Wednesday, August 16th, 2006
The only profit-taking rule you need (part II)
Yesterday we looked at the only profit-taking rule that CANSLIM and breakout investors really need.
We’re going to be a bit cheeky and apply the rule to F5 Networks (FFIV). Investor’s Business Daily recently took a look at how it would apply its own sell rules to the stock.
Here’s how Global Growth Investor would have played it.
As with the theoretical example yesterday, the first stop loss goes at point 1, below the base/consolidation where the breakout (and buy point) occurred.
After the breakout, the FFIV reacts to just above $50. But we only move the stop loss up when it hits a new high at around $57. We keep repeating that after each reaction and subsequent new high is made.
We end up with a stop loss at point 5 when the stock hits a new high of around $74. But after the new high is hit, instead of forming a higher base it falls beneath the previous base at around $62.5.
As the stock no longer making higher bases, it is not trending up anymore. Our stop loss point is triggered and we sell.
Some will correctly point out that when the stock hit a new high of around $74, it then formed a new (small) base before rallying to around $74 again. When it fell beneath that smaller base at around $68 that could also be viewed as a sell signal even though a clear new high had not been made.
In coming articles we’ll take a look at how to deal with situations like that and some other patterns that signal a trend has ended.
Word Count: 262. This entry was posted on Wednesday, August 16th, 2006 at 3:19 pm and is filed under When to sell. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
