Friday, December 31, 2004

A brief description of the best strategy I have right now.

The buying is done near technically important areas on the daily chart, such as handles and pennants. I enter a small position on the first and/or second "higher low" that a stock makes. The best buying scenarios are where you can identify an ascending lower-channel support line. I will keep buying the smallest lots I can on these ascending lows. If the stock fails to hold the line of support, then I quickly exit some or all of the position. One of the benefits of accumulating this way is that you immediately see a profit if you are right in your buying. Another benefit is that it is very clear when you need to exit the stock, because you were wrong about the low being a "higher low". Yet another benefit to buying this way is that because your position is small at first, you can afford to give it a looser stop than you could with a large position. And the best is that if the stock does break-out, you can hit it with a big break-out buy order to complete your line. As for cutting losses, there are a couple ways to do this. You can place a stop under the most recent support, or you can use your "break-even" price as a stop so that you don't let the gain turn into a loss. Both work well.

For profit taking, I will sell when the stock falls under the following price: 1% less than the 10-day MA as of the previous day's close. You can use whatever MA you want for this, not just 10. I have found that in almost all cases that this price is hit, the run is over and you aren't missing anything by exiting. The one exception seems to be that if you stop out, the following day you can buy back in if the stock rallies strongly on big volume. The MA guidelines should help you determine whether you are right to buy back in or not.

This is the technique that my experiences lead me to believe will work the best for me. Also, keep in mind that this technique is new to me, and not fully tested. It also takes a lot of time monitoring unless your brokerage firm will let you place "if - then" limit and stop order pairs.

I plan to post a few chart examples over the next couple of weeks.

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