FXstreet

In analyzing thousands of trades and investments, I have found that many lose money because of their entry levels, not because of what they are buying or selling. This is, of course, also directly tied to a lack of any consistent risk management strategy.

Before making any investment, it is critical that you determine where your stop would go on either the long or short side. Based on this level, and where you are planning to enter the market, you can then calculate your risk.

By doing this calculation, you are likely to find that sometimes the risk is 8-10% or more. That is too high a risk, in my opinion, as a string of losers will quickly drain your account. Even one or two big losers a year can drastically reduce your chances of being profitable.

Regular readers of my daily columns know that I always give specific entry levels for my recommendations that are tied to the stop loss. Unless you are just buying a couple of hundred shares of a stock that trades over a million shares per day, you should always use a limit order.

If you use limit orders then the “market is rigged” chant of Michael Lewis’s massive publicity campaign is not a concern, as I have expressed previously. With a limit order you have agreed on the price no matter how it is routed.

In the first example I will look at the Spyder Trust (SPY), which I recommended on Monday, March 31 (point 1). The futures were trading sharply higher early Monday and the S&P 500 A/D line had turned positive at the end of the previous week, point 2. It looked as though the March trading range was going to soon be resolved to the upside.

The second quarter pivot, with just one day left in the first quarter, was calculated at $182.74, which also corresponded to the March 15 low. Using the March 21 high of $188.21, the 38.2% support was at $181.99 with the 50% support coming in at $180.11.

After this analysis, I concluded that a stop needed to be under $180 so I used $179.77 as a stop. In the first hour of trading, the SPY had a high of $187.18 so I recommended going 50% long at $186.08 and 50% at $183.96, with a stop at $179.77 (risk of approx. 2.8%).

Just before noon, the hourly chart of the SPY showed that it dropped down to a low of $185.52, filling our initial 50% buy order at $186.08. The SPY closed the day at $187.01—which was the start of a wild week. The SPY hit an intra-day high at $188.80 on Friday and tested the hourly starc+ band (see arrow) before reversing to the downside and closing the week at $185.51.

On Aril 10, the second 50% buy at $183.96 was hit as the SPY had a low of $182.06. The following day, the low was $181.31, which was still well above the stop. Certainly, the rapidness of the reversal was a surprise but the S&P 500 A/D line (see Fig. 1) was holding well above the support, line b, from the March lows.

On Tuesday, April 15, the SPY triggered a high close doji buy signal. The following day, the A/D line broke its downtrend, line c, as noted on Fig. 1 (point 3). Once the $190 level was overcome in June, the stop was raised to $185.93, which was above the average entry price of $185.02.

Expedia, Inc. (EXPE) was recommended on Thursday, May 29 as earlier in the week the relative performance had broken its downtrend and moved well above its WMA. The previous week (point 2), the on-balance volume (OBV) had moved above its short-term resistance at line b and this was a sign of accumulation.

The stock had gapped higher after the Memorial Day weekend so a stop under the prior week’s low of $68.96 seemed appropriate. The high for the week was $73.52 and, therefore, I recommended that you go 50% long Expedia (EXPE) at $72.41 and 50% at $71.44, with a stop at $68.96 (risk of 4.1%).

The prior day’s low had been $72.31 and the quarterly pivot was at $72.10 so I wanted to buy a bit above these levels at $72.41. The weekly high for the week ending May 9 was $72.43. I also looked at the ranges of the prior two days (see circle) which had a mid-point of $72.70.

For the second buy level, I chose $71.44 which was just above the 20-day EMA at $71.20. EXPE made a short-term high on Monday, June 2 at $74.45 and then corrected the next two days. The correction low was $72.21 which was just above the 20-day EMA at $72.02 and the initial buy order was filled.

EXPE had a high on June 19 at $80.49 and, on a move back above $78.60, I would raise the stop to $73.12.

Lennar Corp. (LEN) was also recommended in the same daily column. It was one of my favorite homebuilder picks last fall as our longs were stopped out in March for a 22.5% profit.

One of my favorite entry techniques is to look at the prior week’s range. As noted on the chart the week ending May 23, LEN had a high of $40.66 and a low of $37.76 so the weekly range was $2.90.

The weekly chart of LEN showed that it had just triggered a weekly HCD buy signal as it closed above the prior week’s doji high of $40.44. The weekly OBV had moved strongly above its WMA the prior week (point 1). This was, therefore, a very strong market.

Looking at the weekly range of $2.90 (high-$40.66, low-$37.76) and subtracting 1/3 ($0.96) from the high gives you $39.70. The quarterly pivot was at $40.09 with the rising 20-day EMA at $39.19. The week’s low was $37.76 so I used a stop at $37.46, which was 0.8% below the week’s low.

Therefore, my recommendation for Lennar Corp. (LEN) was to go 50% long at $39.78 and 50% at $39.30 with a stop at $37.46 (risk of 5%). Since LEN was recommended, the low has been $40.01. If the market had looked less strong, I would have picked an initial entry that was just above the weekly mid-point of $39.21.

The weekly OBV (not shown) is ready to make another new high this week. Also, both the weekly and daily RS lines are above their MAs and acting positive. Therefore, I Tweeted a new recommendation before Thursday’s opening to go 50% long at $41.44 (just slightly below the close on 6/25) and 50% long at $40.81 with a stop at $39.44 (approx. risk of 4.1%). The stock opened at $41.81 and traded as low as $41.00 by mid-day.

On June 4, I recommended Altera Corporation (ALTR) as it had just generated an Aspray’s OBV Trigger (AOT) buy signal as the OBV moved back above its rising WMA. The prior day (point 1), ALTR closed at $39.38, which was well above the 20-day EMA at $33.09. The chart and technical studies looked quite positive and the prior day’s range was $0.49 and, therefore, $0.25 cents below the day’s high of $33.48 was $33.23.

I also looked at the twin dojis that were formed several days before I made my recommendation (see boxed insert) as, on both days, ALTR closed at $33.25.The prior three week low was $32.05 so my stop was placed at $31.79.

Therefore, my recommendation for Altera Corporation (ALTR) was to go 50% long at $33.27 and 50% long at $32.75, with a stop at $31.79 (risk of 3.7%). The recommendation was tweeted before the open and ALTR opened at $33.21 so the initial buy level was hit.

ALTR hit a high last week of $35.32 and is now pulling back. The strength of the next rally will be important as a failure to make another new rally high will be a signal that I should reduce my position.

Alcoa Inc. (AA) was an early February pick as the very high readings in the ARMS Index reflected panic selling in the stock market. The daily chart showed the sharp rally in AA from the January 10 low of $9.77.

Just seven days later, AA had reached a high of $12.26 and formed a doji. The following day (see chart) a LCD sell signal was triggered. The stock quickly dropped to the short-term 38.2% Fibonacci support at $11.31, and ten days after the high, the 50% support at $11.02 was also violated.

AA came up in my monthly scans and closed on Friday January 31 at $11.45. I thought that a wide stop at $9.88, just below the January 13 low, needed to be used. Therefore, for Alcoa AA, I recommended going 50% long at $10.86 and 50% at $10.24, with a stop at $9.88 (risk of approx. 6.3%). This was a higher risk than I normally like to take but it looked as though AA could be forming a major bottom and I had been bearish on the stock for some time.

Five days after the column was released, AA dropped to a low of $10.81 but then closed the day at $11.04. The stock gradually began to climb and the OBV broke through resistance, line a, on February 19. This provided further evidence that the uptrend had resumed and, eventually, AA hit a high in early March of $12.35.

Later in the month, I did not like the short-term action so I Tweeted a recommendation on March 20 (point 2) to sell one-third of the position on the opening. This was filled at $11.80 for an 8.6% profit and I also then raised the stop to $11.35. This locked in a profit on the entire position. This week, the stock hit a high of $14.79 and may look to sell another one-third of the position at higher levels as it is up 33.4% from the entry level.

Often times, the stock or ETF will just run away from my buy levels but I try to never chase a market as it makes the risk too high. Sometimes the market will move higher for a week or more but then drop back to the buying level several weeks after it was recommended.

On June 16,I recommended Chevron Corporation (CVX) as it had closed the prior week strong (point 1) at $127.76. This further confirmed the breakout above the resistance at line a.



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