Things You'll Need:
- Brokerage Account
- Available Funds to Trade with
- Intra-Day Trading Capability (Online Broker Authorized)
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Step 1
As alluded to in the introduction, the first step to trading cyclical stocks with an online trading account is to scour the charts looking for those few key stocks that exhibit a cyclical pattern that carry certain technical traits. What I liked to look for was a standard cyclical pattern but with a clearer indication of a turning point. I was looking for clear bottom signals. And I would miss a lot of them because I was looking for a so called 'capitulation bottom', where it looked like the stock was about to free fall. This means the stock broke through the bottom trend line, but intra-day, and I would set a buy price well below the lower trend line. The buy in would usually occur at a price below the closing price of the day. But to successfully do this I had to set online limit buy orders very low and most of the time missing the buy in. But if you find enough stocks that cycle, you will eventually hit one or two.
I have read that intra-day capitulation bottom is often manipulation of the stock to trigger stop loss orders so that the manipulators could buy in on a lower price. One will never know for sure why this behavior happens but, given a good set of circumstances one can take advantage of it.
One bit of warning, don't deploy this strategy when the markets become volatile. Overall bad news in the markets can be devastating to this strategy. -
Step 2
After finding a handful of solid companies (read well run) that show clear cyclical behavior, prepare your limit orders. Set them to take advantage of the false bottom breakthrough (that would trigger stop loss orders). Don't worry about missing the buy-ins if you are too low. There will be other companies to try this with.
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Step 3
After some time you will likely hit one or two of your limit buy orders. If successful, the stock should rebound by the end of the day and end up higher than where you bought it. If not, you probably missed the capitulation bottom and will just need to wait some time for the stock to cycle back up (assuming overall market conditions and company news don't turn negative). But assuming the strategy played out ideally, you should be able to set a stop loss order at a higher value than where you bought the stock (near the end of the trading day). But this does not always happen. So place a stop loss for protection, even if you have to take a loss. But be careful not to get triggered by manipulation. If you don't feel comfortable placing a stop loss, get out right away and look for other opportunities.
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Step 4
The last step to trading cyclical stocks with an online trading account is the exit. Depending upon how long the stock cycle period is you may have to wait a few weeks to a few months. I did not like to have to wait a few months thus I chose stocks that cycled on the order of weeks instead. I would set a limit sell order for that position at a value a bit below the peak of the trend line (from charting analysis). Don't try to hit the peak, experience shows you will probably exit at a lower value on the way back down than you would have been able to get out at on the way up. However, if you want to try a different exit strategy, go for it. It's a good way to learn.
