Monday, October 21, 2013

Rising Stops Will Lock in Gains (Hopefully)

My positions are doing well, which is a good time to start worrying. Luckily, my stops are rising, and that should help lock in gains.

As a reminder, I use a combination of initial, close-only stops and trailing, close-only stops. 

That is, I set an initial stop where I think it's prudent when first entering a position. That stop is activated if the stock closes at the stop or lower.  I then sell at the open the next morning.

When a position reaches a 10% open gain from the initial entry, I then raise the stop to the entry price.  It then becomes a trailing stop -- rising if/when the closing price rises. That stop is activated if the stock closes at the stop or lower.  I then sell at the open the next morning.

I gave up on intraday stops because it became painfully obvious the HFT traders were pushing the market down to activate my stops, and giggling all the way to the bank. I remember back in the day when trader would laugh and say "so you think the market is out to get YOU?" 

Thanks to high-frequency trading, yes, the market is out to get me.  It's out to get you, too.

Here are my open gains on my natural resources positions. No, I'm not showing you what the stops are.

It's not too surprising that all the open positions are in positive territory. It's been a good month for natural resources and for the markets generally. A bull market makes everybody look smart.

You may not think that EPI and CEW are natural resource positions, but in my view they are. EPI is India, and thus one of the biggest markets for commodities. CEW is the emerging market currency fund, and that's obviously linked to the dollar, which is (or should be) fundamental in commodity pricing.

An Example of a Trailing Stop

I hesitate to even talk about my stops on a public blog. You never know when some bot is fishing for information to use against you. But I'll give you one example.

TAN closed higher at 39.50 yesterday.  10% of that is 3.95. Subtract 3.95 from $39.50, and the new stop as of this morning became$35.55.

Since I entered this at just over $30 a share, that locks in a nice gain, PROVIDED that TAN doesn't gap down the day after the stop is triggered.

In the meantime, I'm content to let it run.  TAN gapped higher today, which is always good news, and the ADX tells me that this bull run isn't tired yet.  If TAN continues to rise, I'll continue to raise the stops.

That's one example. Obviously, I'm protecting nice open gains in PKD as well.  REXX just recently joined the raised-stop club. The rest of the picks are still working their initial stops. 

However, I don't become hidebound by the rules. I'm also going to raise my stop on DVN, because its big surge today brought it nearly to a 10% gain.  I might as well protect some of that, even though it's not at 10% yet. Stops can also be adjusted to take advantage of natural support in any stock. And I use wider or tighter stops where prudent.

DVN is surging partly because of the news of its deal with Crosstex. However, I also think DVN is surging because CNBC is talking about oil plays today. I have mixed feelings about that. I always worry that by the time the babbling heads on TV notice a trend, it's over.

My gold positions have eked out small gains, and I'll add new positions if we see follow-through this week. Interestingly, analysts from the big banks are now saying that gold is poised for a November rally. That also worries me, but we'll see.

I'm writing this post to give you an idea how I trade my plan.  You should have a trading plan as well, and it doesn't have to resemble my plan. You just should have SOME kind of plan.

This market seems simple right now -- everything is going up -- but it will turn and bite you like the rabid pig-dog it is, and it could do that at any time. You plan for the good times. You plan twice as much for the not-so-good times.

I keep saying this, and it's worth repeating: These are not official recommendations. I am not your investment adviser. You should not buy something just because some guy on the Internet likes it.  Do what is best for your own investing purposes. 

And good luck to us all.

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