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Stock traders can work within short-, medium- or long-term timeframes, and different stocks can be better suited to investors with different timeframes. If you are a short-term trader, knowing how to spot the best stocks to buy for the short term is essential to generating the kind of quick profits that you seek in the market. Although the specific stocks that are best for short-term trades are constantly changing, there are certain fundamental and technical characteristics that can help you to identify the best short-term picks at any given time. Building a strategy around these factors can increase your chances of success with a short-term trading strategy.
Revenue and Profitability Trends
Look for companies whose quarterly revenue and profit growth significantly exceeds their major competitors and industry averages. Analyze the rates of growth rather than the absolute value of growth in these areas. For example, if a company's revenue increased from $1.5 billion to $1.7 billion in one quarter, the increase of $200 million would represent about a 13 percent growth rate. Compare that to a company whose revenue rose from $2 million to $3 million. The significantly lower increase of $1 million dollars in the second example equates to a 50 percent growth rate. Stocks with higher growth rates are more likely to experience dramatic price gains in short periods of time, creating valuable short-term trading opportunities.
Companies Paying No Dividends
Look for companies that do not pay dividends to stockholders. Every dollar paid in dividends is a dollar that cannot be reinvested in a business for growth. Companies who reinvest profits are more likely to experience rapid growth than those who share profits with stockholders, since they have more cash on hand to finance ambitious plans, all else being equal. Dividend-paying stocks can be better suited to longer-term timeframes, so stay away from them as a short-term trader.
High Price Volatility
On the technical analysis side, look for stocks with high price volatility -- those whose prices swing widely up and down rather than remaining relatively constant with only steady growth. Higher price volatility can introduce greater risk for traders, but it can also present the most profitable short-term trading opportunities. By timing your trades at the right moment, you can ride a wave of upward price movement and sell your position just before the price swings back down. High volatility stocks can be especially profitable for day traders, as they may present several short-term opportunities each day.
Look for stocks whose price is in a strong trend in multiple timeframes. If a stock is in a clear uptrend on a five-minute, one-hour and daily chart, for example, it is much more likely to continue upward in the short term. Trend alignment in multiple timeframes means that investors with different timeframe goals are all thinking in the same direction. This increases the chance of self-fulfilling expectations of price movement over the short term materializing in the market.
Timing Trades Around Earnings Reports
Earnings seasons can present profitable opportunities for short-term trades, although this approach relies on intuition and business experience a bit more than others. If you believe that a company has performed sufficiently well in the marketplace to beat analysts' expectations for its revenue and profitability, consider buying into that stock before its next quarterly earnings report. If the company beats estimates, its stock price is likely to rise sharply in the short term, creating an opportunity for a quick profit. A similar opportunity arises on the sell side if you believe a company has underperformed and will not meet analysts' expectations.
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