The Importance Of Money Management
Each evening we focus
on the most interesting aspects for the upcoming trading
day. The comments are based on observations of the nightly
updates of the Stocks/Sectors and Market Bias pages. They
are provided for educational purposes only and are not
intended to be direct trading advice. Also, keep in mind
that these remarks are made up to 12 hours in advance of the
market’s opening. Therefore, overnight events may alter the
outcome of these observations.
On
Tuesday, the Nasdaq opened flat-ish (a) and mounted a decent rally early on.
However, this was short lived as it quickly went into drifting/waiting on the Fed mode.
Once the status was announced, the index sold off hard and fast to close on its low
(b). This puts it just under the prior lows (c) and at a new yearly low.
I
suppose the next question becomes whether or not this is a double bottom? It’s
way too early to tell. Markets, especially now that everyone is so educated, seldom
do things in a “pat” manner. We could likely see a stab below
and/or re-testing of these levels. My team of 6-year old analysts are still
calling this chart a downtrend as the right side is lower than the left*.
On Monday night, I was discussing my trading style. To
review, we were using Toll Brothers
(
TOL |
Quote |
Chart |
News |
PowerRating) as an example and entering on
a pullback as the stock traded above 1/16 above the prior day’s high (a) at 40
1/4 and placing an initial protective stop below the lowest bar of the setup (b)
at 38 3/16 for an initial risk of 2 1/16 points. This gave us an initial profit
objective of 42 5/16 (the entry, 40 1/4 + the initial risk of 2 1/6). This
profit target was achieved (c) and we exited half of the position. We then moved
the protective stop on the remaining shares to breakeven–the same as the
entry(a).Â
On Monday, I stated
“I’ll expand further on why money management is so important.” Tuesday
provided a great example. Notice that the stock sold off and traded below the
entry (a). This stops us out for a scratch on our remaining shares (d). As you can see, what could have been a losing trade was profitable due
to simple money management techniques.
One last point, when
a pullback reaches its old highs (e) it either breaks through (a breakout) or
fails (a double top). In this example, it appears that it was a double top and
is one more reason why money management is so crucial.
Back to the markets.
Just when things were beginning to shape up, we get whacked again. The good news
is through waiting for entries (follow-through), using protective and trailing
stops and taking partial profits (see above), we are able to survive until better
times. Also, as I’ve been preaching, during uncertain environments like this, you
don’t bet the farm. Â
Looking to potential
setups, Scios
(
SCIO |
Quote |
Chart |
News |
PowerRating), mentioned recently and
on the Pullbacks
Off Highs List, still looks like it has the potential to rally out of a pullback
Neuberger Berman
(
NEU |
Quote |
Chart |
News |
PowerRating), also mentioned recently,
continues to sell off but still might have the potential to resume its
longer-term uptrend if (and only if) it can take out (trade above) the
prior 1-2 bar highs.
On the short side,
Adobe Systems
(
ADBE |
Quote |
Chart |
News |
PowerRating), in the weak software sector
(
$GSO.X |
Quote |
Chart |
News |
PowerRating), appears to be stalling out in a rally from lows.
Best
of luck with your trading on Wednesday!Â
face=”Arial, Helvetica”>Dave Landry
P.S. Reminder:
Protective stops on every trade!
*If you ever find a broker
who will let you trade off the left side of the chart, let me know!
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