Tuesday, October 11, 2011

Jim Cramer's 4% rule

I was watching Jim Cramer's Mad Money on CNBC the other day and came across some advice he gave that I'd like to share. When picking stocks or ETFs it can be difficult to get it at the right price point. In the general sense when the stock you have your eye on is down 4% for the day it can be a good time to buy or - if it's up (and you own it or want to short it) it can be a good time to exit - or short a trade. I found this to be pretty good advice because I saw this trading pattern myself a few times. When it comes to penny stocks (stocks trading lower then $1) this percentage might be even higher, it all depends on what type of trader and the amount of risk you are willing to take. For me I would go for even a 20% (penny stocks) rule - in that case since those equities tend to be extremely volatile every day. You can imply this rule even with Forex. If your favorite pair trades 5% - 10% or even 20% higher or lower, it might be a good buy or sell. The whole percentage rule if just another tool in your trading tool box. Of course there can be many other factors such as technical or fundamental analysis, but trading with a percentage rule is definitely worth checking out. Nowadays there are plenty of stock and other equity trading websites out there (even on this website!) that let you see instantly which currency pair or stock was up or down for today by what percentage. Most likely, when you check the same equity the next day it's slightly up (or down) by a lot. If you would implement this strategy everyday it would be highly likely you have a winning trade on your side!

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