Question:

Most of my money is tied up in my govenment TSP(Thrift Savings Plan). I have a choice to put the money in either government bonds, the S&P 500 fund, small cap fund, Foreign fund or bonds.

Question:

Just wanted to let you know that I am glad I continued with your service. I have been able to find some great stocks from your watch list.   How do you find these stocks? Out of all the stocks that have increased in the most in the last few months, do they have something in common that the other stocks that have not gone up as much have?

My Response:

Question:

I am struggling a bit with my profit taking sell rules.  I do pretty
well selling positions that aren’t working to keep my losses small.
However, I have trouble holding on to my winners.  I either sell to
early wanting to bank that profit (especially after a few losses in a
row) or watch a winner turn into a breakeven or small loser (I try to
limit my winners from becoming big losers).  I am trying to do the
O’Neil 3 to 1 thing but find many of my purchases never quite make it to
the ~20% level before they correct.

Do you have specific sell rules?

Any ideas in this area would be much appreciated.

My Response:

It’s a good question – selling to take a profit is the most difficult part
of investing because there are so many if’s, and or buts.

Honestly, I don’t have specific sell rules but do follow certain guidelines
you’ll want to consider:

1. I almost always sell before an earnings announcement

2. Typically, you’ll want to lock in profits around 20 – 25% in a strong
market, but towards the end of a bull run or in an iffy market, consider
taking profits at 15%.  So instead  of a (20% – 25% to 7%-8% ratio) use a
(15% to 5% ratio).  If you look at my model portfolio, you’ll notice that
the average gain is around 15.5% and the average loss around 5.5%.  Maybe
consider taking profits at 15% while keeping losses small.  You can be right
less than half the time and still do very well.

3.  Did the the stock break out with force and run up quickly then
consolidate quietly?  Is it still exhibiting good price and volume action
(heavy buying, light volume selling).  If so, this could be a big winner for
you and you may want to hold out for profits more than 20 – 25% in a
strong bull market.

4. Look for a change in trend of price and volume as a signal to lock in
gains.  A good example is CBG, a current Model P. holding.   Beginning July
5th, buy volume began to subside as it edged higher.  Of course in hindsight
I should have locked in that 20% profit right then and there.  At the time I
was thinking that post holiday trade was skewing the volume a bit and high
volume selling hadn’t yet appeared.  Now that they have appeared I am
looking for an exit point, preferably around 45, if it can get that far.  I
still have a decent chance of locking in 15% profits before earnings.

5. Don’t forget to pay attention to upward trend lines as well as prior
resistance points as well.  They can provide good predeterminded sell
points.  A good example of this is DCAI, another current holding in the M.P.
This is a stock that has carved out a deep base, with resistance at the high
in the left side around 35.  Would I continue holding if it hits that high?
No, I’m taking very nice profits off the table.  Deep bases have a much
higher failure rate, so it’s unlikely that DCAI gets to 35, carves a nice
handle and shoots to the moon. I’m just looking for a nice run in the right
side and unloading.

Selling is somewhat of an art form and you will never be perfect.  If you
can keep losses small and maybe move your profit target closer in a bit, you
will be successful.

I have certainly had my share of blunders.  In 2003, I took a quick 50% gain
in TASR, that cost me 10’s of thousands in the long run.  At the beginning
of this year, I let large gains in DHB, XXIA and TASR slip away in the Model
Portfolio and have been chipping away all year to recover those losses.  It
is important to track your trades and learn from mistakes.  Be flexible and
adjust.

I think you’re on the right track, just a few minor adjustments.

Member Response:

Thanks.  I agree selling is the most difficult but probably the most
important as well.  I have tried to adhere to the 3 to 1 mantra but most
of my stocks purchased have corrected before they hit the 20% range and
then I hold on too long for either a small loss or gain.  I have more
recently been willing to take 12 – 15% gains but then feel my stops
become a little too tight and get stopped out of good trades.

I have since widen my stops a bit but try to keep losses to 4 – 5% and
then take 10 – 15% gains, especially in a less than raging bull. 

Do you see value in a 1st level profit target where you would sell 75%
of your position and a 2nd profit target to sell the remaining 25%?  I
have always talked myself out of this type of selling but know
evaluating the merits again.  What are your thoughts?

My Response:

If you’re buying at the correct time, cutting your losses at 5% should keep
you in the majority of trades, provided you have good entry points.  Maybe
take a look at your entry points and the quality of the base?  I’d be happy
to take a look at a few if you’d like.

I do see some value in taking partial profits depending on the situation,
but I’m more of an all or nothing trader.  This keeps the number of
positions to a minimum and keeps commission costs lower.  It really depends
on the company.  I think that the solid, established companies like an
Apple, Starbux, Google ,etc this method can be a good one for locking in
profits ahead of earnings.  For example, I will most likely take 50% profit
on Google before earnings are released (on the 21st) and let the other half
ride.  If the stock drops to support maybe I add back that other half.  If
the stock soars on the earnings, you still gain on the other half.  However,
with more volatile, unestablished companies, the best option is to usually
sell ALL before an earnings report.

Generally speaking, I think it’s best to avoid getting too cute with
selling.  If you have the solid 20% gain, take it… ALL of it.  Just
remember the signs of what to look for with the potential big winners, which
might provide larger gains.

My Response:

Just wanted to discuss trading in the first half hour a bit so there
isn’t any confusion about my strategy.  If you’ve been a member here for
awhile you know that I won’t make a trade in the first half hour to hour
when purchasing a breakout.  However, there will be times when making a
purchase in the first few moments of trading will be advantageous.  When
a stock breaks out and makes a significant gain (such as in the case of
DCAI which vaulted 9% yesterday), it will often pull back significantly
in the first few minutes of trading at some point  over the next couple of
days as traders take quick profits or the stock gets a valuation downgrade
from a brokerage (what I like to call a "red tag sale"!) and then recover
almost as quickly.  If you missed a breakout the previous day or were
holding out longer to make the stock "prove itself" it can allow you to get in
at a price closer to the original pivot.  So trading may occur in the first few
minutes under special circumstances.

Why not just purchase the stock at the breakout, which in the case of
DCAI would have been 24.78?  You could have purchased at this price but
I believe it would have been a riskier trade.   Considering the stock
failed to breakout successfully the first time I made the purchase, I
wanted the stock to prove itself yesterday by closing the day above the
pivot, which it did.  Sure I take the chance of the stock getting away
and missing the trade completely, but it’s a risk I’m willing to make.
There are always other opportunities.

If you look at Grupo Aeroportuario (ASR) in the first few moments of
trading this morning, you’ll see it made a similar move.  The scenario
was a bit different in that the stock was continuing the reversal at
resistance of 35 that it began yesterday, but it too returned to near
the pivot point in the first moments of trading today offering another
chance to get in.  It wasn’t a trade I made in the Model Portfolio, but
getting in at 33.25 or so would have provided a nice entry point on a
technically superior stock.

I’m familiar with most of the books recommended. In my humble opinion, they are more of an investment classics actually.

Would recommend 1 more though

Lessons from the Greatest Stock Traders of All Time – John Boik.

It includes to-the-point essential techniques and rules, charts, Short and Concise and Easy to read or re-read
( These elements are important and helpful in sustaining a long term discipline )

It features these 5 traders

• Jesse Livermore–How early market defeats taught him the number one rule of profitable trading–Cut your losses and move on!
• Bernard Baruch–Techniques Baruch learned from his $5 a week Wall Street job–and how they helped him build a multimillion dollar portfolio
• Nicolas Darvas–What this "outsider" did to regularly outmaneuver Wall Street’s top pros in his spare time
• Gerald Loeb–What Loeb saw that many others missed, allowing him to sidestep the Crash of 1929
• William O’Neil–How O’Neil expanded on the time-honored rules of his predecessors to become a great modern-day success story

If there is only one book that an investor can read, it’s definitely this one. And just as Nicholas Darvas re-reads Loeb’s book every 2 weeks while active trading, this is definitely a top choice for current investors.

If sections were prioritized for re-reading, my recommendations would be
1.) Nicolas Darvas
2.) William O’Neil
3.) Jesse Livermore

There ‘s another investment classic series which i may intend to acquire and read or recommend :-
A fool’s money – John Rothschild.

Question:

I noticed last years annualized returns is 32%.

Actually, there was another website whose analysis and annualized returns is about 100% and there was another website focusing on volume analysis that reflected an even more postive returns of over 200% with QQQQ options trading!

This is not to say who is better but just can’t help noticing the difference and wondered why…any comments ?

My Response:

Question:

How do you determine your position size and where do you set you
initial stop?  Do you enter the entire position at once or look to scale in?
How do you choose among the potential candidates for purchase and maintain a
balance across strong sectors?

My Response:

Good questions.  When I’m maintaining a portfolio I typically like to hold
no more than 6 or 7 positions (for a smaller portfolio this may be less, a
larger maybe a bit more).  With this in mind, most positions for this
portfolio will be in the 10K to 20K range.

As far as how big a position I take in a stock really depends on the stock
and the action of the market.  If the market is uncertain, I’ll initiate
smaller positions to start and add to that position if it continues to act
well and/or market conditions improve.

For stocks that I would consider to be "core" holdings I’ll initiate larger
postions.  These are stocks with a longer history of solid results with good
support from institutions.  I would consider FFIV such a holding.  Other
examples of these kind of companies might include a YHOO, SBUX, EBAY,AAPL,
etc.

As far as setting stops I don’t set stops because I’m able to watch the
market during the day.  Stops should generally be set a couple percentage
points below the nearest support level (that could be a moving average OR a
whole number).  For example, in the case of ECIL my sell trigger would be a
drop below 8 since this was an area of resistance in the past and appears to
be serving as an area of support right now.  Whole, significant numbers
often serve as areas of support/resistance.  If the stock price is below 10,
any whole number can be support resistance.  As you get to higher priced
stocks, that tends to move to multiples of 5. 

As far as choosing candidates, I use the Breakout Tracker just as my members
do.  It’s really a system I built for myself because I wasn’t happy with
what’s available.  I’m just sharing it : ).  Look at the Top Industries tab
and look for common themes among 10, 20 and 30 day performance.  If you
take a look right  now you’ll notice strength in anything internet related, semis, home
furnishings/appliances.  Basically, tech is where the money is moving.  You
can see top stocks from top industries by clicking the link "show stocks of
top industries".  The default sort is by Total Rank.  This instantly gives a
list of the highest rated stocks in the industries that are really moving.
You’ll notice 2 right at the top that were featured in the latest stock
watch report: FFIV and VDSI.

You can also find these top candidates in the Breakout Watch screen (which, by the
way can be filtered to show only those stocks from the Top Industries) in
order to find buy candidates quickly.  I use this screen to come up with a
great list of candidates very quickly.