A big trend move is coming — here’s how to trade it…
After a big gap up the
market failed to follow through and gave back most of the morning gains, though
it did close with a little upswing. So far the bounce appears fairly
weak. Retails and Internets have had a nice bounce but appear to be losing
steam. Biotechs have been especially weak the last few days. Critical support in
(
BBH |
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PowerRating) rests just above 187. With quarter end this week, I suspect we will
see some upside bias so there is still hope of some continuation north.
Over the weekend I read through the Original
Turtle Trading Rules. For those of you who are unfamiliar with the turtles, they
were a group of traders who traded commodities using a trend following system
that was developed back in the early 80’s. They became famous due to their
incredible returns and previous lack of trading experience.
In reading through the system I was most struck
by the discussion of profit taking. The following is an excerpt:
“For most trades, the Turtle System Exits were
probably the single most difficult part of the Turtle System Rules. Waiting (for
your stop) can often mean watching 20%, 40% or even 100% of significant profits
evaporate.
There is a very strong tendency to want to exit
earlier. It requires great discipline to watch your profits evaporate in order
to hold onto your positions for the really big move. The ability to maintain
discipline and stick to the rules during large winning trades is the hallmark of
the experienced successful trader.â€
I can’t begin to tell you how true this is for
anyone trading a trend-following system. Intermediate-term growth traders will
find that the biggest portion of their gains will come from just a few trades
each year. It is the ability to ride those trends for all they are worth and not
get stopped out early that will allow you to make terrific profits during a
strong trend.
In my September 12th column I spoke of the fact
that I believed the market was setting up for a large move. This move may not
happen for a few weeks or months still, but when it does, it will pay to be on
the right side of the trend. We’ve been consolidating for a long time (since
January of 2004), and because of this, many intermediate-term traders have
learned that they are being rewarded by taking quick profits rather than trying
to stick with extended trends.
When the next big move comes as I anticipate,
trend traders would be wise to follow the advice of the turtles. Forego the
quick profits and hold on for the big gains.
For those that may be interested the Turtle
Trading Rules can be found at
www.originalturtles.org
Best of luck with your trading,
Rob
Rob Hanna is the principal of a money
management firm located in Massachusetts. He has spent the last several years
developing and refining methods for trading in stocks across multiple time
frames. He selects stocks using both fundamental and technical criteria, and
then trades them using technical analysis techniques.