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Thursday, March 09, 2006

Viewer Mail - 030906

Kevin sent the following email:

"I've been following your blog for a while now and I'm interested in how you set your stop once you entered a trade and it's going in the direction you want. I remember you saying that you set your stop initial at the other end of the bar that you use to enter, but how do you move it from there? For example, on the LEXR trade yesterday, on the 3rd bar there was a big upper wick and then the price seemed to retrace to your entry point on the 5th bar(or at least close to it). when did you decide to move your stop? Again on bars 9,10, and 11 there was a slight retracement. Just curious how you deal with them.

Thanks for your time!"

I wish there was an easy answer, but there is not. There are many things I try to consider when moving stops and protecting profits:
- give a stock some "wiggle room"
- don't let a winner turn into a loser
- hold out for your target
It can all be confusing, and you only get "good" at it through experience.

Having said that, here are some general thoughts:

Using your reference to LEXR as an example - I was worried about the third bar, and would have closed the position if price closed back below the opening range (OR) high. It never did. That is one reason I did not sell on the fourth and fifth bars - also, those bars did have upper wicks (as you mention), but they also had lower wicks which indicated indecision (so, more neutral than bearish). When I saw the sixth bar narrow in range and close strong, I felt good that the rally would continue.

Going back to your email, bars eight through ten formed a shallow pullback, and bar eleven was a nice hammer - so I was not concerned about that area.

The bottom-line is there is no real rule of thumb. Look at BLS on Monday - it was narrowing in range and could not really clear the OR high (even though price was above the OR, it never "took off"). That price action was throwing up red flags as I indicated in the post.

In general a close back below the OR is a huge red flag (though, I don't always close the position at that point - I will sometimes wait for the original stop to be hit). Other than that, you have to pay attention to the price action and analyze what is going on in the big picture. That is why I always "preach" about taking fewer high-quality set-ups - that way you can monitor them closely.

One other area I watch closely is the half-way point between the OR and the Fibonacci extension - price will sometimes stall/reverse at this point.

I don't know if I answered your question, but I hope it helps.

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