If you’re a growth investor, you often won’t be the first to discover a hot prospect. Growth stocks often experience strong price run-ups, then falter, often retracing much of their recent progress. Jumping on a fast-moving stock after it has already made a big move adds risk.
I’ve settled on an unscientific rule of thumb for determining when a stock is in that condition. I measure the difference between the stock’s closing price and its 200-day moving average. It’s in the risk zone when the stock price is 50 percent greater than the moving average.
Being in the risk zone doesn’t mean that the stock isn’t going higher. Qualcomm moved into the risk zone when it crossed $10 in March 1999, on its way to $180.
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