My Standard Rule For Exiting Trades
Today’s piece will be
short, and to the point. Additionally, my column will be written by
my colleague Bo Harvey tomorrow as I will be traveling out of town. So, enjoy
the holiday weekend, I will resume on Tuesday. Now let’s turn to the point of
today’s piece, making adjustments. During November and December HVT picked up
measurably, mainly in the gold mining stocks. There was good travel range,
liquidity, etc etc. While 2004 is showing many of the same attributes in that
sector, the first week and half were definitely different. It was only after
several days of taking the same approach that I did in the waning days of 2003
that it became obvious subtle changes had taken place.
Were the HVT techniques still valid? Yes. So
what changed? Price dynamics. I believe it is largely due to the shift of
capital away from the sector (gold stocks have been beat up pretty good so far
in ’04) or at the very least, less capital flowing into that sector. This alone
will have an impact on the way a specialist will handle order flow. No longer
can he/she rely on “depth” in his book to absorb large orders, suddenly he needs
to become the “depth” and that will alter the price dynamics.
Case in point. My standard rule for exiting
trades is to always exit into strength/weakness depending on whether you are
short/long with a market order. Presently market orders are not all that
advantageous, relatively small orders cause mini air-pockets and not so good
fills. Secondly, establishing trades requires a greater degree of anticipation
than usual. Yes you still need all your rules to be met, but perhaps you enter
before the last and final piece is in place. Again, this is a function of less
liquidity and depth. Once the trade becomes obvious, it is too late, the price
has moved well away from a reasonable entry point.
“Dave, are you saying shoot from the hip, that
sounds a bit out of character?” No, not at all, the cardinal rules of HVT need
to be in place, yet there is a degree of anticipation that must be adopted.
Reducing share size will help ease the anxiety associated with this, but if you
are focused like a laser beam on the price action of the stock, and resist the
temptation to trade every stock under the sun (like most traders) you will be
surprised what subtle signs will reveal themselves to give you that edge in a
market that requires the sharpest edge possible.
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As always, feel free to send me your comments and
questions.