What Do All the Top Stocks Have in Common?

Big price trends are fascinating…

They often soar upwards with relatively few pauses. It all seems so obvious in hindsight.

But these big upswings can be elusive in real time. Many traders never experience a triple-digit winner — they simply never figure out how to trade them effectively.

Around this time of year, I look back at the best stocks of the last 12 months. They reveal a lot about how the biggest trends develop. This helps me develop strategies to trade them.

Check this out. It’s the ASX 200’s top 40 stocks for the 2017/18 financial year:

Source: marketindex.com.au/asx200, 29 June 2018

You’ll be familiar with some of these stocks. The likes of BHP Billiton, Macquarie Group, and Flight Centre Travel are household names for most people.

But the same can’t be said for every stock…

Companies such as Appen, Lynas, and Reliance Worldwide will draw a blank from many people. I’ll bet that relatively few traders knew about these stocks a year ago.

Take a moment to look through the top 40. These stocks have ‘shot the lights out’. Having a few of them in your portfolio could have made a real difference.

So how could you identify these stocks earlier?

How to detect motion in upcoming stocks

Well, it’s actually rather straightforward…

To be one of the best stocks, the share price must rise. This is the one thing all the top stocks have in common. There’s no other way to make it to the top 40, pure and simple.

This is where Quant Trader comes in. It scans the daily share prices changes for trends. You could say it’s a motion detector — a stock can’t trade higher without tripping the sensors.

Now, here’s the interesting thing…

27 of the top 40 stocks are in Quant Trader’s Overflow portfolio. Another seven hit their exit stops in recent months after racking up double digit gains. That’s 34 out of 40 stocks.

Here are the results that Quant Trader got:

The average return from this group was 80.6%. In comparison, the ASX 200’s top 40 were up by 86.6%. Quant Trader was able to capitalise on almost all the gains.

Now, the table’s data is only for the 2017/18 financial year. Some of the stocks have been in the portfolio for longer, and have a larger overall gain. For instance, Seven Group is up 203% in total.

You’ll also notice the figures don’t always match the first table. This is because some of the stocks have been in the portfolio for less than 12 months.

The top 40 makes up just 20% of the ASX 200 (and less than 2% of the overall market). Despite the group’s relatively small size, Quant Trader has made a hypothetical profit on 90% of them.

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How does trend trading work?

OK, so let’s go through three examples.

I want you to study each trade carefully. You’ll get an insight to how big trends develop. You’ll also see what it takes to ride a trend. This is the key to profiting from similar moves.

All the stocks in this update are from the Overflow portfolio. I’m using the Overflow as it doesn’t have a company limit. This lets you see how the strategy works without restrictions.

Right, here’s the first stock: Appen Ltd [ASX:APX]:

Source: BigCharts
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Let’s start by putting the trade into perspective. The chart shows the share price since the company’s listing in January 2015.

Now, have a look at the box in the top corner. That’s the 2017/18 financial year. APX was already up by 700% from its listing price. This wasn’t your classic ‘down and out’ bargain.

Many people avoid buying after a strong move. They reason that a stock must be nearing the end of its run. Their overriding concern is to avoid buying at the top.

But this is often a mistake.

You see, strength is positive. It’s a good indicator that a trend will continue.

And some trends — like this one — can last for a very long time.

Here’s what the trade looks like up close:

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Quant Trader’s entry was at $4.20 on 18 July 2017. The buy trigger was a new high in the share price.

I often hear people talk about ‘buy low, sell high’. They’ll say you should never buy a stock after a strong run. Many would have said that APX was due for a fall.

But these people miss the point.

You see, strength indicates that buyers are paying up to own the stock. The path of least resistance is up. Buying into this momentum puts the odds of success in your favour.

The next stock is Reliance Worldwide Ltd [ASX:RWC]:

Source: BigCharts
[Click to open new window]

Again, I’m starting with a weekly chart. This gives you a bigger picture view.

You’ll quickly spot the difference in this trade. RWC had not been rising for several years. Instead, the stock had been trading sideways since its listing a year earlier.

As before, the box shows you last financial year.

OK, let’s zoom in on the action:

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Quant Trader’s buy signal was on 9 May 2017 at $3.07. The trigger was a breakout after a period of range bound trading. This often leads to further buying and a rising share price.

But the key to this trade is the exit strategy. This is what makes a big gain possible.

Look closely at the red line below the share price. It resembles a set of rising stairs. This is the trailing stop. And it can potentially turn your entries into a lot of money.

Now, pay close attention to the trailing stop. You’ll notice it gives RWC plenty of room to move. This is the key to staying on big trends — it helps you ride out the corrections along the way.

Ask yourself this: Would you have been able to ride this trend’s up and downs, without the help of a calculated exit?

The reality is that many people can’t.

You see, they lose their nerve on the pullbacks, and sell too early. This makes it all but impossible to stay on the trend…a trend that could make them a lot of money.

Looking at a trade in hindsight is one of the best ways to learn. It gives you the chance to see what works, and what doesn’t. You can then apply this knowledge with confidence to new trades.

The last example is Seven Group Holdings Ltd [ASX:SVW]:

Source: BigCharts
[Click to open new window]

SVW has an entirely different setup to the previous stocks. I would describe this as a classic turnaround story. The shares were recovering after a three-year bear market.

This is one of my favourite plays. Stocks like SVW are often out-of-favour. The market’s low expectations can lead to big upside if the company’s fortunes begin to turn.

Check this out:

[Click to open new window]

Many people are attracted to stocks like SVW. They like the fact the share price has been falling, and they perceive a bargain. The problem is, they often buy too early.

You see, trying to pick the low is a longshot. You’re fighting against the trend, and you could lose a lot of money in the process. I’ve seen more than a few careers end this way.

Have another look at the chart…

The key to this trade was not attempting to buy at the low. Quant Trader waits for the moving averages to turn higher. This increases the odds that a recovery is underway.

Another critical factor is to stay with the emerging trend. This means resisting the urge to bank an early profit. Many traders sell after a small rise and never get the bigger move.

OK, let me sum it all up for you.

This how you could profit form the year’s best stocks:

1. Don’t be afraid to buy into strength — chances are the shares will run further.
2. Use a trailing stop that gives a trade breathing space. This helps stay on a trend.
3. Avoid falling stocks — wait for signs of an uptrend.
4. Be slow to take profits. Letting winners run is the secret to big returns.

Most trades won’t reach the top 40 performers list. Some promising trends will result in a loss. Others will only post modest gains. And that’s OK. It’s all part of the strategy.

The important thing is that you spread your capital widely. This increases the odds of getting some of this financial year’s best stocks. These can make a big difference to your overall results.

Until next week,

Jason McIntosh,

Editor, Quant Trader

PS: Options trading is one of the most overlooked investment strategies that you can take advantage of right now. Get started with expert help — free!

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Jason McIntosh

Jason McIntosh is a professional quantitative analyst. Before he graduated in 1991 he joined Bankers Trust — a Wall Street investment bank — to be a trader. These days, he’s a private trader and system developer. In 2014 he launched the wildly successful trading service: Quant Trader.

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