How to Speculate Stocks

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Rule for Intelligent Speculation
Rule for Intelligent Speculation (Image: chart background image by Stasys Eidiejus from Fotolia.com)

Many investors try to speculate in the stock market but are confused as to how to actually make a higher return doing it. Speculation relies on the direction of the overall stock market instead of the stock's true value. Many aspiring stock speculators don't know how to speculate stocks, but by following a few simple steps you can do it profitably.

Things You'll Need

  • Investor's Business Daily Sunday Edition
  • Computer
  • Stock Charts

Speculation In The Stock Market

Turn to the Market section of the Sunday edition of Investor's Business Daily. Look up the stock sectors for the stock market and select the sector with the highest Relative Strength, or RS, score. This relative strength is scored 1 through 100 and is a comparative indicator between the sector's performance and the general market as a whole.

Pick the strongest stock sectors to speculate in.
Pick the strongest stock sectors to speculate in. (Image: strength image by Andrey Kiselev from Fotolia.com)

Look up the stocks that make up that sector and write them down. Next, look up their RS scores and make note of them.

Make a list of potential stocks to speculate in.
Make a list of potential stocks to speculate in. (Image: pen money and shopping list image by Warren Millar from Fotolia.com)

Pull up a stock chart on your computer using a free service like FreeStockCharts.com and input "SPX" which stands for the S&P 500. The S&P 500 is an index of the largest publicly traded companies in the U.S.

Click the indicator button and select the Simple Moving Average, or SMA. Input the value of 200 in the SMA so that a 200-day SMA will appear on the screen with the S&P 500 Index. If the S&P 500 is trading above the 200-day SMA then the market is bullish, or trending upwards, and fit for speculative opportunities.

Speculate in upward trending stocks only when the S&P is trading above the 200-day SMA.
Speculate in upward trending stocks only when the S&P is trading above the 200-day SMA. (Image: chart background image by Stasys Eidiejus from Fotolia.com)

Check your stock list for stocks that are also trading above their 200-day SMA. Make note of them.

Wait for the stocks on your list to make a new two-month price high. When price pulls back, then place a buy order 1 point above the new two-month price high. Once the stock's price trades upwards and through that price high, the buy order will automatically take a position as the stock resumes its bullish trend.

Tips & Warnings

  • Always trade the stocks with the highest RS, if possible, but only when both the stock and the S&P 500 are trading above their 200-day SMA.
  • Always have an exit plan if the trade doesn't work out like you had planned. Use stop-loss orders no further than 5 percent from your initial entry and exit the position if the S&P 500 begins to trade below its 200-day SMA.

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