The Trend has Started

The Trend has Started

Once the trend has gotten out of the initial up turn, it becomes much easier to set stop losses. Buying because of a ‘buy’ signal now becomes selling because of a ‘sell’ signal. The beginning of a trend reversal has the additional weight of clearing out all the previous trend sentiment. That is why double bottoms are so prevalent. The initial reversal moves prices up. The sellers, feeling that they are able to get out at a better price, start selling again. Be prepared for the typical bottoming patterns. The advantage of the candlestick signals is that it prepares investors for instantly acting upon a pattern setup.

As a trend begins to move, create your own mental image of what would have to happen to indicate that the forces of the trend have been altered. The review of charts showing turning of trends will give you an idea of what price movements occur, as the reversals get underway. It is visual. Occasionally a sell signal will appear after a few days into the uptrend. The stochastics may be the indicator that reveals that profit taking is occurring and not a trend reversal.

The most important investment defense should be, “When in doubt, get out.” If your original game plan was to trade the position, or hold it for a two- week move, two-month move, six-month move, it makes little difference if you liquidate a trade because it does not appear to be maintaining a direction. There is absolutely nothing wrong with closing out a trade when it doesn’t look good and buying it back when it does, even if it is at a higher price. The hang-up about buying a position, closing it when things look sloppy, then buying it back when all indicators look good again is our own egos. “What if after I sell it, it turns right around and goes back up?” That is what most investors fear. How foolish we would look after selling out of a position, and then it made a major move up without being in it. But that would have been true ten years ago. Back when it took thirty minutes to hear back from your broker and the cost was $250 or more in commissions.

Today, if you decide to get out of a position, or you get stopped out, and then the position turns back up, buy it! Today’s commissions, getting in and out, can be as low as $10.00, maybe as high as $54.00 roundtrip. If you have a $12,000 position on, $54.00 to get out when things looked bad and back in when everything in that price movement looked good again, is very small in­surance to protect your downside.

Our egos get really bent out of shape if there is the possibility of having to get back into a position at a higher price than we got out. How stupid we look! We could have just left our position alone and made out much better. Except for two things:

1.     The position was closed when all indications were that the price could head lower

2.    Look stupid to whom? Over ninety-nine percent of the time, no one else sees any of the trades you put on.

A punch of a button and a bad situation is closed. A touch of a button and the position opens again. If you had to get back in at a little higher price than what you just sold for, so what! The point of maximizing profits is not to make the most on each stock move. Maximizing profits involves making tire most with the invested dollar. Nobody cares that a stock you were in went up ten dollars and you only netted seven dollars. If the probabilities were not always good to stay in the position, the prudent strategy was to be out. The important function of investing is to make the most from your invested dollar, not the most from every trade.

Get in when the probabilities say to get in. Utilize the signal, the stochastics, market direction, sector activity and any other parameter that indicates it is time to buy. Get out when the signals tell you to get out. Sometimes that will be tomorrow, sometimes that will be two weeks, two months, or two years. The signals reveal when the buyers have taken over. The signals reveal when the sellers have taken over. Nothing in the structure of today’s investment world requires you to stay in a position any longer than needed. If a trade does not appear to be doing what it is supposed to after being in it twenty minutes or two days, get out. Go find a trade that has all the probabilities in your favor. There are dozens of profitable trades every day. Once your knowledge encompasses the general thought processes behind the signals and high-profit patterns, your investment acumen will expand immensely.

There is a vast difference in investment philosophy between buying stocks with fundamental potential of going up and identifying stocks that are going up. Most investors live by the theory that a good company held long-term will reap the best returns. This is not the best investment strategy avail­able today. Look at Enron, Lucent, Worldcom Inc., or dozens of other stocks that were tire leaders of their industries just a few years ago.

Today’s market requires today’s investment strategies. Those strategies require the ability to identify when a trade is not working. Use the insights developed by the Japanese rice traders to decide when a trend has been stifled. There is nothing wrong with taking two or three 3% losses, and not taking a 20% loss, to finally get into the 30% gain. Profits should be you ultimate mo­tive.