A Method for Selling
Stockscores.com Perspectives for the week ending April 22, 2011
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In this week's issue:
Knowing when to sell is one of the four things that you need to master if you are to trade the market successfully. Selling is challenging because we get wrapped up in the emotions of taking a loss or not maximizing our profit. Ultimately, it is fear and greed working against us to hurt our trading performance.
Having a succinct set of rules and processes is a big help for any decision that can be affected by emotion. Everyone should establish their rules for entry, risk management and exit as part of their trading plan. Here are some things to consider to help with the exit decision.
First, we need to understand what trend lines, support, resistance, price volatility and trigger candles are. These are each relatively simple concepts of technical analysis which help to provide the signals to exit a trade.
A trend line defines the general movement of the market over time. An upward trend is in place when the bottoms are rising from left to right. These bottoms are the points where price stops going down and starts going up, I often refer to these as inflection points. By drawing a line across the inflection point lows, you can define the upward trend line.
Support and resistance are similar in concept to trend lines; they act as floors and ceilings on price movement. Support is a floor that the market has established over time, it is a low point that demonstrates the minimum investors are willing to accept for the current fundamentals of the company.
Resistance is the opposite, it is a ceiling price which demonstrates the maximum amount investors are willing to pay for the fundamentals over time.
How much price changes over time defines the price volatility for the stock. The more price volatility, the more uncertainty investors have about the value of the company's fundamentals. Investors are confident about the stock's price when a stock is trading with very narrow price volatility. So, a stock breaking from low price volatility is an indication that there is new information that justifies the change in price.
Finally, trigger candles are something that I have defined in the StockSchool course material. They are candles whose range are taller than most of the candles before it. These candles represent a period of time when the buyer or sellers were motivated to push price beyond its normal range. Trigger candles occur on days when the market has a strong opinion.
So, how do we use these tools to tell us when to sell? Here are some rules for selling stocks you have bought, you can reverse them for short selling:
Plan to take a loss on a stock if its price falls and closes below the support price established before the entry signal.
Upward trends take time to develop which means we have to be patient with stocks early in their upward trend. I find it is best to not look for an exit signal (unless you are getting stopped out at a loss) until the stock has doubled its risk amount. The risk amount is the difference between the entry price and the stop loss price.
Once the stock is in an upward trend and has doubled its risk amount, exit the trade if an orderly, linear upward trend line is broken.
If the stock runs far above its upward trend line, the market has become emotional and a pull back to the trend line is likely. To protect profits in this situation, plan to exit if the stock closes below the low of the last green trigger candle.
While these rules are quite simple, they do require some practice to see effectively. I expand upon these rules in the Exit Signals video available in the Online Video Training area of Stockscores.com. There is also a simpler, more mechanical method that does not require any judgment, just the application of logic. I teach that method in the StockSchool Pro course.
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The strongest sector over the past four weeks has been Biotech (ETF symbol IBB). In my day to day trading, Biotech names come up over and over as stocks that are making moves and presenting good trading opportunities.
When doing Market Scans this past week, US Biotech stocks again came up in the results as stocks that were making breaks from predictive chart patterns. Here are three stocks to consider from this sector:
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1. ACAD
ACAD was featured in my daily newsletter at $2.10 earlier this week as it broke through resistance at $1.90. It quickly shot up to 42.38 on Friday before some late day profit taking took it back. I expect that we may see some profit taking continue early next week but the long term chart has little resistance until $4 and then $6. Support right now is at $1.59. Disclosure, I own 48,776 shares at an average cost of $2.199.
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2. AEZS
AEZS is a very liquid Biotech that made a break through resistance this past week and traded strong volume. It breaks from an ascending triangle which I find is one of the most reliable chart patterns. With support at $1.80 and resistance at $3, the upside potential compensates well for the downside risk. Disclosure, I own 100,000 shares at an average cost of $2.146.
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3. NEPT
NEPT came alive on Thursday, trading strong volume and breaking out of a cup and handle pattern. I think it could pull back in the short term, hopefully it does because that will improve the potential reward for risk outlook for the trade. The stock has support at $2.29.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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