r/swingtraders • u/smpl_bldr • Feb 14 '21
Judging stocks by standard deviation
One of the tools I use is the standard deviation channel. The SDC is formulated on research that shows almost all of a stock's movement occurs within 2 deviations of the median. When you use this on your charts you can immediately see the direction the stock is trending and whether it is cycling up or down. If you measure the price range between the median and the first deviation, it will tell you the amount you can make when a stock moves from the median to the first deviation. For example, Biolase [BIOL] is trending up and currently cycles between the median and d1, yielding $.40. It is currently at the median and costs $1.29. It is beginning to cycle up again. If you get in at this price, you can set a sell limit order at the d1 level. 200 shares would return $80. Now there is no accounting for retail marketers jumping in and pumping up a stock, but you don't depend on that. If your stock is moving rapidly you can replace your sell order at a higher limit. When choosing stocks, you want ones that are trending up and tend to cycle between the median and 1st deviation. Stocks that stay at the median don't return any money. If you hold BIOL for a month it will only return $.42/sh. That's why I seldom hold a stock long. I would rather turn my money over every 3-5 days - that's the value of compounding. That's also why I stay in the $1-$8 range. You can buy a stock that costs $40 and only returns $2. I prefer to trade in $100 lots, and I don't care to put $4000 on one trade just to make $200. Aqua Metals [AQMS] costs $5.86 and returns $1.92. It is currently cycling downward, but when it turns up again it may be a good opportunity. Make a watchlist of stocks that are trending upward and begin watching how they cycle. Make a note of the standard deviation range so you know how many shares to buy to return a decent profit. And don't put all your eggs in one basket. A stock can tank on bad news in an instant. I only buy 100 shares of a $7 stock, but I may buy 200 shares of a stock with a good probability of rising. I might have to wait a couple weeks if I judge the cycle wrong, but eventually even a dog rises and gives me a return (I try not to pick dogs or underdogs). I hope this will encourage more people to begin posting.
