Mining for Gold
“Dad, I think I found a winning stock!” my son exclaimed, bursting into the room with his laptop in hand. He had that look in his eyes—the one that said he’d just discovered the next big thing. I couldn’t help but smile. It reminded me of the early days of my own trading journey, when every stock felt like a potential goldmine.
“Alright,” I said, setting aside my own charts. “Let’s hear it. What’s this winning stock?”
***Author’s note: The specific stock that we are discussing is low float AI company Due to the questionable nature of this stock, I’m not going to share the ticker or the chart. Rather than immediately rejecting it, I wanted to use it as a teaching opportunity.
He proudly showed me the ticker symbol of a small tech company. “It’s under $10 a share, and they’re working on some really cool AI and robotic stuff. I think it’s going to explode!”
“Alright,” I said, setting aside my coffee. “Let’s hear it. What’s this winner you’ve found?”
He spun his laptop around to show me the chart of a small, speculative tech stock. “It’s up 300% this month, and it’s breaking out! Look at the volume—it’s huge! I think it’s going to keep going.”
I leaned in to study the chart. The stock had indeed broken out of a long base, and the volume spike was hard to ignore. But something about it felt… off. I pulled up the company’s financials and raised an eyebrow. “Hmm. The fundamentals aren’t great. They’re not profitable, and they’ve had a reverse split in other words they reduced the number of shares to be able to raise the price, which is usually to comply with exchange listing requirements. What do you think about that?”
He shrugged. “I don’t know. The chart looks good, though. Isn’t that what matters?”
I smiled. “You’re not wrong. The chart does matter—a lot. But let’s dig deeper. This stock might be in Stage 2, but it’s also speculative. It’s had one big move over a couple of days on news. That means we need to be extra careful. Let’s walk through how to approach a situation like this.”
Stage 2: The Advancing Stage
“First, let’s talk about Stage 2,” I began. “This is the advancing stage—the ‘spring’ of a stock’s life cycle. It’s when a stock breaks out of its base and starts trending higher. This is where the big money is made, but it’s also where a lot of traders get burned if they’re not careful.”
I pointed to the chart. “See how the stock broke out of this resistance level with a huge volume spike? That’s a classic Stage 2 signal. The price is moving up, and the momentum is strong. But here’s the thing: not all Stage 2 breakouts are created equal.”
“What do you mean?” he asked.
“Well, some stocks have strong fundamentals to back up the price movement. We want to be in the types of stocks that institutional investors will buy and keep buying. Others, like this one, are more speculative. They might be riding hype or momentum or a press release, but there’s not much substance underneath. That doesn’t mean you can’t make money on them—it just means you need to be extra cautious.”
The Speculative Trap
“Let’s talk about why this stock is speculative,” I said, pulling up the company’s financials. “They’re not profitable, their balance sheet is weak, and they have a shelf offering which means they can sell shares to raise capital. That doesn’t mean the stock can’t go up—it just means there’s more risk involved.”
“So, why would anyone buy it?” he asked, confused.
“Good question,” I said. “Sometimes, stocks like this are driven by hype—maybe they’re in a hot sector like AI, or they’ve announced a new product or contract that everyone’s excited about. Other times, it’s just pure momentum. Traders see the price going up, so they jump in, hoping to ride the wave.”
“But isn’t that dangerous?” he asked.
“It can be very dangerous,” I admitted. “That’s why we need a plan. If we’re going to trade a speculative stock we need to be disciplined. We can’t get caught up in the hype or fall in love with the story. We have to focus on the price action and manage our risk.”
How to Trade a Speculative Stage 2 Stock
“Alright, let’s talk strategy,” I said. “If we’re going to trade this stock, here’s how we’ll approach it.”
Confirm the Breakout
“First, we need to make sure the breakout is real. A lot of breakouts fail, especially in speculative stocks. Look for a strong volume spike and a clear move above resistance. This stock has that, so it’s a good start.”Waiting out the Pullback
“This stock has now started a pullback, which is normal. The good news is that it hasn’t immediately given all of its move back. The bad news is that it hasn’t shown much strength after that initial big move. So before we would consider buying this stock, we need to be confident that the selling pressure is finished. So we would want to see it move higher through the areas where it is getting sold. I have a setup for this entry called the Slingshot that I’ll teach you later, which identifies the price action that we want to see before buying.”
Set a Stop Loss
“Next, we need to protect ourselves in case the trade goes against us. We’ll set a stop loss just below the consolidation level. That way, if the stock falls back into its base, we’ll get out with a small loss.”Take Profits Gradually
“With speculative stocks, it’s important to take profits along the way. We’ll sell a portion of our position as the stock moves up, locking in gains and reducing our risk.”Watch for Red Flags
“Finally, we need to keep an eye out for warning signs. If the stock starts to reverse on heavy volume, or if the fundamentals get worse, we’ll get out immediately. No questions asked. We can’t afford to get greedy or emotional with a stock like this.”
The Bigger Picture
“Here’s the thing,” I said, leaning back in my chair. “Trading speculative stocks can be profitable, but it’s not for everyone and frankly its not where you should start. You need to have a clear plan and the discipline to stick to it. Otherwise, you’re just gambling.”
He nodded, studying the chart again. “So, you’re saying I could trade this stock, but I need to be careful?”
“Exactly,” I said. “breakouts can be powerful, but they’re not a guarantee because many breakouts fail. And with speculative stocks, the risk is even higher. That’s why we focus on risk management and stick to our plan.”
The Takeaway
“So, what do you think?” I asked. “Do you still want to trade this stock?”
He thought for a moment, then smiled. “I’m not sure, but I’ll follow the plan if I do. Set a stop loss, take profits, and watch for red flags.”
“That’s the right attitude,” I said. “Remember, trading is about probabilities, not guarantees. You do not have to take the trade because even the best setups can fail, so we always need to be prepared.”
As he closed his laptop, I could see the gears turning in his head. He was starting to understand that trading isn’t just about picking winners—it’s about managing risk and staying disciplined, especially when dealing with speculative stocks.
Until next time, stay curious, and may your stocks move in your favor.
Cheers,
Disclaimers
“Not Investment Advice Disclaimer”
The content covered in this blog is NOT to be considered as investment advice. I'm NOT a financial adviser. These are only my own personal and speculative opinions, ideas, theories, hypotheses, charts, technical analysis (TA), insights, curated news publications, and price prediction(s).
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The Speculator’s Journal may contain links to affiliate websites, which means we receive an affiliate commission for any purchases made by you on the affiliate website using such links. Affiliate commissions will be used to fund a trading account for my son.
I do like your storytails 💪
Came here after watching your Tradelion presentation on Youtube. Do you have writeup on more details for your 4EMA strategy?