How to Spot Big Winners
A trader usually has high expectations for profit when a stock breaks out of a consolidation pattern. The trader may have visions of the stock doubling or tripling in price. However, this is generally the exception rather than the rule.
Most stocks will rise about 20%-30% before they pullback, and holding through the pullback can erase much of the stock's gain. Generally, a trader should bank some profits after a stock gains 20%-30%.
To maximize profits, it's important to be able to spot those stocks that could be big winners, since a trader will want to hold the stock rather than sell it with gains of 20%-30%. Big winners have the potential to trend for a long time and make substantially greater gains.
One way that is helpful is the 10/5 Rule: If a stock that can rise 10% in 5 trading days, it is acting very strong. As you know, some stocks can rise 10% on the first day of the breakout, especially if they gap up on strong volume. But these situations are the exception.
Above is a chart of Alibaba (BABA), an IPO released in September. The daily chart shows three horizontal lines which represent the trigger price (green), the 10% price level (blue), and the 20% price level (purple).
Alibaba (BABA) was a ProSelect listed stock pick that triggered at $91.00 on 22 October (Day 1). On Day 5, BABA's high surpassed the 10% level. It might take a stock 6 or 7 days to hit the 10% level, depending on market conditions, but the 5th day is where you want to check the stock's progress.
After gaining 10%, BABA pulled back to its 10 SMA; it found support and surged again, hitting the 20% price level on day 11. The big winners will hit the 20% level after about 15 days. BABA's price action represents a potential big winner, so it is a stock to try and hold for the longer term.
Also, note how the ADX line (blue) crossed above the 50 level as price hit the 20% mark. An ADX peak above 50 makes a “Power Trend,” as described in my book, ADXcellence—Power Trend Strategies. Power trends are key to substantial gains, and ADX is helpful to confirm the powerful price action of a potential big winner.