I get asked this question infinite times on Twitter and through DMs. “What’s the next 10-bagger”, “How can I find the next KODK”. Simply put, you don’t know and neither does anybody else. If there was a software or algorithm that could actually catch those plays, it would be worth billions of dollars if it was exclusive to one person. If every fund used the same algo, all edge would be lost.
The best example I can give you are what happened to FB last week and AMD a month ago before it’s explosion in stock price. Both stocks went through several weeks or months of “consolidation”/low-volume where they bounced around the same tight channel. It was a boring time for those stocks, but at the same time you knew they would break-out and have some upside, you just didn’t know when… Right? Because of the lackluster nature of stocks during consolidation times, not many people are interested in holding. Traders want 100% gains and they want them tomorrow. In my opinion, this is the right time to enter a fundamentally strong stock that has under-performed relative to their competitors who are also at the top of the class.
This is how swing traders and investors should be looking at trends. Personally, I don’t like buying random stocks that aren’t on my watchlist. So what I like to do is keep an eye out for unusual changes in option volume/sentiment for tickers that I know. If I start to see OTM bullish flow being bought up, before the stock has broken out, it could be the right time to enter a position. If the stock has broken out on extremely high volume flow, then chances are it’s already too late. You don’t know which previous position have been closed now that the stock has melted up, who has taken profits, and what catalysts are still out there. At that point you are FOMOing and chasing stock. I’m not saying it can’t be profitable, sometimes the trend can run on much longer than anticipated, but when you reach the point of FOMO the risk/reward ratio is not in your favor. Do you want to jump on when it’s at climax and bag hold? Or buy the bottom?