Editor’s Note: Over the past few weeks, I featured a couple of articles from Monument Traders Alliance’s Bryan Bottarelli about the significance of the Fed’s September meeting and how he’s planning to capitalize on the central bank’s interest rate cut.
Today, Bryan answers one question that every investor is constantly wondering: “How can I decide which stocks to buy?”
To learn more about Bryan and his team’s mission at MTA, check out their website here.
– James Ogletree, Senior Managing Editor
One of the most common questions I get as a trader is…
“How do I know which company to trade?”
The truth is…
There are thousands of tickers out there, and it’s easy to get overwhelmed.
You’ve also got fear-based news headlines and social media hype hitting you on your smartphone and computer all day.
Overall, it can be difficult to know which strategies will actually lead to consistent gains.
But over my 20+ years as a trader, I’ve developed some tried-and-true methods for finding the best buy opportunities.
Here are 3 key factors I look for before trading a company.
Use these and watch your trading confidence skyrocket.
No. 1 – Notice the product in the real world
The first thing I look for when trading a stock is real world value.
For example, say I’m at a coffee shop, and I notice a lot of people wearing a certain kind of shoe.
That’s a strong buy signal because that company has demand.
This is especially true with women’s spending trends.
Women make up 70-85% of household purchases, so noticing what women are buying is one of my staple strategies for finding companies worth trading.
Start looking for these consumer trends and you’ll be ahead of 90% of other traders.
No. 2 – Look for an upcoming catalyst
A catalyst is a known date/event that could determine whether the market is bullish or bearish on a company.
These catalyst events include quarterly earnings reports, product launches, mergers, buyouts, ETF inclusion, and FDA approvals.
Before these events happen, you’ll often see traders buying, shorting or hedging a stock.
Then, the market digests the outcome and a stock either spikes or falls.
Keep in mind – this is not about guessing what’s going to happen to a stock ahead of earnings. However, when you’re aware of these events – you can position yourself in a way that increases your likelihood of a winning trade.
No. 3 – See if the company has strong institutional backing
Another factor I look for is institutional backing.
Institutional backing is when big players – mutual funds, hedge funds, pension funds – all put serious money behind a stock and hold it in size.
For example, before tech group Nvidia’s big run in 2023, it had whale funds like ARK Invest, Fidelity and BlackRock all with large positions.
This institutional capital acts as a liquidity base (price support) and a confidence signal for other funds.
Another term traders should get familiar with is “Supply burn.”
Supply burn is when the available float (shares that are available to trade) gets reduced or locked up.
For example, say company insiders use their own profits to buy shares of a company (also known as buybacks).
By doing this, they destroy the supply because the number of shares available to the public shrinks.
With low supply, this creates a squeeze effect where any catalyst (like earnings) could ignite major momentum.
Think of float like the kindling… and the catalyst is the spark that could light up a stock.