One thing I often say in my webinars is that you have to know the ‘why’ behind a stock move.
If you don’t know why a stock is moving, you open yourself up to unnecessary losses and mistakes.
How do you know how much momentum is behind the move?
Are you planning to take advantage of a quick trade? Or will the move have more legs and turn into a potential swing trade?
Only when you know the ‘why’ can you make the right trade plan.
I’ll show you how the ‘why’ becomes a crucial component in a trade with two examples…
You’ll want to see these so you don’t make these mistakes…
Two Reasons to Know The ‘Why’ Behind Stock Moves
This past weekend I had Airship AI Holdings, Inc. (NASDAQ: AISP) on my watchlist for a break above $11.
It had the breakout on Monday morning but it wasn’t just a regular breakout and short squeeze…
There was news behind the move.
And it made the move a little more sketchy…
StocksToTrade’s Breaking News Chat alerted that the stock was a chat pump a couple of minutes after the market opened.
That’s why it went straight up…
AISP chart: 1-day, 5-minute candle — courtesy of StocksToTrade.com
It had a nice $1 per share move from the entry signal.
So why does the ‘why’ matter if the trade worked?
The number one reason to know the why behind a stock move is so you can adjust your expectations for the trade.
When I was live in my morning webinar and AISP crossed $12, I told traders not to get greedy. That was our goal from the plan I made on Friday.
And chat pumps don’t have the same juice that legitimate news or press releases have.
Most chat pumps fail after the initial spike. And you can see AISP did have a big drop after the spike at the open.
So it’s better to know the news, adjust your plan, and take profits into strength. If you get greedy or expect too much because you don’t know the news, then you can get caught in nasty downturns, end up selling into weakness, or even take a loss.
And if a chat pump survives, you can always get back in…
Once AISP broke $11, the squeeze was on and it had a VWAP hold high of day break. That’s an opportunity for another trade.
AISP chart: 2-day, 5-minute candle — courtesy of StocksToTrade.com
Another reason to know the ‘why’ behind a stock move is it can tell you when to stay away from a stock completely…
When bad news hits a stock like negative data from a trial or bad earnings — those stocks aren’t dip buys.
Even if they’re ‘real’ stocks.
So many traders ask me about dip-buying stocks that are down huge from their highs…
But when I look for news I see the stock is down for a reason.
New York Community Bancorp, Inc. (NYSE: NYCB) is a good example…
On January 31 the company announced bad earnings and that it was cutting its dividend.
The stock gapped down 42%. That’s not the time to dip buy a stock.
When you know the ‘why’ you can avoid trying to catch a falling knife. Because that 42% drop in NYCB wasn’t the end of the sell-off…
It lost up to 83% of its value as more bad news piled up.
NYCB chart: 6-month, daily candle — courtesy of StocksToTrade.com
So knowing the ‘why’ can help you make better trade plans and avoid stocks with low-odds setups.
Do your research every morning before you make a trading decision and plan.
If you want to know the ‘why’ behind penny stock moves — including chat pump news that you won’t find anywhere else — get StocksToTrade’s Breaking News Chat now.
I use it every day and I think it’s an invaluable tool for new or experienced traders.
Have a great day everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade