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Of all the questions we get here at Money Morning, one we see the most is: "Is it too late to buy Zoom?"
Of course, these folks are talking about Zoom Video Communications Inc. (NASDAQ: ZM) – the videoconferencing player that's seeing torrid growth because of the COVID-19 pandemic.
Just last week, Zoom CEO Eric Yuan revealed that 300 million folks are using the company's software – a jump of 100 million, or 50%, from just last month. In December, the company's user base was a "mere" 10 million.
And Zoom's shares have, well, zoomed. From its trading price of roughly a year ago, the shares have rocketed to nearly $160 – a jump of nearly 150% during that stretch.
Huge moves like this are based, in part, on the numbers. But they're also fueled by a hefty slug of emotion, which can make buying, selling, and trading pretty tricky.
Especially in "Mean Markets" like the one we're navigating right now.
So here today I'm going to show you a nifty trading trick that I use in my trading service and in my personal trading accounts – to avoid buying stocks when they are hitting emotionally charged highs.
One Simple Strategy to Boost Your Gains and Limit Risk
Emotion can be a wrecking ball for traders and investors in any market. But it can be fatal in a market as mean as this one. Folks end up buying the highs and selling the lows, instead of the other way around, and precious capital gets boiled away.
But there's a simple strategy that excises emotion from the equation – a reality that boosts your gains and tamps down on risk.
It's called the "Limit Price Strategy," and it's one I've used for years in my personal trading accounts – and most recently in trades that I've recommended for my Night Trader subscribers.
In fact, I put this strategy to work for the Night Trader folks a bit more than three weeks ago – to buy shares of Zoom on a technical dip.
The stock had been trading at $145 – and I told my followers that we needed to wait for a better opportunity to grab Zoom's shares at a discount.
We made one simple move – I employed a Good-Till-Canceled (GTC) order – with a limit price of $120 – and then we waited.
That's right. We walked away – emotion-free – and then waited for the market to come to us.
In this case, an analysis of the chart helped me arrive at the $120 limit price. My confidence was high that the market would come to us – which was exactly what happened.
My initial recommendation was published March 25. And just six days later, our limit price target of $120 was filled. A mere eight days later, Zoom's shares had resumed their bullish climb and were trading at $150. In fact, they closed that day at $151.56.
With that $31.56 bump, we're talking about a 26.3% gain – in just eight trading days.
To give you a little bit of context, that's an annualized equivalent of nearly 830%.
Here's some simple math on how our trade worked.
If you had simply purchased the shares on March 25 at the open, you would have paid $140.10 per share.
If you used my Limit Price Strategy, you would have bought the stock for $120 per share on April 2.
The results? Given where Zoom shares are trading now, my Limit Price Strategy has returned 41% — versus the 21% you'd have reaped if you just bought the shares in the Mean Market.
Believe it or not, there's more room for the Zoom trade.
You haven't missed out.
I'm looking at the stock now and would still like to add to my portfolio. Of course, not at these prices.
That said, let's use the Limit Price Strategy to set our buying price and wait for the market to bring Zoom back to us.
It's a volatile stock. And a Mean Market.
The shares will come back our way.
Looking at the chart, there are a number of reasons to consider $150 as a good entry price for Zoom within the near future as the stock is once again "overbought."
We'll use that overbought situation as a catalyst for the stock to come back to our price where we'll swipe them up at a 7% discount to today's prices. That'll be good for tacking another 7% worth of profits on to our position compared to those investors that are jumping in at today's highs.
The simple trade: Buy Zoom Communications using a limit price of $150 (GTC).
If my trade gets filled, I get the stock for about 7% less than what investors are paying for it today. I minimize the heightened risk of an emotion-based move. I avoid getting lured into the day's volatility. And I "slow down" the market – making it more my speed.
There is a downside – in all candor, there always is – as I may miss out on grabbing a stock that continues to run higher.
I can live with that.
With such a big swath of the market "on sale," there are plenty of other opportunities out there.
We all want profits – maximum profits, in fact.
But we also want to keep risk in check.
This does both.
Let me know how you do.
I'll be back with other great opportunities for you …
And in the meantime, don't forget to check out my latest webinar…
You see, the market is going to fall. It's going to fall hard. And it's going to keep falling until September.
It's a bold prediction… but today, I'm going to show you why you don't need to be scared of what's coming.
You just need to understand it, and you'll have a chance to make a lot of money. I'm laying out the facts right here…
About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Straight-Up Profits. He also contributes to Money Morning as the Quant Analysis Specialist.