You’ve Got A Windfall Profit, Now What?

You’ve Got A
Windfall, Now What?

 

As I’ve mentioned in the
past, 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 you 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 homerun
(through the use of trailing stops).

 

Let’s follow up on Mercury
Interactive (MERQ)
a potential “homerun” (mentioned recently). When we last left off, we were
discussing the fact that it has moved nicely lower (see column archive from
7/19/04). Partial profits could (and should) have been taken and the stop
was then moved to breakeven and trailed on a two point basis. On Wednesday,
the stock imploded. The best thing to do in this situation is to TAKE more
profits. Hang on to a piece and continue to trail a stop but make sure you
lock in the lion’s share.

 

 

 

Once 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.  Also, it has come
to my attention that many of you do not short. I sincerely believe that if
you want to be successful longer-term at trading, you must play both sides
of the market. So, if you would like to learn how to short, email me and
I’ll send you intro that covers the basics.

 

On Wednesday, the Nasdaq
gapped open to its exact high and then sold off for a solid trend day lower.

 

 

 

The S&P also found its high
in early trading and sold off for a solid trend day lower.

This action puts it back
below its 200-day moving average (the blue line below).

 

 

 

So what do we do?
Well, so much for a pullback. This market can’t
even lift its head for more than a day. I guess about the only good thing I
can glean is the fact that the pessimism is so thick, you can cut it with a
knife (I was going to be a pessimist, but I figured it wouldn’t work out).
However, that in and of itself isn’t reason enough to suggests that a bounce
is imminent. Obviously, Wednesday’s action makes an oversold market even more
oversold. And, judging from the after hours news, it looks like we could be
in for more selling on the open. Therefore, since we are so oversold, if
you’re not already short, sit back and wait for the next bounce.

 

As far as setups, for those
with big ones**, Chicago Mercantile Exchange (CME)
looks poised to resume its slide out of a First Thrust. Use caution though
since a) the market is oversold and b) this one can move a half a dozen
points in a flash (therefore, requires a very loose stop).

 

 

 

Best of luck with your
trading on Thursday!

Dave Landry

dave@davelandry.com

P.S. Reminder: Protective stops on every
trade!

P.P.S. My new 20-hour course is now
shipping.

Click here to learn more, or to order..