Friday, February 15, 2013

What To Do When A Position Trade Moves With Velocity

MetaStock SPRS Series - Week 106 - TechniTrader® Stock Discussion for MetaStock Users - What To Do When A Position Trade Moves With Velocity - February 18, 2013
By: Martha Stokes C.M.T.
Many times position traders will suddenly find themselves in a stock that is moving with velocity, running strongly out of a platform while they are holding the stock as a position style trade.

This can be exhilarating and worrisome at the same time. You need to make a decision to protect these sudden profits as most of the time, these big runs will encounter profit taking by large lot traders that can cause big drops in price quickly.

The chart example below is a position style trade. It has been building very nice platforms as it moves up steadily, but during this rally it ran quickly out of the platform and is at risk of profit taking.

Chart 1

This chart example is a young company that started its public debut well with a minor correction after its IPO date and has steadily climbed afterwards, but the recent run is too fast and too steep to sustain. Some large lots are likely to take profits.

Chart 2
Percentage stop losses should never be used for a position style hold, because you are likely to get taken out of a trade prematurely.

The first thing to do is to check the position style Financials and Fundamentals to determine what is driving price so suddenly.

Two things are driving price:
  1. The company announced it is buying back some of its outstanding shares. This is a positive announcement indicating strength in several areas of key importance to position trading.
  2. It tendered an offer to buy for cash debt notes from a lender. This also is a strong statement by the company.
Now that we know what the move has been about, we can determine a plan of action to deal with the price movement caused by these positive announcements.

Position traders always have several choices:
  1. You can sell and take profits.
  2. You can hold with a trailing profit stop that is swing style support levels.
  3. You can hold with relaxed position style profit stop.
  4. You can hold with a tighter position style profit stop.
The most important thing you need to do in these instances where price suddenly moves with strong velocity is first:
  1. Identify why the price has moved fundamentally as this will tell you whether to exit immediately or to continue to hold.
  2. Consider all of your held strategies for dealing with the gains and choose the one that suits your particular risk tolerance, rules for trading, and goals for this stock.
If you plan and prepare, research, evaluated and THEN make a decision on your position trades you will be far happier with the results.

Never react with a knee-jerk action, always know the facts before making any decisions.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner
©2013 Decisions Unlimited, Inc.

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