, LLC, Investment Advisory Services, Cary, NC

Growing a Small Account – Common Obstacles and Mistakes to Avoid

 In Hot Stocks, Swing Trading


In the last blog post we discussed some of the key things to understand when trying to grow a small account quickly.  One of the most important things to understand is that equity curves go up quickly in bursts and then move sideways to lower for weeks or longer for the best swing traders.


This past week is a good example of some of the obstacles you will confront and how to handle them.  So lets dive in.


Gap and Go versus Gap and Fade Earnings Weeks


During some weeks during earnings season stocks will have a stronger tendency to gap and go.  Meaning, the strongest reports and outlooks will be met with a large gap, brief consolidation, followed by another stronger move higher.


During other times, stocks will tend to gap and fade more often.  Meaning, the stock will gap higher and tend to trend lower from there.  This more often occurs near a short-term market peak or market consolidation period.


Both Google and Apple had strong quarterly earnings reports over the past couple weeks.  Google was the better one but both stocks gapped much higher after the earnings report.  Meaning the stock opened a lot higher than the last trade the day before.


Now its pretty common for mega caps to gap higher and then fade after a strong earnings report.  They have a very large float, a lot of money is paid to analysts to come up with new valuations right after the report, and there is not enough volume to push the stock higher given large number of shares available to trade.


But most of these mega caps, whether they gap higher or lower, are tending to trend lower after the first few minutes after their earnings report.


This is also occurring in smaller cap stocks as well so far this earnings season.  However, the move lower tends not to be large enough to make much shorting these stocks either.


Trading Smaller Caps after Earnings


So far the small cap Russell 2000 and other small cap indices are roughly flat for the year and way below all-time highs made about 2.5 years ago.  So far in 2024 they are lagging the market again.


We saw 2 high tight flag breakouts over the past week that would have hit our stop point using our strategy rules without making it to the profit target.  Not coincidentally, both of these stocks were below $10.  The other 2 high tight flag breakouts in a higher price range worked great for those using our high tight flag strategy over the past week or so.


So one of the lessons over the past several weeks is that when things are not working as well, its time to raise the bar in your strategy.  Meaning, find ways to raise the bar in your trading rules to raise your win rate.  This will force you to trade less and focus on just the very best opportunities.


The last thing we want to do is trade more during a sideways, choppy market when the best stocks are not following through to the upside out of good technical patterns.


Winning in a More Challenging Market


Ideally we want to see small caps lead the market higher.  Unfortunately, we have not seen this in about 3 years.


There are signs that this could change meaningfully soon.  Lower bond yields and an economy that holds up OK in the months ahead would be a good sign.  So we have to be ready to notice when lower priced stocks are performing well.


Until then, we mostly avoid stocks under $10 in favor of higher priced stocks.  Over $25 is better.  These offer better win rates anyway whether the small cap indices are leading or lagging.


Here is a good example of how lower priced stocks can hurt our returns when trying to build a small account quickly.


Last Tuesday we saw CGC and ACB break strongly out of high tight flag patterns.  CGC was the higher priced stock that made a near 30% move from our technical entry point in just a few hours while not even pulling back even 1.5% below the technical entry point after it was reached.  ACB only went up 5% before hitting the stop a day later.


CGC triggered the parabolic exit strategy which would have gotten you out with a big profit near the open the next day.


Usually the first to break out is the one you want to be in after a big catalyst like we saw on Tuesday for the cannabis industry.  And, recently, over $10 is an even better price range.


But if the market is selling stocks with good news with an improved outlook, we want to stick with the higher priced, more reliable stocks.  So one way to raise the bar for a qualified trading candidate is to raise your minimum stock price.


If the lower priced stocks start to perform better or if they are near multi-year highs in a long-term uptrend going back many months or more, we can consider them on a case by case basis.


Look for a Catalyst – Only Bigger


Now there are some stocks that are exploding out of  base patterns this earnings season.  It just takes a bigger catalyst and more improved outlook than usual.


One way to perform better trading right now is to focus more on the top tier earnings eruptions patterns.  So stocks that have an even larger beat and bigger guidance raise that we talk about in the earnings eruptions course.


TMDX met the rules in the earnings eruptions course on Tuesday morning.  Those using the earnings eruptions course could easily check all the rules and see that the stock and earnings event passed all of the qualifications in the course with flying colors.


But what was unique about this situation is that the beat was not a few cents per share.  And the sales beat was not 1% or 2% above the expectations.  No, they beat by 33 cents per share and on the top line by more than 10%.


And even after backing out the sales beat, sales guidance for 2024 received a huge boost as well from the company.


Also, the stock was up about 15% after hours before the open and was near new all-time highs.  All of these factors are bullish for this stock with strong growth.


PI also had a very strong beat and raise quarter and also had a big earnings breakout just below all-time highs.  Like TMDX, PI is up big a few days later from the open after the report.


Other stocks with enormous beat and raise quarters are also having big earnings breakouts.  The key right now is to look for the top echelon of beat and raise quarters and forget most of the rest.


Again, raising the bar in your strategy is key in a range bound, choppy market.  So trade less and you will likely do better by only trading the very best opportunities.


Another Key to Swing Trading a Small Account


Raising the bar on the key factors you are looking for in a swing trading opportunity is a good way to perform better in the current market conditions.


Its also important to keep tabs on all the other trading opportunities that meet your requirements but are not in the top tier of all the opportunities coming on your radar.  Once the lower tier opportunities start to perform well also, we can trade more and take full advantage of improved market conditions.


Until then, only trade the very best with a bigger catalyst and consider smaller position sizing.  This will keep you from one of the biggest mistakes newer traders make, getting too aggressive when market conditions are less than ideal.



How to Grow a Small Account Quickly Part 1


What We Look for in a Great Swing Trade


Our Top 2 Swing Trading Opportunities for the Weeks Ahead


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