You’ve Got A Windfall, Now What?
Trail ’em (and Scale ’em) If You Got ’em
Money management–the use of protective stops, trailing stops, and profit taking–is crucial to your long-term success as a trader. A simple money management system is to take at least half of your profits when they are equal to or exceed your initial risk. You then move your protective stop on your remaining shares to breakeven. This way, barring overnight gaps, you have a “free” position that has the potential to turn into a home
run (through the use of trailing stops).
Let’s follow up on Peabody Energy
(
BTU |
Quote |
Chart |
News |
PowerRating), mentioned recently.
When we last left off on
04/12/05, we were were talking about the fact that it
triggered, it hit the profit target, and it continued lower. By taking partial
profits and ratcheting the stop down to breakeven, we were set up for a
potential home run (barring overnight gaps). Notice that the stock has continued
to move nicely lower (nearly 7 points since first mentioned). When you have such
a large open profit, it’s often a good idea to scale out–take additional
profits. You’re now in a position to trail more loosely on your remaining shares
to (hopefully) continue to participate in a longer-term moves.
Do they always work this well? OF COURSE NOT! That’s why I
have the P.S. at the end of every column (the one about protective stops, not
the one trying to sell you something!).
Yet again, if you’re new to momentum-based swing trading and would like more information on the basics such as trend, entries, and money management, email me and I’ll be happy to send you the primer section from
my second book.
I also have an introduction to shorting article for those who are not familiar
with playing both sides of the market.
On Friday, the Nasdaq gapped lower and after initially
bouncing around, it began to sell off hard. It bounced again early in the
afternoon but stalled out and sold off hard for the remainder of the day. This
action has it continuing to melt down out of its recent sideways trading
range.
The S&P put in a similar performance.
Yet again, I think the big blue arrows speak
for themselves. It’s usually about this time that I get hate mail telling me
to shove them up my “arse.” Before you write me, just realize that I have
no control over the markets. I just draw the arrows.
So what do we do?
The market is now VERY oversold.
However, this in and of itself is not reason to buy. If you do try to buy,
oversold will become more oversold. And if you short, it’ll bounce from
oversold. Therefore, unless you are a nimble trader looking to play an opening
gap reversal, avoid initiating new positions. Instead, continue to look to take partial profits
and trail your stop lower (e.g. on stocks mentioned recently such as BTU,
KLAC, etc..).
No setups tonight.
FYI
Once again, I have the recording from Wednesday’s audio/visual show.
I covered many recent examples such as BTU (mentioned above). Email me if you
would like this link the links to prior shows.
Best of luck with your trading on Monday!
Dave Landry
P.S. Reminder: Protective stops on every trade!
P.P.S. Learn my newest and most advanced version of my Bow
Ties Strategy. Click
here for details.