Great Trades
Tony Golan
Chief Technical Analyst
StockProfit.com™
The challenge is about the same for everyone: You have a certain amount of money, you want to use that money to make more money, and you think the stock market is the perfect medium for it. If you want to take your money and turn it into more money, you will have to take risk, and if you take risks, inevitably, you will have some losses.
If you're good, doing a lot of trades over a long period of time and different market conditions, you will make money on a little bit more than 50% of your trades. That means that if you're really good, you will still lose money on a little bit less than half your trades. Knowing that going in, you must do all you can to minimize your losses, and you cannot let any one loss knock you out of the game.
One of the truest of Wall Street adages is "Cut your losses short and let the winners run", yet I have not met many people that actually practice that as part of their trading plan. There are many reasons for this, but this is not the subject of this article. The point here is that if a trade is not going to work out, you want to find out about it as soon as possible and get out with as small a loss as possible.
For simplicity's sake let's say you'll make money on 50% of the time and lose money 50% of the time. It doesn't take a mathematical genius to understand that if you average $1000 gain per trade and $1000 loss per trade you will actually lose money due to commissions. Similarly, it also doesn't take a math genius to understand that if you average $2,000 gain per winning trade and $1,000 loss per losing trade, you don't even have to be right 50% of the time to be profitable.
For example, in 2007, I did 22 intermediate-term trades. Of those, 11 were losses, averaging a 7.7% loss per losing trade. The 11 trades that resulted in gains averaged an 18.1% gain per winning trade.
Also, in 2007, I did 31 swing trades. Swing trades are shorter-term trades, resulting in smaller percentage losses and correspondingly smaller percentage gains. Of the 31 swing trades, 16 resulted in losses, averaging a 2.7% loss per losing trade. The 15 winning trades averaged a 6.4% gain per winning trade.
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The above graph was generated by TradeStation, showing the actual profits generated by a $50,000 account that traded only the swing and intermediate-term trades that were issued in the Momentum Stock Trader from June 2007 to June 2008, showing a 30% gain in the account during a time in which the Dow lost more than 13%. What is actually just as important as the 30% gain in an otherwise tough year was the consistency of the up-trend in profitability. This is done over 75 opened and closed trades (150 transactions), in different market environments.
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By far, the best trades for cutting the losses short and letting the winners run are intermediate-term trades. Intermediate-term up-trends are up-trends that last from 3 weeks to 3 months. That's enough time to allow a major move to materialize, and the intermediate-term buy signals attempts to buy the stock at the end of a correction against the trend, and the beginning of the next up-leg. In effect, the intermediate-term buy signal says the stock should go up to a new high from where you buy it without first going below the most recent low.
Like I said before, the average loss on an intermediate-term trade in 2007 was 7.7%. Therefore, a 20% gain or better within three months would be a good gain on an intermediate-term trade.
For example, in the spring of 2007, TBSI, which was already in an up-trend, started trending away from its 200-day moving average. RSD crossed above the 25% threshold, signaling that this stock was stronger than the rest of the market and was a good candidate for a buy if the right setup materialized. TBSI kept trending higher, going from about 10 to a high of 24.36 without any significant pullbacks to speak of. Once it hit a high of 24.36, however, TBSI pulled back slowly and mildly for 5 trading days, hitting a low of 20.21 on June 12th, then reversed back up with a white candlestick and above-average, rising volume on June 13th. The stock was oversold and this was an intermediate-term buy signal.
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The high on June 13th was 22.47. If TBSI went .02 above that high, we wanted to buy it. After we buy it, if it then goes back below the June 12th low of 20.21, the stock will indicate it is not going back up to the highs and that we were wrong on the timing, so our protective sell-stop will go at 20.16, 0.05 below the most recent low, where I drew the horizontal blue line on the chart.
That night, I issued an intermediate-term buy to subscribers of the Momentum Stock Trader. The order read: "Buy TBSI @22.49 Stop 23.49 Limit GTC. Once executed, place an order to sell TBSI @20.16 Stop GTC".
The next day the order triggered and we bought TBSI @22.49. The chart below shows what happened in the following month. Remember, the horizontal blue line on the chart indicates where the initial sell-stop was placed.
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After rallying from 22.49 to a high of 33.18, TBSI turned back down with a long black candlestick and above-average, rising volume. Although TBSI did not close near its low of the day, we went ahead and took the profit, getting out the next day at the open at 29.98 for a 33.1% gain in just under a month.
About a month later, CPHD which was also in a strong up-trend, made a new high of 16.39. It then and pulled back slowly, became oversold, and made a higher low of 14.27, then turned back up with a white candlestick bullish reversal pattern on above-average and rising volume. This was an intermediate-term buy signal as well.
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That night, I instructed subscribers to the Momentum Stock Trader to buy CPHD. The exact trading instructions were to "Buy CPHD @15.41 Stop 15.91 Limit GTC. Once executed, immediately place an order to sell CPHD @14.22 Stop GTC". If CPHD goes back below the 14.27 low after we buy it, it will invalidate the up-trend and would then be unlikely to turn back up and rally to new highs. Once again, I drew a horizontal blue line on the chart to show where the sell-stop was placed.
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The chart above shows how the trend in CPHD unfolded after we got in. On November 7th, market averages confirmed they were in intermediate-term down-trends and there was too much risk in continuing to hold our intermediate-term positions. I instructed subscribers to the Momentum Stock Trader to exit all long positions at the open on November 8th, 2007. We sold CPHD @23.81 for a 54.3% gain in 3 months.
Sometimes, the exit signals on these intermediate-term trades are much clearer at the top. About five weeks after getting into CPHD, DRYS, which had been one of the best-performing stocks of 2007, made another new high of 78.74, then pulled back slowly. On September 18th, DRYS declined to a low of 66.56, then reversed back up and closed above the open and above the previous day's high with a white candlestick and an outside day pattern (a day in which the stock makes a lower low and a higher high than the previous day) on rising volume. This was a perfect intermediate-term buy signal in what was then one of the best-performing stocks.
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That night, I instructed subscribers to the Momentum Stock Trader to buy DRYS @74.02 Stop 75.02 Limit GTC, and once executed, to place an order to sell DRYS @66.61 Stop GTC. If DRYS were to go up to a new high, it would go straight up without going back below the low of September 18th outside day pattern.
The next day, DRYS opened above our buy-stop price and we bought the stock @75.00. That proved to be the right time to enter this stock. The following chart shows what happened to DRYS after we got in.
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DRYS shot straight up, but after rallying for close to a month, it made a bearish reversal pattern on declining volume on October 11th. The stock continued to rally, made another new high of 130.48, then reversed back down sharply with a bearish reversal pattern and above-average, rising volume. That night, I instructed my subscribers to sell DRYS at the open the next day. For your convenience, I drew a horizontal blue line and the word "Sold" above the candlestick with the bearish reversal pattern that told me to sell.
The next chart shows the next two months of the price action in DRYS. Although it initially flirted with higher highs after we exited, that proved to be the right time to exit DRYS, too. I have always believed it's better to sell a stock a little too early than a little too late.
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Trading cemeteries are absolutely full of traders who bought a stock for a short-term trade but failed to sell when the trade didn't work out and kept holding it, wishing and praying that it would somehow come back, but it never did and therefore a short-term trade turned into a long-term investment, in many cases never coming back in the lifetime of the actual investor.
There is no greater trading sin than to let a short-term trade turn into a long-term investment. When you're dealing in short-term trades, you don't have the luxury of time or of sitting through big adverse moves.
Swing trades are short-term trades. As such, the average losses are smaller than in intermediate-term trades, and so are the average gains. In 2007, we did a total of 31 swing trades. Of those, 16 resulted in losses, averaging a 2.7% loss per losing trade. The 15 swing trades that resulted in gains, however, averaged a 6.4% gain per winning trade. That means the average gain is more than 2.3 times the average loss. Again, you don't have to be a math major to figure out that if you keep taking all these trades with the same amount of money per trade, you will come out ahead.
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Remember, swing trades are short-term trades, lasting from two days to three weeks. If the average loss on a swing trade was 2.7% in 2007, any gain over 10% in three weeks is a good swing trade. A gain of over 20% would be spectacular but doesn't happen very often.
In late September 2007, OMTR had been in a strong up-trend. The stock made a new high, then pulled back slowly for 4 trading days. After the fourth day of the pullback, it was time to anticipate OMTR to turn back up.
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That night, I issued a swing-trade buy on OMTR. The swing trade buy instructed my subscribers to buy OMTR @29.02 Stop 30.02 Limit with a protective sell-stop @27.48. In other words, we placed an order to buy OMTR when it went 0.02 above the previous day's high and placed a protective sell-stop 0.03 below the previous day's low. Now, if OMTR went above the previous day's high, it should rally to a new high without going back below the previous day's low. If it did go back below the previous day's low, the short-term up-trend would be no more and there would not be any reason to stay in OMTR.
The chart below shows what happened after we got into OMTR. I drew blue horizontal lines above and below the day prior to the entry for ease of recognition.
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OMTR rallied pretty good after we got in, never declining below the low of the previous white candlestick that made a higher low and a higher high, and therefore continued trending up. On October 5th, where the above chart ends, it made a low of 32.91, and again closed above the open with a white candlestick that made a higher low and a higher high. We moved the sell-stop to 32.88, 0.03 below the low of October 5th. The next chart shows what happened after.
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OMTR couldn't go any higher. After three more days of consolidation, OMTR turned back down and declined below our stop, and we sold OMTR @32.88 for a 13.1% gain in slightly over two weeks.
Another example of a good swing trade was ANW. Only a couple of days after we got into OMTR, ANW presented us with a perfect swing trade setup. Like all other swing trades, ANW made a new high, then pulled back slowly for 3 trading days. Once again, it was time to anticipate the turn back up.
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That night, I instructed subscribers to the Momentum Stock Trader to "Buy ANW @32.27 Stop 33.27 Limit Day with a protective sell-stop @29.97".
The chart below shows what happened after we got in.
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ANW shot straight up and through our buy-stop-limit order and ended the first day near its high. The next day, ANW was up again, closing slightly above the open and off the high of the day with a Shooting Star pattern, indicating a potential loss of upside momentum. That night, we raised the sell-stop on ANW to 36.33 in accordance to the risk-control plan for swing trades. The next day, we were stopped out of ANW at 36.33 for a 12.4% gain in 3 trading days.
By far, the best swing trade of 2007 was in SID. In August 2007, SID made a low at the 200-day moving average, turned back up and rallied to a new high of 61.53 (The above chart reflects a 3:1 stock split in SID since then), or 20.51 post-split, then pulled back mildly for three trading days that made lower highs and lower lows. If SID now turns back up and goes above the high of the third down day, it will be likely to run up to new highs. So, we would want to buy SID whenever it goes 0.02 above the high of the previous day, then place a protective sell-stop below that day's low. Then, at the end of every trading day in which the stock made a higher low and a higher high than the previous day and closed above the open, we would move up the stop to 0.03 below that day's low, and keep moving it up and let the winner run as long as it could go.
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That night, I issued a swing trade buy on SID to subscribers of the Momentum Stock Trader. The instructions were to "Buy SID @59.97 Stop 60.97 Limit GTC. Then, place a GTC sell-stop at 58.38". That's the post-split equivalent of buying SID @19.99 and setting the stop at 19.46.
The chart below shows what unfolded in the next two weeks.
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SID had rallied up to a new high of 75.60 (25.20 post-split) with a white candlestick (meaning it closed above the open) that made a higher high and a higher low than the previous day. In accordance with the risk-control plan for swing trades, we raised the stop to 71.02 (or 23.67 post-split). I drew a horizontal blue line below the stop. The next chart shows the price action for the next two days.
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SID did not go any higher. On October 3rd, we were stopped out of SID @71.02 for an 18.1% gain in just under 3 weeks. Clearly, the short-term pullback in mid-September provided an excellent trading opportunity that truly cuts the losses short and lets the winners run.
If you have reached this paragraph, you must be very committed to trading successfully. Trades like the ones described above can start coming to you right away. To become successful using the Momentum Stock Trader, you need to subscribe to the service, divide up your money properly, then patiently take each and every single swing and intermediate-term trade with equal dollar amount, and resist the temptation to do trades that don't fit our strict parameters.
Click here to subscribe to the StockProfit Momentum Stock Trader service and let's get you on the road to profitable trading.
Tony Golan
Chief Technical Analyst
Disclaimer: Copyright© 2008 StockProfit. All rights reserved. StockProfit is an independent electronic publication providing information on select public companies. StockProfit is not a registered investment advisor or broker-dealer. There is a risk of loss in all of trading. Past performance is no indication nor guarantee of future results. The information contained herein is believed to be accurate.This update is provided as an information service only, and the statements and opinions in this update should not be construed as an offer or solicitation to buy or sell any security. In no event shall StockProfit and/or its publisher, Pan American Relations, Inc. or any of its employees or affiliates, be liable for any direct, incidental, consequential, indirect or punitive damages whatsoever arising out of the use of the Information, or for any errors or omissions in the content thereof, including, but not limited to, from any investment loss, damage or expense incurred by any investor resulting from the Information, or from the purchase or sale of any profiled company or any company which we make commentary. We recommend using good-'till-cancelled stop orders to minimize losses in the event of an adverse price movement. We have not been compensated by company(ies) mentioned above in any way. We do not hold any positions whatsoever in the above mentioned company(ies).
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