Oscillating stocks are also referred to as rolling or channeling stocks. The price of these stocks tends to remain within a well defined trading range with an upper and lower price limit. The basic strategy is to buy when at the lower limit and sell when at the upper limit. If the price continues to oscillate, the trading system will continue to produce profits. Modern online trading methods provide the investor with the means to easily and efficiently buy and sell stocks. When using this strategy, the trader must be aware that the past performance of a stock does not always suggest that it will perform in the same manner.
Charting methods are often used to analyze price movements of securities over time. Interactive stock charts are available from stockbrokers as a service to investors. Drawing tools are usually included with the software and will be useful for determining price channels. The trend line drawing tool will be used to connect two or more extreme historical price targets. The higher trend line is called resistance and the lower line is called support.
Support and Resistance
Support lines can be drawn on the chart at a price point where the stock has typically hit bottom and reverses upward two or more times. The more times the price has bounced off support, the stronger the indication that it will do so again. The chart should be in the daily time frame and extend back in time for months or even years. The same technique is used to determine resistance. Find two or more price points where the price could not break through resistance and then reversed direction downward. The price channel is created by these two lines, and the signal is stronger if the upper and lower lines are horizontal and parallel.
Sifting through thousands of stocks and drawing channel lines can be a daunting task. With practice the trader can view many charts and see if areas of support and resistance are evident without first drawing the lines. There are many online services available that detect and report rolling stocks. The Amazing Stocks website provides a free service, but most require a fee. The trader should look for stocks within a price range that fits the trading budget. Some trades may take a considerable amount of time to develop, and others may go bad, causing the trader to sell at a loss.
The use of equity options can enhance the rolling stock trading method. The trader can buy a call when the stock is at support. The call gives the trader the right to purchase the stock at the exercise price on or before contract expiration. Always allow enough contract time for the stock to increase in value. The advantage to trading options is that the risk is limited to the premium paid for the option. A put option can be purchased when the stock is at resistance, avoiding short sell rules and requirements. The trader must be educated and gain permission to trade options.
Dana DeCecco has been writing for Lakeside Venture Capital for three years and has has maintained financial websites since 1998. Holding a Series 3 license, DeCecco is a former commodity trading adviser with an extensive knowledge of trading financial markets. He studied business at Penn State University.