Timing a Trade - An example
I've had several requests to show an example of a stock that I traded that was posted on this board and meets the criteria set out at the home page. The stock that I'll review is YHOO. Checking out messages #3 and #22 for comments made on YHOO. As a reminder, this one split so make the necessary adjustments.
Items 2,3 and 4 are stock specific so I'll address them first.
Item 2: Determine which stocks are stronger then the trend of the market. This one is easy. YHOO jumped a major creek and went on to new highs before retracing back to the edge of the creek. During the same period of time the market was moving to lower highs and lower lows.
Item 3: Determine which stocks offers the best potential for the time frame of one's speculation. Since we are in a trading range, it's normally best to trade for the short term. Looking at the $27 line, a potential count of $6 offers potential targets of $32 to $33. Any position taken in the $29-$30 area offers a 10% return.
Looking at a potential intermediate term speculation, should the market move through the top of the trading range, YHOO offers targets to $39 1/2. This offers a potential 35% plus from the same $29-$30 area. Of the stocks mentioned on the board this is one of the better prospects.
A question that might arise is why consider the intermediate term if we are focusing only on a short term trade? There are two reasons. First, should the market continue to move to the upside after the market indicates a buy, a stock that offers better intermediate term prospects then other similar situated short term candidates is more likely to continue it's move to the upside.
Second, it offers a means of determining which stock may be the strongest if there are more candidates then you wish to speculate in. One of the important factors in achieving higher returns over a longer period of time is to focus your funds in a limited number of issues. Spreading out across too many issues dilutes the gains. Diversification can be overdone, so it's important to try to recognize which issues are the strongest. Higher intermediate term potential provides evidence which assists the speculator in determining which issue may be best.
Nevertheless, it is important to make sure that even when using intermediate term targets to assist in separating the issues, the trade is being made for the short term. The only way it will become an intermediate term trade is when the trailing stops (exits) that are being adjusted upward as the stock moves up aren't hit.
Item 4: Determine which stocks are most ready to move, those on the "springboard". It doesn't get much better when looking at YHOO. A jump of a major creek and then a backup to the edge of the creek as the market moved to new lows. The touching of the new demand line, formed off the lows from mid-March that connected with the LPS on 3/24 and on the back up to the creek in late April, on several occasions while the new short term uptrend continued as the market declined. On several of those days minor moves to the downside were on substantially decreased volume and spread. All of these are good "springboard" points.
Now let's look at items 1 and 5.
Item 1 - Determine the trend and position of the market and then decide to be long, short or neutral. With the market in an established trading range and the position of the market being in a spring position, short term long positions could be potential speculations that one would be considering.
Item 5- Timing the speculation in the appropriate stocks when the market is oversold or overbought. On May 21 and again on May 25 the market entered the oversold area. IT's TIME TO SPECULATE.
Taking a position in YHOO during this period would have the speculator entering in the $28 1/2 to $30 area. How many shares? What stops? How is the best way to manage the trade, once the speculator is in?
First, remember that this is a short term trade. Don't get greedy. The best way to eliminate or reduce this risk is to make the exit decisions immediately after entering the trade. The best answers to the questions in the above paragraph are based on the experience of the speculator. There aren't any set of rules but for those interested in some excellent guidelines I'd suggest reading Van Tharp's book "Trade Your Way to Financial Freedom".
In this book there are great ideas on position sizing, stop (exits), and so much more. Every speculator is different and needs to determine what works best for them. Reading this book will offer great ideas of how to find a process for managing the trade once the speculative and timing issues are resolved.
OK, where are we as of today (June 10). Well, that depends on how the speculator has managed the trade.
This speculator made two buys of YHOO. At this time, I've sold half of my position. My target, based on a 3-1 reward/risk ratio, was slightly below $33. When that was hit, I sold half of my position for a nearly 15% profit. The other half is still open but my stops have been moved up to guarantee a profit in excess of nearly 10%. Should YHOO move higher, I'll move my stops up increasing the profits on the second half of my position.
I hope this answers the requests I've had over the past week. The stock was mentioned on the board and anyone that made note of it could have done the same thing I did by following the steps on the home page.
Additionally, as a side issue and to answer another request, an O'Neil (CANLSIM) user might have considered a position in YHOO on May 26th, after the breakout day but it's doubtful. First, there really isn't a good pattern and second there would be doubts whether a move from this 4th or 5th base would pay off.
With Wyckoff, there isn't any doubt. You take the trade and the profits. BTW, long term or intermediate term speculators could still have positions or could have taken profits and re-entered on several subsequent occasions. I mention this because YHOO is an excellent example of a stock that could be on a watch list that meets the criteria of O'Neil's CANSLIM process. |
