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Strategies & Market Trends : Technical analysis for shorts & longs -- Ignore unavailable to you. Want to Upgrade?

To: Johnny Canuck who wrote (42823)	11/25/2005 9:10:54 PM
From: Johnny Canuck	Read Replies (1) \| Respond to of 70058

Always Cut Losses at 7% To 8%, Even With Highly Rated Stocks Tuesday November 22, 7:00 pm ET Marie Beerens Investor's Business Daily More than a month into a new rally, growth investors may be feeling optimistic, having watched plenty of breakouts emerge. In that kind of positive climate, it may seem counterintuitive to think about cutting losses. But even the best rallies will have their share of laggards. As the market has rallied in the last few weeks, many stocks have remained volatile. Protecting your capital remains as important in a bull market as it was in the bear cycles of the past. The primary rule of investing is to sell a stock if it falls 7% to 8% below your buy point. This kind of attitude takes discipline, plus the ability to suppress your ego for the sake of your portfolio. When a stock hits that 7% to 8% loss threshold, it's important to admit you made a mistake and sell immediately. "The whole secret to winning big in the stock market is not to be right all the time, but to lose the least amount possible when you're wrong," wrote IBD's founder William O'Neil in the book "How to Make Money in Stocks." "In other words, to get the one or two stocks that make big money, you have to look for and buy 10." You can use simple math to see the benefit of cutting losses quickly. To recover from a 7% loss, you will need to gain only 7.5%. To recoup a much larger loss, the necessary gain rises rapidly. A 25% loss requires a 33% gain to get back to even; a 50% drop needs to be offset by a 100% gain to return to square one. Note that the 7% to 8% sell rule should not be confused with a leading stock that pulls back from its high after a strong breakout and run-up. Even the best stock may ease 10% or 20% after a 50% advance, digesting its gains. A true leader will often recover quickly and shoot to new highs after such action. Even when a stock has strong fundamentals and IBD ratings, it's not guaranteed to go up. Buying volatile stocks breaking out of late-stage or flawed bases can increase your risk. Take Forward Industries (NasdaqSC:FORD - News). The maker of accessories for cell phones, MP3 players and cameras earned strong Earnings Per Share and Relative Price Strength Ratings, topping the IBD 100 in the summer of 2005. The micro cap has surged from penny-stock status, vaulting 614% from the end of 2004 to an all-time high of 29.85 in September. The stock broke out of a six-week consolidation on July 25 (point 1). That was short of the minimum seven weeks required for a proper base to form. After running up for a few days, Forward stalled, falling back to its 50-day moving average (point 2). That proved to be the start of another attempted base. But the pattern lasted only five weeks, again making it flawed. Forward tried to break out on Sept. 9 (point 3), but reversed sharply on above-average trade, a bearish sign. It kept falling from there, slashing through its 50-day on Sept. 22 (point 4). The stock tried rebounding above the line but reversed, slicing its 200-day on huge volume Nov. 18 (point 5). If you purchased the stock at the 23.48 or 29.10 (point )buy point, your 7% sell point would be 21.84 or 27.06, respectively. If you hung on to the stock in the hopes of recouping your losses, you would be down 25% or 40% on your investment. It would take a much larger gain to recoup that kind of loss. Remember to carefully scrutinize a stock's chart before buying, even if it's a leader. If the breakout fails and the stock falls 7% from your buy point, sell right away.