Greetings, fellow Pro-fundity team members -
4-28-00 Page Background music:

D. This Week's Guidepost

“BREAKOUTS - 4”

1. Last week we discussed a method to trigger a sell signal when the price chart genuinely turns down, called the RSMA. That is, when the character of the price trend has reversed, it is time to exit. However, the main point in this series on ”Breakouts” is to let our profits run when appropriate. A sound growth stock may see trends with increases of 2X, 3X, 5X, even 10X when the supporting cast cooperates. Can we take advantage of this? Sometimes! We are dealing with the toughest part of trading in the market; When to sell!

2. Buying is easy. We are not under the gun time-wise, we can either buy or not. Sure, we may miss some bargains if we delay, but our trading account doesn’t decrease at that time. And there are always other bargains around the corner. But all that changes when we have money on the line. “The price has dropped, but if I sell now, I will only realize a 6% return. If the price goes up only 45 cents, that return will look like 8.9%! Wow! The technical’s look great. Better wait...” Sound familiar? This is when our “trader-character” emerges. What is our risk tolerance? Now we know.

3. Let’s examine the price chart we have been looking at in recent weeks for a way to minimize that risk.
   
   

4. This shows a great trend, from $18 going into September to $90 going into March six months later. Let’s put a trailing-loss sell order as we move up the ramp to continually protect our increased profits. Sounds simple enough. But how far below the price should we place the sell-stop order? Look at the expanded chart below which shows the price action near the beginning of the ramp in October to see what price would keep us in the stock.
   
   

5. We hit a high closing price of $28.88 on October 20th. The lowest price in the following dip was $21.75 on 10/29/99. To remain long, our sell-stop must have been lower than this price. The table below summarizes all potential sells through the period shown in the first chart above. This is a “what-if” exercise, a valuable technique to understand the personality of a stock. From this table we can see how far below current price the stop-loss must be to prevent a sell trigger before its time.
   
   

6. Moving ahead in time on the price chart, we see the dramatic increase that prompted this discussion. Had we chosen a 30% level for our stop-loss, from the previous table, to keep us long in MCTR through the ramp, we could have recovered 70% of the increase at the top of $142.00 on 7 March. That means a sell-trigger at $99.40, missing a bunch of the profit. So, where is our advantage? The next figure shows our price chart with the addition of trading bands as outlined in our book on page 141. This first chart has an envelope width of 3 standard deviations, which accounts for the volatility of the prices. These are parallel lines above and below the moving average of the price chart. Very simply, when the stock price reaches the upper band, SELL!
   
   

7. Adherence to the envelope sell-rules would bring us over $130 per share, a healthy advantage. The very important point in this discussion is the use of sell strategies together to help minimize our risk. We started with the RSMA technique to stay long in a rising trend. It did that well. However, it failed to get us out without giving back a substantial portion of our profit. We next looked at a trailing-loss exit technique to help protect profit as prices move higher. The level chosen determines how aggressive we want to be, trading on peaks and dips. The closer we set the stop-loss to price, the more often we will trade. Finally, we reviewed an old technique, the trading band (or envelope) which defines the normal price pattern in a trend. When it exceeds that envelope, we know something unique has taken place. In our example above, the jump in price in March was clearly out of the ordinary.

8. The answer to our question of minimizing risk, as we trade in growth stocks that may experience increases between “trading” periods, is one of diligence. Careful study of price charts, using the charting techniques covered in previous guideposts and in our book, can provide the edge the spells the difference between successful and mediocre results. And remember, it is the selection of companies with sound fundamentals that make this problem we have just addressed an issue. May we have such problems often. Stay tuned to for more insights.
   
   

   Recently (12/28/99), eminent stock market chartist and guru Don Worden (founder of TC2000) made the following comment: “Every stock has a personality. You should study a stock's personality before you attempt to come to conclusions about its technical strength or weakness... “

   To Worden’s observation we add a hearty hurrah! That is the purpose of the Rolling Analysis section. It is not to fix buy and sell triggers. It is to help us understand the personality of tickers we are considering to be rollers. This is but one unique and proprietary feature of Pro-fundity that sets it apart from other rolling stock web sites. Properly utilized, this will provide a market sense and understanding of the nature of what we call “rolling stocks,” increasing their successful use to fatten our wallets.

It is our intent to help our subscribers understand market strategies well enough to make informed decisions and understand the risks.

TC-2000 tutorials are available on the home page.