• Tighten stops. If other stocks in the same industry begin trending down, then tighten the stop in the stock you own in that industry. If your stock shoots up several points in a few days, then tighten the stop because price may reverse and retrace much of the gain.
• Trade with the trend. If the market and industry are moving up, select stocks with upward breakouts. Avoid counter-trend trades - the market or the industry is going down and your stock is moving up. The rise will be less than you expect unless the market or industry reverses. If you buy a stock even though the market is trending lower, that’s fine providing you expect the market to reverse shortly. Just hope that you don’t get stopped out while waiting.
• Trade on the intraday scale. Switch to the intraday scale or the next shorter period to place the trade. The shorter time scale will zoom into the price action and highlight support and resistance zones. I use the one- and five-minute scales to time my entry.
• Raise that stop as price rises. Check the volatility and place the stop no closer than 1.5 times the current price volatility.
• Never lower a stop. If you feel a desire to lower a stop, sell the stock. Fall in love, just never with a stock.
• Follow the same stocks each day. Become familiar with them. Don’t invest in unfamiliar stocks. Over time, you’ll know when the stock is expensive and when it’s cheap. That voice will tell you when to buy and sell.
• Trading takes work. You have to believe the system you trade or you’ll ignore the signals. Explore new techniques that add value to your system and prune the deadwood as it becomes less effective.
• Check commodities. I follow oil, copper, and natural gas because so many of the industries I track rely on them. If the price of oil is shooting up, the airlines, truckers, and chemicals may suffer but oil service companies, refiners, and drillers should prosper.
• Tune your system. The markets change over time and so should your system and your trading style. When the markets are choppy, directionless, I make short-term trades. When the market is trending, I relax and my hold time increases.
• Ignore chat room chatter. Some of the worst trades I’ve made come from scenario trading. I’d read that the price of oil was predicted to rise because of a production shortage. Then I’d buy a refiner and get cleaned out when the price of oil dropped instead. Don’t restrict this advice to the Internet chat room. Apply it to newspaper articles and television news as well. Don’t trade scenarios. Buy-and-hold investors may do well with scenarios, but they can wait years.
• If you have to ask, you’re making a mistake. If you have doubts about a trade, such that you feel compelled to ask someone’s opinion about it, then skip the trade. Don’t let others spend your money.
• Set price targets. With experience, you’ll be able to tell when price is about to turn. Use the measure rule for the chart pattern (usually the pattern’s height added to the breakout price) to predict a price target. For more conservative targets, use half the formation height projected upward. If the target and overhead resistance are nearly the same, then you’ve struck gold. Place a sell order to dump the stock just below the resistance zone. You may be early, but you never go broke taking a profit.
• Watch for a throwback or pullback. Prices turn postbreakout in an average of 3 days and return to the breakout usually in 10 or 11 days, so watch for that. Have faith that prices will resume the original breakout direction-they do-86% of the time.
• Don’t short a stock. If you can’t make money on the long side, you won’t make it on the short side either. Try it on paper first.
• Prices drop faster than they rise. I found this out when I reviewed the statistics measuring the time from the breakout to the ultimate high or low. Price trends after downward breakouts were quicker and steeper than their upward counterparts. This emphasizes the need to use stops to get out. If you can’t sell, your losses will grow quickly.
• Price reverses one month after the breakout in a bear market. This is also true in a bull market, but less often. The one-month benchmark also varies from pattern to pattern. It’s rarely shorter, but often longer-five to seven weeks after the breakout. I found a slight rise in the number of patterns reaching the ultimate low a month after the breakout, so don’t expect price to turn on a dime every time.
• Price moves most in the first week after a breakout. I discovered this when looking at failure rates. This emphasizes the need to get in early after a breakout. The best way is to have a buy order positioned a penny above the breakout price. That will get you in early and you won’t have to worry as much about throwbacks taking you out.
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