As we know, using a long-term trading perspective on new and exciting stocks can pay off.
While it’s easy to think that we need to be running highly-complicated scans and constantly watching breaking news on our phones to catch The Next Big Thing, it’s not true.
We can catch monstrous winners in a boring, simple way.
When looking to trade new stocks, stocks that are recent IPOs, we’ve discussed that we first need to wait for a 12-month simple moving average (SMA) to print on our chart.
Then we need two consecutive closes above that average.
And then we boringly just stay in the trade until price closes below our SMA.
The past 2 Fridays in these pages, we saw this work nicely on PANW and SCHW when they were brand-new:
However, it doesn’t always work perfectly the first time. With new stocks, sometimes it takes the market a while to decide they’re superstars.
Take ISRG (Intuitive Surgical), for example. It was an IPO back in 2000.
In June 2001, the SMA showed up on our chart. In December 2001, we got a possible entry.
Unfortunately, it wasn’t ready yet and Trade #1 would have been a small loser. But it’s good to stick with new stocks.
Trade #2 would have been a slight winner from July 2003 to about June 2004 (+12%).
If we kept ISRG on our radar, though, we would’ve been deeply rewarded.
Trade #3 starting in July 2004 and closing a little over 2 years later was a monster, hypothetically returning over 400%.
And after that, Trade #4 running from April 2007 to about July 2008 would have made 100% more.
When trading small stocks, not everything happens right away.
But when it does happen, it can be huge.
— Scott Welsh