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Strategies & Market Trends : The Rational Analyst
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To: Scott H. Davis who wrote (1035)5/30/1998 5:15:00 PM
From: ftth  Read Replies (2) of 1720
 
Hi Scott, it's always hard to judge whether an apparent market overreaction will be followed by newfound demand at the lower level. To protect against that demand not materializing (or worse, a bona-fide problem is made public the next day), a couple things can be done:

First, run through as many scenarios as you can for the next few trading days (write them down so you can sit and think about them). Try to do this the night before so you aren't pressured to make an immediate decision during market hours that likely is more an emotional reaction).

Try to identify what price/volume action would indicate that things aren't unfolding according to your plan. Have a contingency plan for each of these. Concentrate more on the things that can go wrong rather than the things that can go right. The things that can go wrong are the ones that require action.

A couple of possible plans:

Determine what you consider a full position, and feed the position with incremental purchases as it unfolds. This also eliminates the need to call the exact 1-shot buy point. Base your stops on the active position amount.

Or, sometimes there is a very narrow buy range because of the chart support or indicator levels. In these cases a 1-shot purchase is best. Select your buy point and place the limit order. If it doesn't hit, you put it in the "oh well" pile and move on. There'll be others.

You can't do this last type of trade if you're going to be in meetings all day at work, unless you have a broker you can give instructions to. The stop that you determined the night before should be set right after your order is filled. [Some day these on-line brokers will allow if-then-else order sequences. Then there's no need to use a broker at all].

Another possibility is the use of options. There are all sorts of option-only or option+stock combinations that can cover both sides of the trade. One side is closed out when the direction is confirmed.

Another option is to swear off pivot point trades. Make it a part of your overall strategy to never buy expected pivots after a fairly large decline (even in a good company). Make it a point to always wait for a new equilibrium level to establish, and the volatility to stabilize.

I know you probably don't like this last idea much, but 6-8 weeks from now this may turn out to be the best strategy. Large declines seldom pivot on a dime and march back up to new highs without spending some time building a new base.

It's easy to look back and say this swing or that swing would have been profitable. The hard part is really knowing whether you would have opened and closed the trade at the right times.

just a few thoughts.
dh
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