, the market sector as well as their own financial situation and risk parameters.
By Joel Laceda - October 15, 2013 BehindWallStreet.com
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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