Monday, November 28, 2005

When to Raise Stops

Trading rules are a must if you want to trade for a living. Only by following a systematic approach will you be able to find trading success. Most of the time, stocks require some room to move, and tight stop loss orders don’t offer a lot of upside potential for swing trading. However, on rare occasions, you can book greater profits by knowing when to raise stops and pay yourself with big gains.

Recently, the market has been tremendously strong. We’ve had a number of big winning stock picks, and it’s important to know when to tighten stops. Because the market has moved almost straight up (nearly a parabolic uptrend), it's time to get more conservative and raise stop loss orders on open positions. Markets don’t move in straight lines for very long, so it’s important to recognize when an uptrend is getting a bit tired and due for a rest. It’s at times like this when a stock trading strategy can use some conservative adjustments to capture profits.

Last week, instead of following my swing trading strategy which gives my trades room to move, I raised stop loss orders aggressively to lock in big gains. Whereas most of the time it’s best to follow your stock trading strategy, occasionally it’s wise to get a bit more conservative when the market is on the verge of some consolidation. With the DJIA having rallied 800 points from the October lows and the S&P 500 and NASDAQ moving virtually straight up (7 straight sessions worth of gains), it’s only prudent to take some profits off the table and patiently allow new trades to set up. The move up earlier this year from the April lows was followed by several weeks of horizontal price action, which is a possibility here as well. This provides an excellent area to raise cash and await the next market signal.

As the market corrects from this bull run, more stock picks will emerge in the coming weeks for swing trading. Right now, I’m willing to let the market come to me rather than chasing extended stocks for new buys, and I’m raising stops and cash in the meantime.

Jeff White


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