Going Long on a Stock? What to Consider First.

2022-01-03 | Mary Ellen McGonagle

When considering going long on a stock, deciding when to enter your trade is one of the most critical components of your investing strategy. Chasing a stock after it’s already had a significant run will diminish your upside potential, while getting into a stock that’s trading below upside resistance can lead to immediate losses.

What Does it Mean to Go Long on a Stock? 

Quite simply, being long on a stock means that you are purchasing a stock which you then own, with the expectation that the price is going to rise. Your long stock position and your funds invested will rise and fall with the price of that stock.

The time frame or how long you own the stock will depend on several factors such as your investing time horizon, your outlook on the stock market or your exit strategies.

When to Take a Long Position… and When Not

When considering the purchase of a stock, one of the most important factors will be the general condition of the stock market. In other words, you want to make sure that the markets are in an uptrending period of strength that will help lift your stock higher. Without this backdrop, your odds of making gains on a long position diminish greatly.

For the early part of 2022, the markets will likely be in a period of great uncertainty with the impact of the spreading Omicron variant still unknown, while inflation has been spiking due to wage pressures and Covid related supply issues for manufacturers.

The markets do not fare well during periods of uncertainty as positive and negative sentiment among investors cause stocks to bounce around as the bulls wrestle with the bears. In this type of situation, you’d be better served to wait for a healthier market backdrop before purchasing new stocks.

If the markets are in an uptrending phase, you’d want to make sure that if you go long on a stock, it is in a strong area of the markets. In other words, it’s in a sector or industry group that is relatively outperforming. Studies show that the sector and industry group affiliation of your stock accounts for almost 50% of that stock’s price movement. So getting a stock in a strong area of the markets will make a big difference.

In early 2022, beaten down Retail stocks seem to be coming into favor so that could be an ideal place to focus your research.

From here, once you identify a potential stock purchase, you’d want to make sure that the chart pattern of the stock is positive. In other words, is the stock above resistance and emerging from a sound base?

An Example of a Successful Long Strategy

This skill of reading a price chart properly may take time to master but your time will pay off tremendously. Below is an example of my biggest winner in 2021 as the stock gained over 400% in an 8-month period. A marked-up price chart is below:

 

 

The entry point is highlighted above and as you can see, it was when the price of the stock rose above a 2-month period of back and fill price action. This is called a flat base breakout and when it occurs on volume (as it did above), the chances of that stock trading higher are improved. In addition, the new high in price at that time indicates that the stock is above any upside resistance.

Also, the company – Plug Power (PLUG) – is an alternative energy stock which was a group that was far outpacing the markets at the time of purchase. The group remained strong until the beginning of 2021.

My exit point in PLUG is highlighted above as well, and as the stock breaks below the simple moving averages lines (green, pink and blue), you would not want to go long a stock as the lines are now upside resistance.

Trading stocks can be very exciting and even more importantly, very profitable. I’ve been educating professional and self-directed investors for years and teaching how to time your entry point when going long a stock is one of the first steps on your way to becoming a successful trader.

If you’d like to learn other, highly important tools on your way to being a successful investor, take a 4-week trial of my MEM Edge Report. It not only will do the work for you as far as identifying top stock candidates in the best industries, you’ll be provided with entry and exit points as well.