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Frequently Asked Questions

I’ve noticed that you talk about the RSI a lot in your analysis. What exactly does it show?

Oct 12, 2017

You’re absolutely right. The relative strength index – more commonly referred to as the RSI – is one of my favorite indicators on a stock chart. It’s an overbought/oversold oscillator that measures a stock or index against itself.

Don’t confuse it with relative strength, which is very different as it measures one chart against another to determine the stronger. The RSI is a formula that helps determine if a stock has run too much to the upside or fallen too far to the downside. There are a few different time settings you can use with RSI. My preference is the 9-day period setting, which takes the last nine trading days into consideration to determine the RSI number. While I could talk for hours on how I use the RSI in my research, it really excels in identifying buy signals.

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Are moving averages something you look at in your stock analysis?

Sep 22, 2017

Yes! I love moving averages because they can tell us a lot about historical trading and give us a good idea of where the stock is (or at least should be) headed in both the near and long term. The 50-day moving average is one of the most widely-used indicators in the world of technical analysis, and yet many investors aren’t familiar with how it works or its importance in trading.

A simple moving average – the type that I use in my analysis – is the average closing price over a certain number of previous trading days. So the 50-day adds up a stock’s closing prices over the last 50 days and divides by 50. The end result is the level of the moving average on any given day. There are a few ways I use this data in my analysis.

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Let’s say you recommend an option in a certain stock, but aren’t actually recommending the underlying stock. What makes you want to trade the option rather than the movement in the stock?

Sep 12, 2017

That’s a really good question, and typically it comes down to timing. In NexGen Profit Mulitplier, we will generally hold an option for anywhere from a few days to a few weeks and stocks for about one to three months. That’s a big difference in holding periods, so it puts importance on how imminent a move ahead is.

If the payoff looks like it will take some time to play out, we will more likely target a trade on the underlying stock. However, if a stock is likely to take a near-term pop, we can maximize that upside potential through a call option. For example, a 2% bounce wouldn’t be worth trading in a conventional stock trade. But that 2% can quickly translate into a double-digit winner through the profit-multiplying power of an option.

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I’ve been a subscriber for a couple of months, and I love your strategy and what you’ve been doing. However, I have a question regarding risk management. Why are there times that you deviate from our plan and stay in a trade even when it closes below support?

Sep 07, 2017

Thanks for your kind words! Your question is a good one. Critical support levels are one tool I use to judge the health of a stock’s chart, but they are not the final word on a trade. As you’ve seen, there are situations where other factors that move individual stocks and the overall market need to be taken into consideration.

Once the support level is broken, I need to see a strong likelihood that it will bounce for us to stay with it. I reexamine all of the factors that led to the support break to determine if we need to make any adjustments. This is when I get in touch with my thoughts so you are kept updated on my latest outlook.

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I understand that you have to weather the storms when it comes to longer-term investing, but how do we make sure we’re not catching a falling knife? I don’t want to be stuck in a name that’s never going to bounce.

Sep 01, 2017

That’s a great question, and the key is implementing a risk management strategy. Many think that risk management is all about managing downside, and that’s true. But it’s not all stop-losses and support levels. It actually starts with the timing of our entry.

When it comes to stock analysis, there are two sides to the coin: fundamental and technical. Fundamental analysis looks at the company itself and takes macroeconomic factors into consideration.

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I trade based for valuations. Does NexGen include valuation analysis?

Aug 25, 2017

That’s a great question, and my stock selection strategy is something we’ll talk about often. One of the first things I look at when analyzing potential investment opportunities (whether for the long or short term) is the company’s fundamentals. Within those fundamentals, I analyze growth of earnings and revenue as well as the PEG (price-to-earnings-to-growth) ratio, which gives us valuation. So it does come into play in my research.

I will say that the fundamentals are not as important when you’re looking for a short-term stock to trade. However, we will still look at them because they help us stack as many factors in our favor as possible. Just because a chart is pointing higher doesn’t mean that the stock is strong on its own. The company could be falling apart at the seams, and that’s exactly what the fundamentals help to tell us.

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If you look for stocks that Wall Street isn’t focusing on, what factors do you consider when deciding to buy?

Aug 18, 2017

That’s a good question, and my answer is: It depends. I’m not trying to be funny, so let me explain.

It all starts with what I sometimes refer to as the three-legged stool that incorporates macro and micro analysis. The big three are fundamentals, technicals and intangibles.

I’ll be explaining much more about these in the coming days and weeks, but to really find the best NextGen stocks, I want to see strong fundamentals that show growth (among other things), a solid chart that indicates buyers are in control and intangibles to drive the stock higher. These can be everything from a sweeping theme (like the millennial boom we’ve been talking about) to a specific event to, quite honestly, gut feel sometimes.

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I am an amateur investor that loves your approach to investing and the explanations you provide for decisions made. I feel that stocks move on “momentum” when fundamentals and technicals are favorable. Isn’t the RSI a “momentum” indicator?

Aug 01, 2017

Thanks for your kind words! The relative strength index (or RSI) is a technical indicator that serves as an overbought/oversold oscillator to measure a stock against itself. It could be considered a momentum indicator when it is moving in one direction, but I wouldn’t put that label on it. There are many times when the RSI moves sideways in overbought territory as a stock remains in a very strong uptrend. In that situation, it would not be a reliable measure of the stock’s true momentum. This can also be said for when a name is falling and the RSI is low.

However, momentum does come into play when using the RSI to identify buy signals. The index is a scale of 1 to 100, and when the RSI moves out of oversold territory (0-30) and back into the neutral zone (30-70), it creates an RSI crossover buy signal.

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What is the best strategy for trading around earnings?

Jul 26, 2017

If I had a nickel for every time I came across an investment strategy that claimed to know how to trade earnings I would be a very wealthy man. Unfortunately I’m not swimming in nickels, and the folks who followed the advice of the so-called experts are likely on the lookout for some extra cash.

When it comes to trading around earnings – by that I mean buying a stock right ahead of its report because you think you know what will happen – the only true statement is that it is pure gambling. Unless you have some sort of insider information – which you’re not allowed to trade on anyway – there is no way of truly knowing what the actual numbers will be. And it’s even more difficult to predict how investors will react to the report and management’s guidance.

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Would you consider recommending options?

Jul 21, 2017

I believe there is a time and place for options in investing, but I don’t see them fitting into our current approach here in NexGen Investor. Not only does the shorter-term nature of options run at odds with our longer-term investments, but they also carry a serious risk factor that not all of us have the tolerance for.

That said, I do have a lot of interest in options personally and have studied different strategies that range from longer-term covered call plays to more complicated shorter-term trades. I’m not ruling out a future newsletter that incorporates some of these tactics, so if you’d be interested in that kind of service please let me know by emailing service@nexgeninvesting.com.

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