PART THREE Practical Examples203trailing my stop, I’ll be frustrated for turning a 3/8- to

PART THREE Practical Examples 203 trailing my stop, I’ll be frustrated for turning a 3/8- to 1/2-point gain into a 3/8-point loss.” Traders must rid themselves of such thoughts. Instead, as the stock is climbing they should be planning their exit strategy, “Okay, the stock is positive. I’m either going to keep the stop at $215/8 or trail it to breakeven. I don’t want to take a 3/8 loss on a failed breakout. I’d rather take the flat trade. Maybe I’ll use $2115/16 so that, if $22 fails, I take a small loss but my break of the $22 stop is confirmed.” The idea is that traders have to have the exit strategy. This lets them focus on the stock activity as the stock moves. Cluttering their minds with thoughts of profit and loss does not allow for clear thinking and the appli-cation of tape-reading principles. The less they are focused on the action itself, the more their emotions control the trade. Successful traders must maintain self-control at all times. They must define their strategy and exe-cute it when the time comes. Fortunately, in this case, the $22 held. At this point, the former resis-tance of $22 now has changed to support. For me, if there were any signs of selling at $22, and I would have exited the trade. With $22 as our stop, we wanted a move to over $221/2 to occur. In the chart, we again see a volume increase as well as the break of $221/2. At that moment, holders of the stock began to consider exiting at least half their shares above the $221/2 level into strength. $223/4 is a good level to sell into strength on the price and volume increases (line 2). Holders would trail the stop to $221/2 as we broke over $23. The next few volume bars from the point at which we took half our shares began to fade. The slowing pace of buying with decreasing volume indicated that the top of this stage of movement was near. We now wanted to look for a price to exit our remaining shares. As the stock moved over the $231/2 level, buying dried up considerably (line 3). We saw a drop in the bid to $231/2 and then $233/8 within minutes. If you waited and didn’t exit into strength, you would have to go as low as $233/8 (circle 4). The lesson here is that exiting after confirmation of the top is more difficult. Those who wished to hold the trade longer were stopped out later at $221/2 on the trailed stop represented by the circle. 204 PART THREE Practical Examples E X A M P L E 1 7 Jump-Base–Explosion (JBE) Setup In Figure EX17, let’s first look at the time period just before 10:30 where the stock moved from $291/2 to $30 on a relatively good volume spike. Unfortunately, I missed the pickup in pace at the $291/2 level. What we saw next was a tight range. The shallow pullback and the absorption of selling suggested a possible continuation of the uptrend. I allowed the stock to define its range from $30 to $293/4. F I G U R E E X 1 7 Jump-base–explosion (JBE) setup. (RealTick graphics are used with permission of Townsend Analytics, Ltd.) PART THREE Practical Examples 205 I wanted to play it for breakout, so I made a choice to buy the bot-tom of the minirange at $2913/16 with a stop at $2911/16. The range was too narrow to scalp in, so I planned to hold the stock for the breakout of the high. Bidding the low of a minirange assumes bid strengthening. If the bid appears to be weak and a break of the low is imminent, then we need to understand the strong possibility that the stock will not hold the low of the minirange, and we need to pull our bid. In this case support was pretty strong as the stock neared the low of the range. As you can see on the chart, the price spiked to the $301/4 to $305/16 area and then got stuck there. At this point in the trade, when it looked as if the breakout was going to fail, I started to feel nervous about continuing. At the same time I had a fairly good cushion thanks to my entry at the low limit of the range, so I held it with my original stop in place. The pullback after topping in the $301/4 area came to $297/8, and I put my finger on the mouse and got ready to exit. Support held and the stock upticked off this level. As the stock went over $301/4, I decided to raise my stop to $30, not allowing my profit to disappear. The ascending line in the bar chart shows a moderate price spike. The circle shows the area $301/2 to $305/8 where I exited half my shares. The stock had another shallow pullback after my exit. Selling was again being absorbed. I tested the $305/8 level again and broke it. Notice the ascending line in the volume chart indicating a large spike. I wanted to look to exit the remaining shares on this larger volume. I chose the area of $303/4 to $31 as a reasonable exit area. On the break of $303/4, the stock hit a high of $31 but there were plenty of sellers on the ask at $31. I exited at $307/8, taking fairly good profit on the second half of my shares. We can see on the chart that during the next 15 minutes or so the stock climbed to $311/2. So by exiting into the volume spike, I left about a 1/2 point on the table. However, on breakout trades, we never know how far they will go. By trading within these ranges, trailing stops, and fol-lowing tape-reading principles, we can bring order into our trading and let the rest of the profits go to those who see things differently. 206 PART THREE Practical Examples E X A M P L E 1 8 Drop-Base–Implosion (DBI) Setup ADC Telecommunications (ADCT) (see Figure EX18) closed right below $19 on the previous day. It opened with a slight gap up. Approximately 20 minutes after the open it hit $19 again. That was a short signal for ADCT. At that moment someone asked me if it was a good time to buy ADCT. Apparently, “buy low, sell high” was deeply ingrained in his trad-ing. I told him that I had just sold it short, and I explained that the “buy low, sell high” principle was in direct contradiction with another: “Trend is your friend.” If you go with the trend, why would you want to buy low or short the high? If a stock is trending down, wouldn’t buying the low be fighting the trend? Every new low confirms the continuation of the trend and should be shorted, not bought. The same goes for shorting of strong stocks. I am sure that you have seen plenty of examples of traders getting killed trying to pick the bottoms or tops. Trading is not about picking tops and bottoms; trading is about determining the trend. Actual buying and selling points within the trend need careful consideration as you try to either pick up the shares at the bottom of a pullback or at breakout level or go with some kind of hybrid, buying half of your position on the bot-tom and adding to it on breakout. Is there a situation in which you buy low and sell high? Yes, there is. You can do this when you have determined that the stock is trading within the range, not trending. But, as soon as the range is broken, you have to switch to another kind of trading: Buy high and sell higher or sell short low and buy back lower. This is why traders who go with “buy low, sell high” do poorly in a trending market. I have seen (and I am sure you have, too) plenty of them getting killed during the huge market run-up of 1999 through early 2000 as they tried to short the tops. The same happened to those who tried to buy bottoms during the market decline in 2000–2001. Let’s return to the ADCT chart. I shorted ADCT when it broke $19 to the downside (trade 1 on the chart). I placed a stop at $191/4 because the stock unsuccessfully tried to penetrate this level during a weak attempt to bounce, so $191/4 became the natural resistance. ADCT broke down pretty quickly. At around $18 it showed some support, and I had covered the short in full. I watched it going down more, and, later on, ADCT found more support at $171/2. It made several weak PART THREE F I G U R E Practical Examples 207 E X 1 8 Drop-base–implosion (DBI) setup. (RealTick graphics are used with permission of Townsend Analytics, Ltd.) attempts to bounce from this level, and then the volume dried up. Unsuccessful attempts to bounce led me to the conclusion that the down-trend was still intact, and another short signal was generated (trade 2). It took traders of ADCT about 20 minutes to realize that the stock was des-tined to go down. I covered it just below $161/2. Note the volume spike as ADCT went down to $16. That was capit-ulation: fast selling on sharply increased volume which usually indicates the end of selling and offers a reasonable expectation of a reverse. This is ... - tailieumienphi.vn