By Harlan Pyan
The following is an excerpt from yesterday’s premium report by All About Trends. Enjoy a free 15 day trial to their service and receive daily stock picks, market analysis, and a complete trading plan.
Last week to our paying subscribers before the market tagged key support zones that we talk about every day we released a special report on:
Using trend channels, lateral supports and the 50 day average to define ones risk.
To all of you on the free subscriber/ those that read our articles list you received a very scaled down version without the long side watch list that went out to our paying subscribers.
How have we done?
Since May 24, we’ve earned the following gains from trades we’ve featured:
And for those with accounts of $100,000 where options trades are recommended over stocks, we have the following gains:
Before we get into a special discounted offer, let’s revist that special report to drive home the point about just how important those tools of the trade and the set ups that come from them actually are.
As you recall we laid out the trend channels, blue lateral supports and 50 day averages. So let’s see how pertinent that information was to us when all said and done. But first we’ll revisit the groundwork of the opening report with BLK as the example.
First, we will recap what we said on June 4th — then we will see where we are today.
From Special Report released on Tuesday June 4th 2013:
We talk all the time we talk about support zones around here.
The three we talk about the most are:
Trend channels when they apply and usually are annotated on the charts in green
Lateral support zone and usually are annotated on the charts in blue
And typically the 50 day average.
All of these define risk. Here’s what we mean by that.
Take Blackrock- BLK for example.
We see trend channel support in the green line very clearly. As long as the stock is within those green trend lines its overall trend is up.
So let’s say you had a weak emotional moment and chased a bus with it at say $290
Look at that level and look at the overall trend of the stock. See it? The overall uptrend as defined by the green trend channel is up.
So what’s the problem? Nothing really if you think about it. You are long a stock in an overall uptrend it’s just that it’s pulled back within that overall uptrend below your entry point.
Now let’s say you bought in the face of fear when it and the indexes were down on Monday. What’s the problem here? Nothing really it’s still within an overall uptrend that has pulled back off of uptrend high.
What’s the difference between the two entries? One is you bought near trend channel resistance the other nearer to trend channel support. It’s all about defining your risk and managing that risk.
What’s our risk right here then? Well it comes down to trend channel support. What percent is that away from our entry? It’s 2.5%, big deal right?
What if it breaks trend channel support after we buy it and are down in it?
We stop out as the uptrend pattern is no more. BUT before we do that we need to see where a prior support level is in blue or where the 50 day average is because if they are near we may want to hang in to them. In this case the 50 day also just happens to be trend channel support.
Remember supports are floors where stabilization can easily take place and an uptrend can get defended. Our point being just because a stock breaks one type of support doesn’t mean it’s toast you know. Just look at the April lows in the NASDAQ Comp. for that.
The NADSAQ broke trend channel support BUT it stopped at a blue line support just below it. And the rest was history away we went. So if you automatically stopped out it was premature.
What’s the moral of this exercise? Before you take any trade look at a chart and ask yourself, IF you were to be buying it right here what’s your risk percentage wise in the event it were to go to the green line or the blue line or the 50-day average.
This is why we say knowing where supports are helps define ones risk. It also smooths out the volatility folks.
Let’s take it a step further and add a new element that ought to really drive it home which is trade size risk management to the mix.
We try to stick to 5-7% per position when we do a trade AS A GUIDE. When you combine that with everything above you see that the risk to the overall portfolio goes down immensely.
On its own trade size risk management is the saving grace for when a stock goes against you. You see when properly employed on its own you can take a 20% whack on a stock and say with a 5% position the total impact to the overall portfolio is one measly percent.
When you use it in tandem with using trend channels, lateral supports and the 50 day average the risk is even more diminished per trade baring an unforeseen news driven event in after hours over which you have no control over anyway.
So you see? We have multiple layers of risk management per position and per the overall portfolio.
Now let’s apply all of the above to some names on the long side watch list and some that aren’t.
Now let’s take a look at the before and after of some of the standouts from last weeks special report in before and after form.
To the blue support line is 6.5%, using 5% of the overall portfolio is 2/10ths of 1% impact
6-10 From the face of fear lows that corresponded with the indexes and this issue tagging support zones and key Fibonacci retracement levels this issue has rocketed 20 points!
Notice how it came down to a blue support line that we talked about and had showing in advance?
To the 50 day average (834) is 3.8%, using 5% of the overall portfolio is 2/10th of 1% impact to the whole.
6-10 From the face of fear lows that corresponded with the indexes and this issue tagging support zones and key Fibonacci retracement levels this issue has rocketed 39 points!
Notice how it came down to a blue support line that we talked about and shown in advance?
9-10 From the face of fear lows that corresponded with the indexes and this issue tagging support zones and key Fibonacci retracement levels this issue has rocketed close to 30 points!
Notice how it came down to the 50 day average that we talked about and showing in advance?
Heck this one alone we bought at $134.03 and here it is pushing $140.00 for a $600.00 gain so far in just three days!
6-10 From the face of fear lows that corresponded with the indexes and this issue tagging support zones and key Fibonacci retracement levels this issue has move 7.5 points.
Heck this one alone we bought at $ 78.37 and here it is pushing $83.00 for a quick $463.00 gain so far in just three days!
And if all of the above doesn’t drive home one of the points we are trying to make about using the 50-day average do yourself a favor and grab a 7- month daily time frequency chart with the 50-day SIMPLE moving average on it and look at the following names. Once you do it will become instantly clear to you the power of this trade set up we are always on the look out for.
OII, SNTS, YELP, PRLB, HTZ, NUS, WDR, ICE, KMX, KR, TSCO, MNST, AZO
EAT, LM, MMM, TMK and the list goes on.
And how about those index charts! Classic All About Trends Key Levels!
Let’s take a look at the SPX and NASDAQ Comp. while we are at it. See the 50-day average? See the tag of the green uptrend channel support? Like we’ve said and constantly pound the table on of the importance of the two they were KEY levels we like to initiate trades on and of course if short cover trade upon.
In summary from the original report
As you can see we’ve laid out in each what is the risk percentage wise of every issue based upon the green uptrend channels when applicable, the blue lateral support zones and the 50 day average. Keep in mind that those are also levels where support and stabilization can occur so upon a tag of them it doesn’t mean that you automatically stop out of them. If stabilization at those levels occur and you stopped out? You’ll wish you didn’t.
You can also see we added the trade size risk management element to each as well based upon 5% positions. We’ll let you do the math on 7% positions.
So what did we accomplish with this exercise? We’ve defined risk two ways visually and we’ve also smoothed out the volatility which in turn smooths out the emotional state as well.
When you look at the percentages as shown you can clearly see there never really is anything to worry about from this point forward when it comes to taking on positions when stocks fluctuate (and lets face it ALL stocks fluctuate) and go below your purchase price as we’ve just framed the risks and the overall portfolio risk.
That goes a long way to towards managing ones mental stress and state.
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