Today’s Trading Lesson From TradingMarkets

Editor’s Note:

Each night we feature a different lesson from

TM University.
I hope you enjoy and profit from these.
E-mail me if you have
any questions.

Brice

How I Deal With
Winning Trades Going Sour

By Greg Kuhn

Whenever I
sit down to write my twice-weekly column
or one of these trading
lessons, my goal is to get to the heart of the matter while attempting to keep
my writing at least somewhat interesting. I could go on and on in many cases.
However, I realize the most important thing is to get to the point, make it
informative and hopefully make you a better intermediate-term trader in the
process.

With that in mind, this lesson will just get right to the point.

What do you do when a profit in excess of 25% evaporates right in front of
your eyes?

As rare as this situation is, it happened to me recently. As painful as it
might seem at the time, it usually spells even more trouble ahead for the stock.

Back in March, when stock after stock was exploding from basing patterns and
blasting to new highs, I bought Phone.Com (PHCM)
breaking out of its own solid, basing pattern. Its 13-week cup-with-handle
pattern left nothing to be desired. Volume was coming in at all the right places
and the day-to-day price action was tight. More importantly, the two-week handle
it formed was even tighter. Moreover, the company had the leading Internet
software product in the explosive field of hand-held Internet-access devices.
Simply, it was a leading stock in leading group at the time.

I bought the stock breaking out from its basing pattern on March 9 — volume
was huge. And although many of the winning stocks in my portfolio were well into
climax runs or rallying into extended positions on weak volume — sure signs of
exhaustion, the leading Nasdaq Composite had only recorded one distribution day
so far into its ascent and other stocks were still emerging from basing
patterns.

Got to take this trade. Can’t miss, right?

Following its breakout day, the stock catapulted the next day on big volume.
Wow! Two days into the move and I’m already up 32% on my position. Should I
sell? What the heck, why not take the nice quick profit and run?

No. 1, stocks that breakout and run like this normally have the propensity to
end up being big winners. Just check out many of the stocks that broke out of
solid basing patterns during the Nasdaq Comp.’s fourth-quarter run. Many of the
big winners acted the same way, as have many big-winning stocks in the past —
even during less phenomenal advances in the market.

Actually, as an intermediate-term trader, the proper course of action, as I
laid out in the Kuhn/Marder Trading Course, is to raise one’s stop-loss to the
purchase price once a stock has advanced 25% or more above cost. It’s one thing
to give back a gain in excess of 25%, but downright bad money-management to take
a loss.

Here’s the point: The Nasdaq Composite topped on March 10 and immediately
headed lower — as did Phone.Com. Three days later I was out at my cost of $157
and the rest is history. Check out what eventually happened to the stock.

As painful as it may have seemed to give back the profit, I will tell you
this: I’ve only found myself in a similar situation a handful of other times in
the past. In every case, it indicated something was going wrong in a major way
and the stock eventually just totally caved in. In this case, the whole market
was about to get whacked big time!

Despite the situation, I was being fed important information from the market.
And any time I can get clear-cut information from the market, which isn’t always
the case, win or lose, I’m always happy to listen. I gave back a profit, but
look what the market’s information kept me from getting into — a clear
disaster.

This is what having a sound set of disciplined rules in your trading is all
about. Have your rules and let the market trade within them. You control it
(the market), not the other way around!

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