This Pattern Has A 20% Success Rate. Do You Trade It?
While the market suffered some high-volume distribution on Friday,
it still looks fairly healthy in general. The next two weeks are going to see
some major vacation time for market participants. Therefore, I would expect
volume to be fairly light. If you trade smallcap stocks, keep in mind that they
can be pushed around quite easily in low-volume environments, so expect some
sharp moves intraday. I still believe the long side offers better profit
opportunities at this point.
Last week I talked about
improving your trading by focusing on risk management. This is something that
can sometimes be especially difficult for intermediate-term traders to grasp.Â
While teachers of day and swing trading tactics typically do a good job of
emphasizing this aspect of trading, it sometimes can be forgotten by
intermediate-term practitioners.Â
I believe too many
intermediate-term traders focus too much on pattern recognition and entry
techniques and not enough on risk management. Cup & Handles, flags, ascending
bases, etc. are great tools for timing your entry. What most traders fail to
realize, though, is that they are not terribly reliable patterns. If 20% of the
Cup & Handles that you buy go on to nice gains, you’re doing very well.Â
A 20% success rate is not a
problem, though.. You don’t need a high percentage of winners, because the
trades that do work out have the capability of producing very large gains. A
handful of good intermediate-term positions per year can earn your portfolio a
very nice return. With the proper preparation and attitude towards research,
it’s very possible to find a few stocks each year that can provide gains of 100%
or more. (For an example, check out NGPS*, which I mentioned in my 11/22
column. After moving above the handle around $17.45, it’s gone on to nearly
double in just over a month.)
As an intermediate-term trader,
if you can find a few stocks like NGPS each year, hold on to them to realize
significant gains, and then break even on the rest of your trades with a
combination of small winners, small losers, and scratches, then you should do
very well. The key is having the discipline to exit the trades that don’t work
out without taking too much of a loss.
Take the trades that meet your
criteria and risk very little on them. Intermediate-term investing is not a
money-machine. It is close to impossible to systematically take profits from
the market in a consistent way using intermediate-term techniques. If monthly
or quarterly consistency is a goal, then you need to trade in shorter-time
frames and institute different techniques. (See cheap plug below.)Â
Intermediate-term investing is a treasure hunt. Treat it as such and you should
do well over the long term.  Â
Index Action
If you’re looking for some
volatility, check out the drugs (DRG.X). Short-term the semi’s have had a
difficult time, but are very close to possible support based on their 12-9 low
and their 50-day moving average. One area that has held up quite well recently
is the Dow 30, especially considering the negative action in Pfizer the last few
days.
Best of luck with your trading,
Rob
P.S. Here’s my cheap plug…if
your looking to diversify your trading with a swing trading technique that is
likely uncorrelated to anything you’re doing now, check out my new
Hanna ETF Money Flow System!
* For purposes of full
disclosure, my firm currently has a position in this stock.