RE: [CANSLIM] AAII letter to the editor

From: "Katherine Malm" <kmalm@earthlink.net>
Subject: RE: [CANSLIM] AAII letter to the editor
Date: Sun, 13 Jul 2003 22:28:07 -0500

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Hi Hong,

The 7-8% rule was originally designed based on an entry at a breakout above
the pivot on high volume from a valid intermediate term base. That base can
be either cup with handle, flat, double bottom, etc. The reasoning behind
the rule was based on WON's research where he observed that, on average, a
strong breakout will fall no more than 8% below its pivot before continuing
the move up. As with all things CANSLIM, remember that this is based on
*average* behavior of stocks after a breakout. That means that some fall
more, some fall less before moving ahead. For a beginner to CANSLIm and/or
technical analysis it's probably good enough to keep a newbie out of
trouble. As one becomes more familiar with technical analysis and has
several years of experience under their belt, understanding the behavior of
the stock itself will help set more meaningful stops.

I disagree that one should automatically set an 8% stop loss when entering
on a pullback and my understanding of reading WON and the IBD's writings on
this are that the 8% does not necessarily apply with this type of entry. A
pullback entry is one in which one waits for a stock to pull back to near
term support, but there is not necessarily a lengthy consolidation at that
particular support. If the stock falls on high volume below that support,
there's trouble in River City. 8% may be *way* too loose a stop. Afterall,
one can still lose their shirt 8% at a time.

Katherine


- -----Original Message-----
From: owner-canslim@lists.xmission.com
[mailto:owner-canslim@lists.xmission.com]On Behalf Of Hong Hsu
Sent: Sunday, July 13, 2003 9:13 PM
To: canslim@lists.xmission.com
Subject: Re: [CANSLIM] AAII letter to the editor


Katherine,

I agree all of your opinions with one exception.  That is,  always cut
your loss at 7% or 8% from your entry price.    I can not find evidence
to support that logically from Mr. O'Neil's book or from my experience.

It seems to me that if a stock fails from its first breakout,  then the
rule holds TRUE.  But after first breakout, the stock may build its
second flat base, or continue went up for a while.  You may buy at pull
back, support line or on the top of second flat base.  In these cases,
if you stick with 7% or 8% loss rule, most likely you will be forced out
because of volatile.   In a message I post two days ago,  I was trying
to find a solution to the issue.  But got no response.

I am thinking to use price progress and time to determine stop,
something like Parabolic System from  http://www.tradertalk.com/,   OR
simply use %, but instead measure from entry point, you measure it from
first pivot OR Fibonacci retreat line.

Your comments will be appreciated,
- -Hong





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