Another ingredient to a successful investment plan is knowing when to take a profit. I will admit this is one of the hardest parts of the game. If you’re a successful trader you will experience a few large gains every year that will count for the majority of your total gain for the year. If you let fear control you then you may sell too early. On the other hand if you become greedy you may hold on too long and allow your profits to slip away. Below you will see an excerpt from the IBD on how to take profits. I encourage you to use this example when you create your own investment plan.
> A simple, clear-cut strategy is to sell after your stock has gained 25%, unless the stock has gone up 20% in just one to three weeks.
> Stock charts are especially helpful in spotting signs of weakness in stocks, often providing clues much earlier than any fundamental indicators show.
> Remember to check the overall market. If the market comes under distribution and weakens, your stocks will have a hard time making any further advances.
For professional investment advice on this topic contact: Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436
advisors@allgenfinancial.com www.allgenfinancial.com
Every successful investment plan has an exit strategy. Knowing how to sell is arguably more important than knowing how to buy stocks. The below from the Investor’s Business Daily gives key points to think about when trying to protect your position from large losses.
* The first sell rule is to get rid of any stock that falls 8% below your purchase price.
* It’s critical to follow this loss-cutting rule regardless of how highly you value a stock. Personal opinions get in the way of smart selling decisions.
* The larger the loss, the higher the recovery you need to get back to the break-even level. (A 50% loss on a $100 stock, for example, requires a 100% gain to get back to $100.)
* Strong stocks sometimes initially retreat close to their buy point (as determined by the stock’s chart pattern). This doesn’t necessarily mean you have to sell, unless the stock goes 8% below the purchase price.
* Avoid making sell decisions based on tax concerns or commission rates.
For professional investment advice on this topic contact: Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436
advisors@allgenfinancial.com www.allgenfinancial.com
Swing trading is a short-term trading technique where traders are usually in a position for a total of a few days to a few weeks. Swing trading is based on a phenomenom that occurs in the stock market where stocks tend to make equally distanced moves up or down. Swing trading is based on three moves. For the long side you would start off with an up move (A), then a retracement (B) which usually retraces 1/3 to 1/2 of (A), then another up move (C) usually a similar distance as the (A) move. See below for example:
Swing trading is also useful for going short in the attempt to profit from downward moves. For the short side you would start off with a down move (A), then a retracement (B) which usually retraces 1/3 to 1/2 of (A), then another down move (C) usually a similar distance as the (A) move. See below for example:
Now that we know what a swing move looks like let’s look at how to apply a swing trade. First let’s look at the long side. You need to look for a strong upward move followed by a retracement that retraces 1/3 to 1/2 of the previous move. Then, once the retracement appears that it is reversing and going back higher place a buy order. Once you’re in the postion place a sell stop below the previous lows of the retracement to protect yourself on the down-side. Look at the following illistration:
For a short trade you need to look for a strong downward move followed by a retracement that retraces 1/3 to 1/2 of the previous move. Then, once the retracement appears that it is reversing and going back lower place a sell short order. Once you’re in the postion place a buy stop above the previous highs of the retracement to protect yourself on the up-side. Look at the following illistration:
Swing trading is simple and effective! You can also use swing moves to come up with up or down price targets for the next move in the stock (reference the previous blog titled “Dertmining Price Targets”).
For professional investment advice on this topic contact: Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436
advisors@allgenfinancial.com www.allgenfinancial.com
There are a number of technical patterns that you can use to determine price targets. In my experience there are four patterns that work really well: Head and Shoulders, Triangles, Rectangle Bases and Swing Trades. All of the following examples will give you examples of upside targets for going long, but the inverse is true if you’re trying to calculate downside targets when going short.
Let’s start with the Head & Shoulders Pattern: To be precise a bullish Head & Shoulders pattern is called a bottom-reversal Head & Shoulders and is inverted from the top reversal head and shoulders. To calculate your price target you take the difference between the bottom of the head and the neck line. Once you come up with that number you add it to the neckline to come up with an upside price target.
The next set of patterns you can use to determine price targets are triangles. There are three types of triangles; Ascending, Descending and Symetrical triangles. The way you determine the price targets are the same for each triangle. You take the distance of the apex of the triangles and add it to the breakout point from the traingle to determine your targets. For shorts you would subtract the distance of the apex to the breakdown. To study further click on the links above as stockcharts.com gives great examples.
The third pattern I want to discuss on how to determine price targets is the Rectangle. Determining the price target for the rectangle is relatively simple. You take the difference between the top and bottom trendlines and add to the breakout for longs or subtract from the breakdown for shorts.
The last targeting method is the swing trade or sometimes called an A,B,C pattern because there are three parts to the pattern. I will only focus on the long side and on how to use this pattern to come up with a target, as I could write an entire blog on swing trading alone. The basic pattern includes the first up move (A), followed by a pullback (B) (this pullback can not go lower than the start of A), then a second leg higher (C). To come up with the upside target you would take the distance of the (A) move and add it to the bottom of the pullback (B). See example as it is better understood visually…
For professional investment advice on this topic contact: Allgen Financial Services, Inc.
888.6ALLGEN (888) 625-5436
advisors@allgenfinancial.com www.allgenfinancial.com
When entering a position you should know what your attempting to make on the upside (reward) versus how much you can lose on the down side (risk). My personal minimum reward-to-risk-ratio is 3 to 1. Which means I’m attempting to make three times as much as I’m willing to risk. Theoretically, all variables aside, if you are to implement a 3 to 1 reward-to-risk-ratio you can be wrong 75% of the time and still break even. Some of the best traders in the world are wrong more than they are right. However, when they are right they are right big and when they are wrong they keep there losses small.
How do you figure out your risk-reward when going into a trade? Your risk is the easier of the two to see. You look for nearby support where you can place a sell-stop below, the diferrence between the current price and the sell-stop is your risk. Trying to figure out your upside potential (reward) takes some knowledge of technical anlaysis. You have to know how to calculate your upside targets bases on chart patterns, which I will discuss in the next blog. Once you know your upside target you subtract that from the current price and that is your reward. Then, take the reward figure and divide by the risk number and you will have your reward-to-risk-ratio. My rule of thumb is a ratio over 3 is worth considering, below 3 look else where. Stay tuned to the next blog to calculate upside targets…
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