We have been following “hot shares” on the forum for some time now and during the so-called “Trump rally” there have been quite a few to choose from. This feelgood factor has increased investor appetite for risk which has assisted many of these “hot shares” and pushed prices to 52-week highs. It is all good and well following momentum but you need to make sure that you are out of the shares when momentum and sentiment start to change. There are signs that the “Trump rally” could be running out of steam although nothing is ever certain in the world of Donald Trump!
You can trade on sentiment
Those with experience of trading stock markets will be well aware you can trade on sentiment without the underlying prospects for a company really changing. The degree of influence that sentiment can have on the share price will vary but even if it is 10% either way that is a potential 20% swing which is a trader’s dream. However, as we touched on above, those who have been trading on the back of investor optimism will need to think again if sentiment is truly changing.
Banking profits
While some people criticise day traders and short-term traders the fact is that they add significant liquidity to the stock market. On the way up they can squeeze prices to levels which are perhaps unsustainable but reflect the momentum at the time. On the downside, once short-term traders conclude that sentiment has changed or share prices gone as far as they can then they will bank profits. Very quickly the balance between buyers and sellers can change and share prices react accordingly.
So, do not be surprised to see some of the “hot shares” of recent times start to fade as investors reconsider their short to medium term strategy.
Making money on the downside
Going “short” on the share is something which many investors have not even considered but in reality it is as simple as buying a share. While “shortselling” can extenuating the fall in a share price these forces will eventually balance themselves out and the shares arrive at a “fair value”. However, you should not be concerned about shortselling as long as you trade within your limits and do not overextend yourself – pretty much as you do when going long on shares.
Overdone correction
What you will see in shares which are performed relatively well over the last few weeks is a likely overcorrection if the “Trump rally” does continue to fade. Just as buyers pushed shares to levels which were perhaps unsustainable in the short term so sellers will do the same on the downside. If you prefer to go along on shares, rather than short, there will be a time to buy back in just as the sellers are finishing and the buyers are coming back.
Opportunities
Volatility is the best friend of any trader because shares are overbought and oversold giving a potential trading margin which can be significant. The key is to buy just before the sellers finish and sell just before the buyers begin to disappear. It is easier said than done but if you can master this technique then short-term trading could turn out to be very lucrative for you.