Volatility
Well Behaved Stocks Reap Rewards
Some stocks move multiple points and multiple directions in one trading
session. Other stocks are more methodical in their day to day movement. Which
type of stock is more attractive to you as an investor? While the attraction
of quick moves is hard to overlook, it is important to realize that most of
the time the best bet is the safe one.
Look at the first chart
of RFMD. This stock shows daily moves of 10% in some instances, which is
significant for a $20 stock. It is difficult to find a discernable trend,
support, resistance, or any chart pattern for that matter. This stock is
currently very volatile and should be avoided by position traders (nice
intraday moves, though, for real time traders). Sure, there are some big
gains there, but what direction to you trade, where do you place your stop
and when do you get out?
Our next chart, BRCM,
shows very well defined trends and price action that is basically
"in-line" with the rest of the chart. This is appealing to position
traders as well as real time traders, and a well-behaved, less volatile chart
like BRCM is one to bookmark for various reasons. When we analyze charts, we
are looking for charts with good movement potential as well as a history of
behaving in an expected manner.
While the dot-com craze
is still fresh in our memories, it is hard to resist the temptation of huge
percentage gains on a daily basis. However, this approach has gone the way
the companies that spawned it, and today's market dictates a more
conservative approach. Look at low volatility stocks like old friends - on a
day-to-day basis, they may not stand out, but over time their value is easy
to identify.
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RFMD - A profile in
volatility
Broadcom is a good
example of a well behaved stock
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