My job prohibits me from any other role than being an end-of-the-day trader. Consequently, I often miss buy points when a stock explodes past the appropriate buy range (pivot + 5%). In a strong bull market I can stretch my buy window to +10%. In this sideways market, however, I am wondering if I should put a buy stop near promising prospects even though I understand that I cannot possibly predict which ones will blow and which ones will continue to consolidate. A buy stop with a Good-Till-Cancel might ameliorate this dilemma somewhat. Of course, I could also wait for a pullback but with this market many good breakouts are falling back below the pivot. Do you have any thoughts on this? This question becomes more interesting as I am watching EASI being absent from my portfolio.
Another member was asking me about this recently. I’m going to copy here how I replied to him, then I’ll add some more comments.
It’s a great question. There are a few things that you can do..
1. Placing a buy stop around the pivot point is not such a bad idea. .. the
only problem with this is that you don’t have the luxury of avoiding a
purchase if the buying volume is not there. Being able to watch the stock
move in real time is a major advantage and often times you anticipate a
large move in stock by looking at the volatility around the pivot point.
Unfortunately, not many have the luxury of watching these breakouts in real
time. If you use the buy stop and find that the stock is not breaking out
successfully, you can always sell the next day.
2. If you have a cell phone that allows you to receive emails, you can
receive these alerts as they happen and put in a call to your broker or make
an online trade at a break in work or on your lunch break provided the stock
is still within the 5% range.
3. Another strategy is avoiding the initial breakout altogether and waiting
for a pullback to the buy point range (half of all stocks will come back the
buy point before resuming their advance). If you take a look at the
Breakouts area , all of the previous breakouts are listed. There are some
good buys there (i have not had time to rank those yet, but plan to do so
soon). Companies like Robert Half (RHI), Kensey (KNSY) I believe are still
in a "buyable range" which is 5% from the breakpoint. Also, if you take a
look at the recent additions to the portfolio, all are still in a buyable
range. However, it’s important to buy as close to the pivot as possible.
The reason for implementing the ranking system is to keep investors focused
on the very best breakouts with just seconds a day… there are a ton of
stocks out there and it only makes since to hold 5-10 at a time, so why not
own the best. Since your capital is limited I would focus on only the best,
which are generally stocks purchased for this portfolio. I am also
considering adding a risk rank for each breakout stock to give investors
another tool for buying what’s best for their circumstances. If there is
anything else you’d like to see in this area, please let me know.
I would never recommend chasing a stock that is 10% past it’s pivot point.
The only time this is a good idea is when a breakout stock returns to the 50 DMA
and bounces (ok, to add shares here). But this strategy requires you to watch
the stock carefully in real time, so it doesn’t suit your situation very well.
Here’s a strategy that I would use. For the absolute best candidates, you may want
to try the buy stop method. The only problem I see with this is that your order will get filled far
away from the buy stop, especially if the stock is really running. So, you’ll want to put in a limit.
The other strategy is to keep an eye on past breakouts with the Breakout Tracker. Which stocks
are highest ranked in all categories. Do a sort by overall rating, then check the gain from breakout.. is it
within 5% of breakout? Is it pulling back on light volume? Is it finding support at key areas?
If so, pull the trigger provided the market is cooperating. As far as EASI goes, the stock will undoubtedly pull
back to an acceptable buy range, so keep an eye on it.
Hope this helps.. let me know if you have further questions.