Walking Through Trades From My Stock Outlook
As a swing
trader, there are several general concepts that I apply. These
include waiting for entries and exercising strict money management techniques such as
setting initial protective stops, trailing stops and taking partial
profits. Below we will expand upon these concepts by walking through stocks
mentioned recently in my nightly column “Landry’s Stock Trading Outlook.”
If you are new to swing trading or my
column, you might first want to read the column archives for the past few
weeks to get a feel for my trading style. Further, you might also want to read Ten
Tenets Of Swing Trading, Bow
Ties, Trading
Pullbacks and my other articles on swing trading under Money
Management, Trading
Indicators, Strategies,
and Patterns.
No Tickie, No
Tradie
As I discussed in Ten
Tenets Of Swing Trading, if there is “no tickie” then there should
be “no tradie.” This means waiting for follow through in the direction
of the trade. Therefore, unless stated otherwise, for longs this means that the
stock must trade above the prior day’s high and for shorts this means
that the stock must trade below the prior day’s low. This general rule
will often keep you out bad trades.
Don’t Bank On It
Here’s an example of why you should
wait for entries. Notice Golden State Bancorp
(
GSB |
Quote |
Chart |
News |
PowerRating), mentioned on 01/04/01
as a pullback, traded sharply lower on the following day. We ignored this
trade because it did not trade above our entry. Also notice that the stock
continued to implode over the next few days. As you can see, by simply waiting
for an entry, a losing trade was completely avoided.
Don’t Just Do It
He’s another example of why you should
wait for an entry. On 01/18/01, Nike Inc.
(
NKE |
Quote |
Chart |
News |
PowerRating) was mentioned as a potential
pullback. The entry for this position was above the 1-2 prior day’s highs* (b).
Notice that on the following day (01/19/01) the stock implodes (a). However, a
losing trade was avoided because it never traded above the entry (b).
Protective Stops On
Every Trade!
Because every trade has the
potential to be a losing trade, I always use protective stops. This
protective stop is normally placed below the low of the setup (for longs) or
above the high of the setup (for shorts). If this is more than 5% away from the
entry price, no more than 5% should be risked.
Bisys Group
(
BSYS |
Quote |
Chart |
News |
PowerRating), mentioned on
01/03/01 as a potential pullback, provides a good example of why protective
stops are a must. An entry is triggered (a) and we go long. Because the low of
the setup (in the case, the 01/03/01 low) is more than 5% away from our entry,
we place a protective stop at 50 (b) for a risk of approximately 5%. The stock
reverses and we get stopped out on the following day (b) for a loss.Â
Note: Although the stock did come back
over the next few days, I can assure you that they won’t always do this. Use
protective stops.
Take Partial
Profits
A simple money management technique I
follow is to sell half of my position as soon as my profits exceed my initial
risk. I then move my stop to breakeven on my remaining shares.*
Amerada Hess
(
AHC |
Quote |
Chart |
News |
PowerRating), mentioned on
01/04/01 as a first pullback/Bow
Tie, provides a good money management example. The entry (a) was 1/16th
above the day’s high, good for the following day. On the next day, the entry is
triggered as the stock trades 1/16th above the prior day’s high (70 3/8). An
initial protective stop is immediately placed 1/16th below the low of the setup
(b) at 68 15/16 for a risk of 1 7/16. The stock trades through our profit
target and we exit half of our shares at 71 13/16 (c). The stop is then raised
to breakeven (a) on the remaining shares. Two days later the stock sells off and
stops us out (d) of our remaining shares for a scratch trade. As you can see,
without money management, this slightly profitable trade (overall) would have
resulted in a loss.
Here’s another example of why money
management is so important. Schering-Plough
(
SGP |
Quote |
Chart |
News |
PowerRating) was mentioned as a
potential short on 01/10/01. The stock triggers on the following day at 51 7/8,
1/16 below the prior day’s low (a). An initial protective stop is placed at 51
(b) giving us a risk of 2 1/8 points. The same day the stock drops and we exit
half of our shares at 49 3/4 (c) for a profit of 2 1/8. We immediately lower our
protective stop on our remaining shares to breakeven–the same as our entry (a).
The following day the stock gaps open and we are stopped out for a slight loss
on the remaining shares. Again, without money management, this modestly
profitable trade (overall) would have resulted in a loss.
Trail ‘Em If You
Got ‘Em
If you are fortunate enough to have
taken your half profits and moved your stop to breakeven, you should then trail
that stop on your remaining shares. As an example, notice Neuberger Berman
(
NEU |
Quote |
Chart |
News |
PowerRating),Â
mentioned on 12/21/00 as a deep pullback, traded higher over the next 4 days. By
trailing a stop below the prior two lows, the majority of these profits were
captured. As you can see, even simple trailing stop techniques can be quite
effective.
Take ‘Em If You Got
‘Em
As a swing trader, windfall profits
are often few and far between. Therefore, you should lock in all or a
significant piece of your profits when parabolic moves occur. After all, large
moves occur as players dog pile onto a market as it becomes obvious to the
masses. You’ve got to ask yourself, once it’s obvious, and the last players are
entering the market, who’s left?Â
Notice Aflac
(
AFL |
Quote |
Chart |
News |
PowerRating), mentioned on
01/17/01, triggered on the following day (a). Then on 01/19/01 the stock
implodes and has its largest one day range in years (b). When you are fortunate
enough to be on the right side of such a large move, you should lock the
majority if not all of your profits. In fact, as this article is
“going to press” (01/22/01), the stock is already trading up nearly
three points.
Summary
There’s a lot more to trading
stocks than just finding setups. You must wait for entries and exercise strict
money management. This involves using initial protective stops, taking profits
and trailing stops. By waiting for entries many bad trades can be avoided. By
using initial protective stops, losses are kept to a minimum when a bad trade
does occur. And, by taking profits and trailing stops, gains can be captured.
The above techniques, while no means exhaustive, should help you when focusing
on swing trade setups mentioned nightly in my Stock Market Outlook.
*Traded this stock as a pullback, the
entry would be above the prior day’s high. Traded this stock as a Trend Pivot
Pullback, the entry would be above the 01/17/01 pivot high (labeled (b) in the
chart).
**Larry Connors has dubbed this
“2-for-1” Money Management.
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