Re: Trailing stops and taking profits (was: RE: [CANSLIM] AAII letter to the editor)

From: Hong Hsu <honghsu@bellatlantic.net>
Subject: Re: Trailing stops and taking profits (was: RE: [CANSLIM] AAII letter to the editor)
Date: Tue, 15 Jul 2003 22:26:30 -0400

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  >look at the price/volume action itself for any signs that the stock 
is in *big* trouble. >These sell rules (see the investors.com site) are 
much more subtle and take a lot of >practice.

Katherine,

Thanks for sharing your professor-style comments with me.   As I am 
newer to CANSLIM, would you elaborate little bit your experience with an 
example of stock: CMTL.   I seem to have many reasons to support either 
sides.  

The stock failed 11.89% with heavy volume in past three days.  How do I 
judge price/volume action is changing its trend direction or not after 
BO for a while.

- -Hong



Katherine Malm wrote:

>Hi Hong,
>
>I think you might be confusing the use of the 7-8% rule. You have to think
>of a stock in several stages for this to make sense:
>
>(1) The stock forms a valid intermediate term base (cup with handle, flat
>base, double bottom, etc.). It sets up and breaks out above the pivot on
>volume >=150% of average daily volume (ADV). Assume you enter at the optimal
>buy point ($.10 above the pivot). Your purchase price is "just right" and
>this is where the 7-8% rule applies.  That is, a stock which is still
>healthy shortly after a breakout will tend not to fall more than 8% below
>the pivot before it continues to rise. If you buy at the optimal buy point,
>then you can then set an inital stop which is not only 7-8% below your
>purchase price but also 7-8% below the pivot itself. That's the very reason
>why you don't want to chase a breakout too far past its pivot. If you
>purchased, say 10% above the pivot, the stock could fall to 8% *below* the
>pivot and still be healthy. If you also set your stop at 8% loss from your
>*purchase* cost, you will be shaken out for no practical or technical
>reason.
>
>(2) Once the stock starts moving up, then you need to decide where your stop
>will be. There are many guidelines for this, but don't mistake a *price
>drop* of 7-8% from one day or week to the next as a reason to get rid of the
>stock. Instead, you want to look at the price/volume action of the stock and
>determine if it remains *healthy.* For example, after a breakout, say the
>stock rises very quickly to >=20% above the pivot. This is considered strong
>follow-through and is often the sign of a stock that has real power.
>However, it isn't uncommon for a stock which rises 20% or more very quickly
>to fall back a bit on low or fairly low volume. Why? Because the short term
>traders get in and quickly take their profits and ride into the sunset.
>However, as a CANSLIM investor, you're looking for stocks that have the
>wherewithal to withstand this sort of short term correction. What will most
>often happen once the short termers influence the stock to slightly lower
>prices will be the intermediate to longer term investors coming in a
>scooping up more shares. That's why you want to stick with it....you're
>riding the stock for bigger gains. As to your trailing stop, you may simply
>raise your stop to breakeven at that point. In other words, you really don't
>want to take any loss on a stock that has risen >=20%, but you also don't
>want to be whipsawed out of a perfectly good intermediate term position
>simply because of a temporary pullback. That's very often what sets the
>stock up to launch further.
>
>(3) As the stock rises, you want to look at the price/volume action itself
>for any signs that the stock is in *big* trouble. These sell rules (see the
>investors.com site) are much more subtle and take a lot of practice. You may
>wish to move your stop up a bit as the stock works its way up, but be very
>careful, once again, not to set it too tightly. A stock can and does remain
>perfectly healthy, rising and falling, rising and falling, while the
>underlying trend itself remains *up*. You want to stick with these winning
>stocks as long as the price/volume action is healthy. Whatever you do, don't
>set some arbitrary trailing stop at 7-8%, because it will have absolutely no
>technical meaning to the behavior of the stock itself. Look for logical
>support areas such as a trend line, a previous area of support, etc. (Again,
>you can find a lot of info on this at the investors.com site.)
>
>(4) At some point, the stock will stop its general upward trend and will put
>in a fresh base. You have several options here. First, you can ride out the
>consolidation and stay in the stock as it breaks out again. If it fails from
>the area of consolidation, you can sell. You can add to the position as it
>breaks out. You can sell as it starts the consolidation. Remember that an
>intermediate term consolidation can be as little as 10-15% (flat base), to
>20-60% for a cup with handle. Your decision to stay with the stock will be
>determined primarily by the underlying health of the market itself, the
>underlying health of the stock's industry, the underlying attractiveness of
>the business itself, and you personal profit taking goals.
>
>All in all, you can't make a general statement about what one *should* do
>with a stock. You have to decide what you are *going* to do *before* you buy
>the stock.
>
>Katherine
>
>  
>


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