Now that we've got some basics down, let's look at something more complicated. Like any technical indicator, crossing the 50-day MA is not a blatant buy or sell signal.
Welcome
The Ascending Triangle
We slept well that night, without the fear of the stock gap the next morning. The next morning the stock gapped lower, which would cost us several points.
The Descending Triangle
To be safe, we like to cover a portion of our position to lock in a profit. In this case, the stock closed at the lowest levels on any good day.
The Uptrending Channel
The second method is to place a limit buy order at the bottom of the channel and "catch the bounce". On the other side of the trade, we place our limit sell orders just below the resistance level at the top of the channel. With the buy-stop method, we wait for the stock to either close at the lowest level of the channel or bounce off it during the day.
Some traders may try to short the stock when it breaks the channel low.
The Downtrending Channel
The most conservative way to close a position is by placing a limit buy order along point 1, the bottom of the channel. You would then buy short the next day using a sell stop when the price broke through the low of the failed day. But by using short sell limit orders, you could enter near the top of the trend line.
We would close our position by partially predicting a move to the downside of the channel and placing a limit buy to cover the orders.
The Bullish Flag
After the flag is formed, your goal is to get in outside the flag. In this example, FLEX left the flag at point 3, where we would have entered. Over the course of the next eight days, we made a 10-point run using our 1-point trailing stop.
After entering the stock on point 3, the high volume breakout day, PMCS traded up more than 20 points.
The Bearish Flag
At point 3, the stock suddenly moves lower on strong volume and we take a short position in the stock. You can see the value of using trailing stops on the next day, when the stock quickly moved 6 points. The bearish flag formed on the charts during point 2, after PMCS made a sharp move down.
At point 3, we would take a short position based on the movement outside the flag.
The Basing Pattern
HOMS broke out of the top of the base at nearly four times its 50-day average volume. The aggressive trader would have started on the first breakout when he saw that the move was supported by strong volume. The conservative trader would have come in on the second day and made a 3 point profit by using a trailing stop.
The Symmetrical Triangle
Conclusion
By now you should have some familiarity with some of the basic trading tools we use. You should be able to see patterns like flags, triangles and bases from any chart on any time frame ranging from 5 minutes to weekly. For example, when you see strongly trending stocks, whether they are moving up or down, you should immediately be able to see any flag patterns on pullbacks or triangle consolidations.
You also need to know how and where to enter trades from those setups, just like we both do, day in and day out.
Insights From the War Room
TradersWire consists of two main components, the Java applet and Insights from the War Room. Our analyst mentioned in the warning that KSS is in the third consecutive day of pullbacks from the high suggesting that this is a possible 1-2-3-4 setup. As mentioned in the warning, the stock traded above day three's high on the next trading day - indicating a reversal.
SONS broke out of the pennant, which told alarming traders to go long on the stock.
Intermediate Term Setup
Scrolling Java Applet
This is just one of the many intraday setups we find for our subscribers every day. In the following pages we will use specific examples to show how you can use alerts to find intraday setups, as well as position trading setups (swings), which may require holding positions overnight.
How to use the alerts
Moving averages
The next trading session we saw GILD trade higher and close above the 50-day MA again.
Silicon Storage Technology (SSTI)
Looking back, it has been consolidating below the 50-day MA for several trading sessions and finally closed above it a day ago. The following day was a wide range day with the intraday low below the previous day's low. Aggressive traders may have taken action to short this stock, while more conservative traders await further confirmation.
Two days later, SSTI broke below the intraday low of 7/19/00, giving me confirmation of the continuation of the downtrend.
Daytrading using the moving averages alert
Intraday Momentum Reversal
Stock goes positive/negative for the first time)
New Focus, Inc (NUFO)
Brocade (BRCD)
Using series of “goes positive/negative” alert to gauge the market strength
NDU0 broke out of consolidation again (another entry point) and into positive territory for the day. Note that there were still a lot of big tech names missing from the "first-time positive". Experienced traders would start going through his list of stocks, especially those in the Nasdaq 100 index, that had not yet turned positive.
PMC - Sierra (PMCS)
Two-month/52-week high/low and volume alerts
Continuation
Volume alerts
GILD
Extreme Networks (EXTR)
We were alerted that EXTR hit a two-month high just four minutes into the trading day. The stock has broken out of the top of the triangle accompanied by strong volume, indicating that buyers have returned and it is time to enter the stock. Looking at the chart, we saw that the stock pulled back near our first entry level and was trading in a tight range.
Now that we've shown you how to trade the new highs with volume alerts, let's see an example of pure volume play.
Paine Webber (PWJ)
Look at the left side of the chart, you will see that PWJ tried to break out of the red line twice and failed. After the PWJ broke above the line, the resistance level became support for the stock. Paine Webber Group (PWJ); The stock had enjoyed an uptrend before pulling back, then rallied in price on Tuesday.
Any aggressive trader is likely to start a small position on the stock if he/she likes to speculate.
5% Higher/Lower alerts
Sanmina (SANM)
I2 Technology (ITWO)
Pullbacks
COR Therapeutics
We saw CORR hit a new 52-week high and close near the previous trading day's low. The stock started to rise the next trading day, reaching a high of 7/14/2000, indicating that there was buying interest. This is an example of a position trade whose result was not ideal because the CORR did not follow the upside.
Daytrading pullback alerts
The red line indicates the price is 10% off the 52-week high set the previous day. We will be ready to short it if it breaks, and go long if it breaks out.
Triple 9s
Program buying/selling
Using the Search function
It's also wise for any beginner to go back and read the Insights from the War Room commentary to see how our analysts interpret the stock's action. We've shown you how to use TradersWire to help you find profitable setups.
Just How Important Is Money Management?
Keeping Losses to a Minimum
Discipline and Consistency
The stock may drop another 2 points, at which point you'll have a bigger loss and feel pressured to make a decision when you're even deeper underwater. Now, if you would have sold the same stock when you planned and it dropped another 2 points, then you would feel relieved that you were out. More importantly, your mind would be clear, you wouldn't have to make another decision with your money on the table, and you could make a new plan.
Take it from us, after thousands of trades it is much easier to make a decision when there is no money on the table.
Always use Stops
If a stock reaches your stop loss point and it is time to sell, it is important that you stick to your plan. For example, if you decide to sell a stock, if it drops 1 point from your entry and you don't execute your plan, what can happen. Remember that you can always buy back the same position if it triggers your registration a second time.
Remember To Trail Your Stops -- Example 2
Silicon Storage (SSTI)
Using Initial Stops With Swing Trades and the Intermediate-Term -- Example 1: New Focus (NUFO)
For those who bought in on the breakout and used a proper trailing stop, you would have made a nice profit (10+ points if you carried the position to the next day).
Trailing Stops
Why We Trail
We entered this trade based on the "withdraw 10% from high" alert on our TradersWire news applet. Following our general guideline of trailing stops, traders would have been stopped on the same day with 1 point of profit. If no trailing stop had been used, we would have lost all our profit and then some, as our initial stop would have been taken out the next day.
Thanks to the stop, you would only feel a bit of the drawdown that came later.
Adjusting With The Market
Instead of placing your stop order with your broker, you will need to close your position manually. For example, if you decide to use a 1-point trailing stop, but know that you may want to adjust it slightly based on other market factors, you can simply use a mental stop. When you decide it's time to close your position, you'll need to sell your shares either with a limit or market order at a loss.
What Do You Do If You Get Stopped Out?
Stopped Out? Let's Go Again -- Example 1
Corning (GLW)
Again, just to demonstrate the importance of an initial stop, position traders buying from the short-term cup-and-handle base (D) would have stopped with a decent stop loss. Not only would the stop loss have saved a trader a loss of 60 points on paper (if the stock had never sold), but more importantly, it would have saved the trader almost two and a half weeks. of mental torture, waiting for GLW to recover later.
Stopped Out? Let's Go Again -- Example 2
Hyseq (HYSQ)
The Worst-Case Scenario -- eToys (ETYS)
Do Not Believe The Hype
Diversify
The next day, ETYS opened nearly 6 points higher and immediately reversed to the downside. If you are a full-time trader, you may need to allocate a larger portion of your capital to the trading portion. For example, if you've owned Cisco Systems stock for the past three years and you see the stock setting up for a new high breakout, it may be difficult to buy the stock.
Next week, you'll have an opportunity to test your trading knowledge in an interactive online quiz.
Welcome Back
Most investors and traders love to buy stocks that are making new highs on high volume as it indicates that the stock is in demand. Fellow traders should take advantage of this by watching for any sign of continuation as the stock takes out the previous day's high (A) to enter the stock. When your buy price target is above the stock's current trading price, use a stop buy order.
Use Limit order to buy if you want to buy the share at a lower price than the market.
