Sunday, August 29, 2010

Trade management and expectation for follow through.

I recall how during May and June, CRUS set up beautifully (high volume thrust with low volume pause close to 20 day MA) several times. I was afraid to trade CRUS because of the overall down trend in the markets and rightly so! However, I do know from my few years of trading experience that it is also OK to be a bull in a bear market if you know what you are doing!

Every time I enter a trade I am always looking for a 50% to 100% up move. In fact, I have entered several stocks at the start of such moves but never caught more than a 30% move in any single trade. But this is a different issue as this delves into my pre-trade planning (including an exit strategy that will catch the big waves), sticking with my plan during the trade (which I suck at horribly) and repeating hundreds of times consistently (I suck at this too but I have still managed to make money....makes me wonder how much I will make when I get more disciplined...can you say MILLIONS!!!). There would certainly be a few 100% plus moves scattered some where in there.

However, what I wanted to focus on was market conditions and expectations for follow through. Had I been looking at the set ups in CRUS in a bull market then I would certainly have traded them aggressively and would have likely made money. However, because I was a in a bear market I passed. What I have realized in retrospect is that I should have taken these trades but with a much lower expectation for profit and consequently adjusted my take profit strategy!

I have already outlined my plans for when I have low expectations for follow through in the post entitled "

In this market...hit singles not home runs!

". Had I used this trade management strategy I would have made money in CRUS, CSTR and the handful of other stocks that had met my long set up criteria during the sell off.

Now I am very bullish on the markets for reasons outlined in the post "

My stance on the markets and trade ideas for next week".

Although one can reasonable argue that since we are below the 200 day MA, my expectation for follow through should still be low; I do not believe so. The markets were declining violently on heavy volume as was the case for much of May and June but now they have settled nicely with lots of stocks (like RDWR, PAY and SPRD) currently forming and breaking out of well formed bases on huge volume. We have already seen one monster stock: JKS increase over 100% in under two months since the market bottom in early July. I am of the belief that others like BORN, ARMC, PWER, RDWR and PAY will follow its lead. Not only am I seeing alot of bullish price action, I am seeing very few stocks break support and follow through! This is what happens in a bear market and was what I had expected to see after the markets broke down from a wedge and sold off hard on the 13th of August.

So having taken all these factors into consideration, I have decided that I will trade BORN and ARMC aggressively if I get triggered tomorrow. That is, instead of following the conservative method I outlined in the post highlighted above ( in this market...hit singles not home runs!); I will hold onto my initial position and look to pyramid on subsequent set ups in the stocks since I now have moderate to high expectations for follow through as opposed to very low expectations as was the case for May and much of June.

I hope you find this post useful in your own trading.

Good luck and good trading!

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