More On What To Do With A Windfall Profit
Trail ’em and Scale ’em If You Got ’em
As I’ve mentioned in the past, Money management–the use of protective stops, trailing stops, and profit taking–is crucial to your long-term success as a trader. A simple money management system is to take at least half of your profits when they are equal to or exceed your initial risk. You then move you protective stop on your remaining shares to breakeven. This way, barring overnight gaps, you have a “free” position that has the potential to turn into a home run (through the use of trailing stops).
Let’s look at Amazon.com (AMZN), mentioned recently as a potential short. When we last left off, we were discussing the fact that it has moved nicely lower (see
column archive from
7/20/04) . Partial profits could (and should) have been taken and the stop
was then moved to breakeven. The trailing stop on the remaining shares was then
lowered. In this case, to two points above the closing price. On Friday, the
stock imploded. In a case like this, there’s no need to hold on for top dollar–make sure you take additional
profits by the close. The trailing stop on the remainder can then be trailed
more loosely to (hopefully) help catch a longer-term move.
Once again, if you’re new to momentum based swing trading and would like more information on the basics such as trend, entries, and money management, email me and I’ll be happy to send you the primer section from my second book.
On Friday, the Nasdaq lapped open but immediately found its
high and then worked its mostly lower throughout the rest of the day. This
action has it closing poorly and puts it below its May low.
The S&P also sold off hard. The May low looks like the
next stop here.
So what do we do? My pontification about
traders not wanting to hold ’em going into the weekend came true (I also said
that the market could bounce, so no matter what happened, I’d still look smart).
Therefore, since this action keeps the big blue arrow intact, we should be
shorting, right? No. The market remains too oversold. So, if you’re not already
positioned, wait for a bounce and then look to establish positions.
On the long side, continue to focus on those issues (in uptrends) that can trade
independently of the indices. The energies are about the only sector left that
qualifies here. Wait for entries though, since they have been soft in more
recent times.
As far as setups, for those with big ones*, Chicago
Mercantile Exchange
(
CME |
Quote |
Chart |
News |
PowerRating), mentioned recently, still looks poised to resume its slide out of a First
Thrust. Use caution though since this one can
move a half a dozen points in a flash (therefore, requires a very loose
stop).
Best of luck with your trading on Monday!
Dave Landry
P.S. Reminder: Protective stops on every trade!
P.P.S. My new 20-hour course is now shipping.
more, or to order..
*Trading accounts