Home work#3

Correct Answers: 
1) What is the “right” type of stock to trade? 
Correct Answer: The right type of stock to trade will have a float of under 100mil shares, but preferable under 20mil. The stock must also have high demand, which is the result of a catalyst. Ideally the stock is trading above the 9,20, and 50ema on the daily, and is not near the 200ema resistance. Ideally the stock is a former runner. The right type of stock will have a min of 3 of the 6 criteria we look for. 

2) What price range is desirable for account growth? 
Correct Answer: Most traders looking for account growth focus on the $1-10 price range. Some brokers restrict margin on stocks under $3.00, which means if you have a tiny account, you have want to trade marginable stocks ($3+ but below $10). 

3) What price range is desirable for conservative trading? 
Correct Answer: More conservative trader will focus on mid-caps and large caps priced above $20 per share. 

You will notice in the chat room that Mike trades larger cap stocks. These stocks are preferred by traders and investors with large accounts because they offer big ranges and you can often buy millions of dollars worth of stock fairly easily. After all, 10,000 shares of a 150.00 stock is 1.5mil in the position. This seems like a lot to me, but for hedge fund and institutional traders it's no big deal. They like trading these high priced stocks because if they make 2-3 dollars per share, that's a 20-30k winner. 

I've always found the lower priced stocks are more predictable and easier to trade, but they can be risky given the huge ranges. 

4) What causes stocks to be extreme? 
Correct Answer: An imbalance between supply and demand creates extremes in price action. This is the result of either fundamental news or technical breakouts combined with limited supply (lower float). Sometimes stocks with larger floats can be extreme if they have exceptionally powerful news. 

5) What is your process for creating a watch list each day? (how will you find stocks, find news, identify potential entries, etc) 
Correct Answer: Your process should start by checking stocks gapping up. These are the stocks with the highest likelihood of making a strong intraday move. Then you want to check the pre-market chart to confirm it’s strong, review the float, review nearby resistance, and check the headlines. Once you have established that the stock meets all your criteria, you can write down possible entries over pre-market highs or vs a break of a critical price such as a half dollar or a whole dollar. Occasionally stocks will be forming flags pre-market and we can buy the break of that flag. 

  

6) What is an example of a type of news that we wouldn’t trade. Also give example of news we’d consider highly desirable. 
Correct Answer: One example of news that we typically wouldn't trade would be a Buy Out. When a stock is bought out, the price is fixed and the stock rarely moves. In contract, a headline such as really positive clinical study results, earnings, an activist investor taking a stake, large contract orders, etc., would all be headlines worth trading. 

7) Instead of having you email me charts, I want you to review this chart for me. Would you consider the chart below to be a good pre-market chart or a bad pre-market chart? 
Correct Answer This would be considered a strong pre-market chart because we are seeing consolidation and it’s holding above support. This stock ended up opening and squeezing to $4.00 on this day. 

8) Instead of having you email me charts, I want you to review this chart for me. Would you consider the chart below to be a good pre-market chart or a bad pre-market chart? 
Correct Answer: This chart would be considered a bad pre-market chart because of the big red candles that dropped down just before the open.