2 Tricks to Book Gains on Turnaround Plays
Buying weak or falling stocks is one of the biggest mistakes an investor can make.
It’s tempting try to bottom-pick cheap stocks. But grabbing shares of a stock at its lows is a dangerous practice.
The problem is the lows don’t always stick. The stock can go down. And down. And down some more… along with your brokerage account.
So how would you like to know when to buy a falling stock just before it turns the corner — without all the guesswork?
It’s possible. Today, you’ll see how it’s done.
Now that you’re able to screen for trending stocks, spot support and resistance levels, and trade breakout moves, it’s time to dive into some more patterns you can use to book consistent gains.
Today, I’m going to show you two tricks to do just that — buying a stock near the bottom, just before it gets it mojo back. If you follow my simple instructions, you’ll have the tools you need to catch a new trend while it’s developing.
First, it’s important to understand that a falling stock probably won’t magically turn around and go up 100%. It takes time. A stock must properly bottom out before it’s safe to trade.
That’s why you shouldn’t throw money at every bum stock that’s having a good day. It’s reckless at best. At worst, it can cost you a lot of money.
The first rule in trading these stocks is patience. You’re never going to catch a stock dead on its lows. You need to give it time to set up for a move higher. If you pull the trigger before a bottoming stock breaks out, you’re increasing your risk of taking a big loss.
You can avoid that mistake by playing these two patterns when you’re looking to snag recovering stocks during the early stages of a turnaround:
1. Double Bottom
The name of this pattern is self-explanatory.
With a double bottom, look for stocks that have found support near the same level and are pushing higher.
Here’s what it looks like:
The two extreme lows at similar levels and subsequent recovery tell us the selling has probably climaxed. You have your buy signal when the stock breaks the dotted blue line.
Remember, you’re not waiting for the stock to jump to new all-time highs. You’re simply waiting for shares to signal that the market has flushed out the aggressive sellers and the stock is ready to move higher.
2. Rounding Bottom
A rounding bottom is a similar pattern you’ll find when a stock slowly begins to bottom out following a prolonged downtrend.
Sellers become exhausted and buyers begin to step in and test the waters, slowly bringing the stock back to life.
This pattern looks a lot like the double bottom. The main difference here is that the chart has more of a rounded look to it (hence the name).
Here’s an example:
Again, we’re dealing with a stock that’s coming out of a powerful downtrend. Note the saucer-like shape of its recovery. You’re not looking for a quick, V-shaped reversal. You want the stock to level out and new buyers to step in before you pull the trigger.
Many of the bottoming stock you’ll encounter in the real world will have lot of work to do before you can confirm that a bottom is in place. For both patterns, the bottom must be in before you buy. There’s no guesswork here.
Think twice the next time you feel the urge to buy a “cheap” stock that keeps dropping every day. Instead of buying shares that are in freefall, you can now time your trades better with these two simple techniques.
Your portfolio will thank you.