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Strategies & Market Trends : Stock Attack -- A Complete Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Ming Z Chen who wrote (4909)	1/19/1998 12:20:00 PM
From: Chris	Respond to of 42787

Hi Ming Chen, [ Long post ] glad to see you posting questions and sharing your thoughts... let me start out with the small vs large caps and then we will talk about volume... and stops... these are my opinions and gathered from trading both large and small caps for 1 yr.. 1) trading small caps is a tough game. price movements are fast and you have to on your toes each day watching... 2) I've found that because of the low daily volume vs a large cap (ie:dell), you will get erratic price swings within a trading day.. this increase in volatility is welcomed by the daytraders who "make the bucks" by playing the wide trading ranges.. (agian, im generalizing a lot, so bear with me)... along with the volatility, sell stops will get hit more often whereas sell stops set for larger caps get hit less often.. (again, a general statement).. 3) Small caps brings about high rewards.. 50-300% gains are not unheard of with the small caps.. that's why penny stocks or <$10 stocks are so "popular"... the rewards are there.. 4) But as always, the risk is high.. if a small cap can go up 50%, it sure can tank 50% as well. Look at cobr, gecm, etc.. they've fallen 30-50% and still haven't rebounded. 5) why this volatility? it's the low daily volume. so each order magnifies the price swings. 1000 share trade for a stock with an avg daily volume of 10000 is a big trade! ========================================== What have I done? 1) I actually have 2 accounts. myself and my dad. myself, i was restricted to playing small caps, and my dad's - i played large cap.. At the end of my first trading year, i've seen that i was much more successful with large caps.. However, there were a few small cap plays that i had great returns on, far outperforming my large cap returns... but the stress load and amt of time/risk/work was much higher playing the small caps. 2) Thus, I made some rules when i look for stock picks. here is what i do when i come up to a stock pick: a) what is the avg daily volume? my minimum would be 100K b) what is the price of the stock? my minimum would be $10 c) does my ta system work for that stock? does it do a good job? d) can i handle the type of price movements (emotionally?) e) does it show CLEAR support/resistance/trend lines? f) how erratic is the stock price? ==================================== I do not belive TA works for all stocks. As Bob G. mentioned, TA does not work too well for illiquid stocks. I tend to agree.. It's also should be stated that -- "i have made my TA system NOT to perform well with the small caps (<$10)... the reason why is that your TA system is very much different from a large cap vs small cap stock.. A small cap TA system requires fast acting/sensitive inidcator settings.. A completely different mind frame.. So, in a way, I'm only speaking for my self. If i were to trade only on small caps, I would have to reshuffle my indicartors and such.. ===================== Placement of sell stops: i would not use a strict 5% sell stop.. the reason why is you have to be smart. 5% from your purchase point is meaningless b/c you're not using the CHART to tell you where to put the stops.. Now, i, myself haven't had GREAT success with stops. i do get hit sometimes and im hitting myself after it rallies.. Thus, my gradual liking to mental stops (but you must carry through your stops.. you must sell once it's mentally hit)... sell stops (mental/hard) should be placed below STRONG support levels and below Moving averages. When i say below, i would put it 1/8 to 1/4 below them.. I would check : a) what is normal trading range for this stock? thus, i have a feel on how tight the sell stop is set in compared to it's normal trading day.. b) how often does the stock spike down this crucial support that im going to use? if it does it often, then chances are my tight sell stop will get hit.. Is that what i want? my opinion on sell stop is this: 1) if the stock is showing weakening TA signals to a SELL, i would try to use a sell LIMIT order.. that means you have resistance at 50 and your support at 48.. Why put a sell stop at 47 7/8 when you know that XYZ ain't moving up anymore due to my weakening ta signals? Instead, sell HIGH! you know 50 is tough resistance and may not go past it.. so I would put a sell lmiit order at 49 .xxxsx at let me sell high... So in that sell stop case, once i know the stock is about to go down, i use sell stop (if you want to play defensive)... or a sell limit (if you want to offensive and try to sell high)... However, let me point out that sell stops are good in that it cuts your losses if things go against you.. However, my feeling is that "if my TA signals are on buy mode and it's a strong signal", then i would do away with the hard sell stop below currrent price.. But once you see ta sell signals, then yes .. i would put sell stops since any downward movement will be fast and powerful as other momentum traders will be jumping off the boat.. hope it helps.. basicially sell stops are good if you know where to put them (very hard thing to do) and just know that playing small caps is very different from the large caps.. please feel free to comment. Chris Chang