Understanding Stocks
Understanding Stocks
Understanding Stocks
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76 UNDERSTANDING STOCKS<br />
look for stocks that have consolidated for a while before<br />
breaking out to reach new price highs.<br />
S: The stock market is all about supply and demand. Find<br />
stocks that are rising in price on rising volume, a signal that<br />
institutional investors might be buying. Trading volume<br />
should be 50 percent above normal. In addition, look for<br />
companies that buy back their own stock and upper-level<br />
managers who privately own shares in their company.<br />
L: Buy the strongest stocks in an industry group or sector.<br />
There is no reason to buy weak stocks (the laggards) even if<br />
the price is lower. In particular, buy the strongest stocks in a<br />
weak market (what technicians call relative strength). You<br />
want the leading stocks in the strongest industries with a relative<br />
price strength of 80 or more (a statistic found exclusively<br />
in Investor’s Business Daily).<br />
I: Buy stocks that are also owned by institutional investors<br />
such as pension funds, banks, and mutual funds. <strong>Stocks</strong> with<br />
strong institutional support are liquid, so it’s easy to enter<br />
and exit.<br />
M: Study price and volume indicators to understand the strength<br />
and weakness of the market. Use stock charts to identify<br />
market tops and bottoms. Use technical analysis not to make<br />
predictions but to understand what the stock is doing right<br />
now.<br />
In the next chapter, you will learn how to make money quickly<br />
using short-term trading strategies.
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