Recent Falls….
how have you faired?
how have you faired?
| Author: | John Atkinson |
| Reference: | This article was first printed in Daryl Guppy’s Newsletter Tutorials in Applied Technical Analysis (www.guppytraders.com) on 16 April 2005 and is reprinted here with his permission. |
“The current market tests trading discipline. Good times and strong trends make it easier to ignore trading discipline. The real test of discipline will come if the market rallies strongly for a few days or a week or so. It’s like a sucker punch. Those who ignored stops will feel vindicated, then when the next collapse comes, they won’t act on stops (again). Unfortunately the market may continue to fall and not rebound. This is the sucker punch. We cannot tell what will happen, but trading discipline protects traders against the unknown and the unexpected.” Readers of Daryl's newsletter will have read his warnings on his view of the index & his suggestions to tighten stops for months. In January at www.prweb.com, I also issued a worldwide press release to caution unprepared novice investors and traders of the potential pitfalls ahead in the market. My wife Angela and I lost our waterfront home on Sydney Harbour in the tech stock crash of 2000, so we speak from hard personal experience. As a result, while most people find trend trading relatively easy, our approach these days is that we carry too many memories of what it’s like to have savage drops, so we are not comfortable letting trending shares give back profit or to drop too far into loss before bailing for the exit. It means our approach is to trade more like ‘frightened rabbits’ as one reader once called himself, even in a bull market. While most traders are looking for an opportunity to buy, we focus more on when we will exit. We tend to trade with our fingers closer to the trigger than most. Having had our emotions devastated from before, we now prefer to grab small profits and inch ahead that way, knowing that we may miss out on some of the bigger longer-term trend trades. So aiming to protect ourselves from big falls, we also aim to take lots of bites out of some trends, taking rises, then exiting when we get the inkling of an exit signal - with the aim to let them fall back and going for the next rise. Sometimes it backfires and we end up paying more to get back in but at least we haven’t lost capital. Similarly a friend of ours Jim Kelly has survived well, having traded for about 40 years. He requires all the planets to be in line before he enters a trade – and it only takes one planet to be out of line for him to exit. During the bear market I wrote a series of articles for Daryl's newsletter comparing various exit strategies. The following are some of our more recent exits and are written to explain how we handled the lead up to the recent downturn. MAP had been trending for months by the time we decided to enter it in December 2004.
On 20 January 05, Smith Barney raised their target to $3.80 after it had closed at $3.36 the day before. Good sign. Hold. One week later it had been tracking along just under the Berg Profit Taker (which we use for taking short term profits when prices close above) for several days and had just got above the psychological round number resistance of $3.50. On 28 January CSFB downgraded MAP to neutral. Not good. It slipped under $3.50 after the news. Three planets for us out of line, so we exited at $3.49.
Subsequent action – four days later on 3 February, MAP rose to a high of $3.63 outside the Berg Profit Taker before slipping back with an Upthrust candle, signaling rejection of higher prices and the end of the trend. On 16 February MAP was hit by computerised stop loss avalanche selling with a low of $2.99 i.e. 17.6% below its recent high of just nine days before.
EXL had been a favourite of ours as we had traded it several times for several months prior.
However in March it rose almost vertically. Planet number 1 on notice, especially when we drew the parabolic trend line using the Guppy tool box.
It closed for a week above the Berg profit taker. Planet no. 2 on notice.
Each day as there was strong buying support on screen we held on, but with tight conditional intraday stops in place.
Then on 21 March on checking the market depth screen we saw that there was an undisclosed buy order (i.e. a very big one) and another buy order for 100,000 queued up at the round number of $8.50, with very little screen support below that.
That signal was all we needed to go contrarian. Now far too many planets out of line for us. We reasoned why would an Institutional trader show his hand to supposedly want to buy over $1.7 million dollars worth of this stock rather than buying it in bite size pieces………
We exited immediately - and not surprisingly the big buy orders weren't there the next day - EXL fell down over 20% to $6.75 in the next four days.
Daryl once wrote in his book that we are but small guppies swimming in a big sea. I've been a scuba diver for many years and love the sea - I've also seen some sharks in my time - so I treat the sea with a lot more caution these days than I used to.
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