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To Beat the Market, Trade Alpha Stocks
In This Week’s Issue:
- Market Outlook – Quiet Anticipation
- This Week’s Market Minutes video – Stock Traders Must Do THIS to be Successful
- Trader Training – To Beat the Market, Trade Alpha Stocks
- Strategy – Pullback Plays
Market Outlook – Quiet Anticipation
The market is in a complacent state. Not strong, not weak, just boring with lower trading volumes and less going on. Weakness in Bitcoin, seasonality, a pullback in Precious Metals, concerns about military action in Iran, tariffs and lunar holidays are some of the reasons investors are lacking motivation to act. No strong selling, no strong buying. The best place to trade are in the stocks that start to trade more volume than normal and move up strongly. These are the names that can attract the crowd while the rest of the market sails through the Doldrums.
This Week’s Market Minutes Video – Stock Traders Must Do THIS to be Successful
Successful traders have a focus that is different than beginner traders. This week, I discuss what that focus should be and show examples of how these concepts work with recent trades. Then, I provide my analysis of the overal stock markets and look at the trade of the week on ABTS.
CLICK HERE TO WATCH THIS WEEK'S VIDEO ON YOUTUBE
Commentary – To Beat the Market, Trade Alpha Stocks
An Alpha stock is one that moves up faster than the overall market, often very rapidly, making them ideal for traders looking to make fast profits. The name is not meant to reference Alpha dogs, males or fraternities, it comes from the correlation relationship between a stock and the overall market.
Most stocks have some correlation to the market in general; this correlation is called the Beta of the stock. A stock that moves up 1% if the market moves up 1% is said to have a Beta of 1. If the stock moves up 2% for the same market move, the Beta is 2. You can find what the Beta of a stock is on many financial websites.
The other component of risk in a stock is the Alpha. This is the stocks movement that is independent of the overall market. If a stock with a Beta of 1 moves up 10% when the market moves up 1%, it has made an Alpha move of 9%, the amount that is more than expected based on its correlation to the overall market (this is a simplification but represents the general concept).
We want to find Alpha stocks because they give us the potential to beat the overall market. If you are happy with the market returns, then buy an index ETF or fund. If you want to beat the market, you have to trade Alpha.
Alpha stocks are characterized by stronger than normal price gains and volume that is abnormal. This typically shows up early in the upward trend and may last throughout the upward price trend. Alpha trends tend to be relatively short lived as the market buys the stock aggressively on improving fundamentals. We tend to get the best returns on Alpha stocks by day or swing trading them.
If you want to beat the market, focus on Alpha stocks. To do that, focus on the stocks that are making strong price gains with abnormally high volume. These are stocks that are in play and able to attract a crowd of buyers who will push the stock up sharply, often in ways that do not make sense. That is the power of the crowd.
In this way, you could call Alpha stocks those that go viral.
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