MetaStock® SPRS Series - Week 162 – March 14, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT
Entering and exiting stock or option trades is a lot like learning how to take off and land a small airplane. The most dangerous times when flying a small aircraft are not once you get up to altitude but as you take off and when you go to land. At both times even small mistakes for example, forgetting to adjust your flaps, maintaining the appropriate airspeed, ascending and descending at the correct angle, and banking properly are just part of the many things a new student pilot needs to remember to take off safely and to land safely.
Both new and veteran traders must also be keenly aware of very similar conditions when entering or exiting a stock. The entry and exit are where most losses occur for retail traders trading stocks and options. The better your entry and exit signals, the higher profits you will earn. Taking time to learn how to properly enter and exit a stock trade is something that will reap huge rewards for many years to come.
Exiting a trade is often a place where emotions are running high, even for a savvy veteran trader of 20+years. If profits are soaring, the euphoria that sets in can make it harder to really see the price action and what is going on. Greed may take over and the desire to get just a little more profit may end up being the decision that wipes out, all of the gains of the past few days for swing traders or minutes for day traders.
For Position Traders, entries and exits are far more forgiving and the gains are significantly higher. Risk is lower and entries and exits do not require the precision of a swing or day trade.
So this lesson is mostly for swing traders.
What you need to remember most about exiting a swing trade is that once you are in profit you need to use trailing profit stops, based on the technical and fundamental support levels on the chart. Fundamental support always is stronger than pure technical support. The next thing you need to determine is whether the run is momentum or velocity. This makes a huge difference in where to place the trailing profit stop.
For the chart below the run is momentum, so the trailing profit stop needs to be below the prior day’s low or at a consolidation area, because the candlesticks are constantly overlapping and the wicks and tails are rather long and frequent. What is happening with this stock is this momentum run was triggered by High Frequency Traders HFTs, and then chased by smaller funds and retail traders. Price is too steep to sustain. The angle of ascent just like an airplane, is causing the stock to lose lift and at some point just like an airplane that goes up on take-off too steeply and stalls falling from the sky faster than it climbed, so too will a stock that runs like this one has.
Many traders will feel very greedy at this point and will want to hold on hoping that the stock will run higher, but there are many details of this chart that warn that holding too long may be a high risk decision in terms of how much profit you keep as the stock falls due to profit taking.
This stock has been under profit taking mode since the black candle of last week. It now has many little weak indecision day candles, these are not hammer candlesticks. These are the newer candlestick patterns that expose how large lots are controlling price even as the smaller funds are buying speculatively. Retail traders are in there also. Balance Of Power BOP is blasting but that is not a Dark Pool giant lot pattern. The Giant lots are selling very carefully so they do not disturb price much. However the stock is losing energy aka volume so this run is exhausted, and at risk of a stall as profit taking overwhelms the small lot buyers.
At this point the exit should be to simply exit the trade, but many traders will hold on rather than taking the profits with the larger lots. Traders often try to “get out at the top” of a run rather than collecting their profits and moving on to a much lower risk trade.
Sure, this stock may push up higher but if you study the chart, you can see that many times HFTs come in and the sell off in one day is stupendous. Since retail traders are not able to trade the millisecond, by the time they enter their sell order, and the order is processed, the stock can move down very fast.
Learning to take profits early and moving on to the next trade is a skill that all traders need to learn.
For more information on Stop Losses go to: http://goo.gl/AtXvPa
Martha Stokes CMT
Chartered Market Technician
Member of Market Technicians Association
Master Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader Stock Market Courses
For additional training visit http://technitrader.com
This Stock Discussion and Training Lesson is sponsored by TechniTrader.com
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