How to Pick a Winning Trade

Christian DeHaemer

Posted April 17, 2024

How to Be a Winner

About a month ago, we were whiling away the afternoon on the deck grilling burgers and playing horseshoes, a younger relative told me he had bought AMD, the semiconductor maker, as a play on AI.

Now, I’ve long given up offering advice on stocks to friends and relatives unless they ask for it specifically.  The reason is that a stock I like today, I might sell tomorrow.  Or I could sell half and buy more on the dip.  Or perhaps I sell a blowoff top and buy another stock in the same sector.

Let’s look at the AI trade as an example.  AMD already had a great run.  It went from $60 to $227 where it peaked on a blowoff top (note that red doji in March) which is not incidentally where my relative bought it.

That thin red candlestick at the top of a trend is called a Gravestone Doji.  It’s formed because new buyers tried to take it higher and failed.  All those people who got in months ago (at $100 or so) see this as a signal to take profits and they start selling.

Think of it as a mountain climber who gets to the top plants and flag and walks back down.  Once you start looking you’ll notice little red flags at the top of market peaks.

Now AMD might go back up long term.  It might not.  Biden is spending billions for companies like TSM and Samsung to build fabs in the U.S.   What happens to supply when they come online?

Semiconductors are a commodity and are very in tune with the business cycle.  When they are in high demand and companies are paying big bucks, capacity gets overbuilt, and the price plummets.  We saw this happen in the early 2000s.  

Here is the Philly Semiconductor Index from that period:

That’s a meteoric rise followed by a grueling bear market – $1,350 to $200, – ouch, that’s going to leave a mark.

So, how do you pick a stock to trade? 

The first rule of thumb is to ignore the market darling, the crowded trade, the stock that is front and center on every finance website.  Because by the time you are reading about it, the trade is over, topped out, done.  Let it go, man.

I’m not talking about industry-specific journals.  If there is a new technology it will show up in blogs related to that industry.  Often you’ll see an oil company strike oil on for instance, days or even weeks before it shows up on Yahoo!Finance.

You probably know more about your industry than anyone else.  If you manage a fast food store and you see a brand of kiosk that everyone is buying you should see if the company is public and start investigating. 

In fact, if you are seeing a scenario like this drop me a line and I’ll investigate it.  We both could make some money.  Many years ago I knew a woman who had just got back from spending a few weeks in Seattle on business.  She told me every woman out there was wearing high-end yoga pants from LuluLemon…  The stock was at $12 and went to $345.

These are special situations that can pay off occasionally, but to consistently make money, you need a system and a plan.  You need to think strategically and tactically. 

You can develop your own plan, modify someone else’s, or find a trader with a proven track record that aligns with your risk tolerance, as well as your personality.  

I’ve read hundreds of investment and trading books. And what I’ve learned is that there are four basic investment styles.  I’ll tell you all about them next week. 

All the best,

Christian DeHaemer
Pro Trader Today