So, a stock which is at new highs has much more of an open running field?
Right, because no one ahead of you is at a loss and wants to get out at the first opportunity. Everybody has a
profit; everybody is happy.
But the downside of that is if you wait for a breakout to new highs, a lot of times the market will
pull back into the trading range. How do you avoid getting whipsawed in those situations?
You can tell a lot by the volume. If the volume doubles one day and the stock moves to a new high, it is
telling you a lot of people are interested in the stock and buying it.
So volume becomes very important as a filtering process to avoid getting whipsawed.
Yes. If the stock moves to new high ground, but the volume is only up 10 percent, I would be wary.
Do you buy it the first day the stock breaks out to new highs, or do you wait for it to consolidate
for a few days?
I want to buy it as soon as it goes to new highs.
If you buy a stock at new highs and it then pulls back into the range, at what point do you decide
it was a false breakout? For example, assume a stock that has been trading between $16 and $20 goes to
$21 and you buy it. What do you do if two days later the stock is back to $19?
If it reenters its base, I have a rule to cut at least 50 percent of the position.
If it reenters its base at all? Do you mean even if it is just below the top end of the base, or do you
require some minimum penetration?
No, if it just reenters the base. In some cases, it will break out and come back to the top of the base, but not
reenter. That's fine, and I will stay with the stock. But if the top of the base was $20 and it breaks back to $19
3
A, I
want to sell at least half of the position because the stock didn't keep on moving. Frequently, when a stock drops
back into its base, it goes all the way back down to the lower end of the base. In the example, if it goes from $21
down to $19X it will often go all the way back down to $16. Therefore, you want to cut your losses quickly.
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