Saturday, October 9, 2010

Swing Trade Idea....DMAN

This is a stock that discovered after running my scans last Friday. After five days of trading it has formed a high probability pattern.

Now on intermediate term time frame the overall markets are very over bought (T2108 above 80) and short term neutral (which is OK but not great) and many leading stocks and speculative stocks including this one are very extended from a price base (consolidation of at least 5 weeks usually formed in the preceding correction). As result the plan for this set up is to take a swing trade and not a position trade. That is, to try and capture the next 3 - 10 day swing not to try and hold on for the next 3 - 6 months!

This stock depending on your account size, stock price and liquidity and stock selection/grading criteria may be a speculative stock for you or a quality stock. This will likely affect the size of the position relative to your overall account that you will be willing to take. In my opinion this is an in between stock and so I will risk about 2% of my account of this trade.

Because the markets are quite extended and has also been quite choppy over past few weeks our expectation for follow through in swing trades has been reduced some what. So one may want to book some profits or all profits at the 3x risk level (which ordinarily would be $11.25 but I would use $11.00 instead since it is the next resistance level on the weekly) depending on how aggressive you want to be.

I would book a third at $11.00 and the 10 day EMA as a rough guide (because it has not closed below the 10 day EMA since its up trend started on August 27th) and/or price exhaustion to exit the other two third. If you exit the entire position at $11.00 you will lock in 2.3 R which is not bad. If you exit a third at $11.00 and get stopped out on the rest you will break even (1/3 X 2.3 R) - (2/3 x 1R). However, if the stock goes vertical and you manage to capture 6R on the second piece of the trade then you profit will be (1/3 X 2.3 R) + (2/3 x 6R) 4.76R or more than double just exiting at $11.00 with entire position. Scaling out will allow us the capture the move if it breaks $11.00 with out offering a low risk set up to get back in with full position.This is the power of scaling out of positions!

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