Tuesday, October 05, 2010

Target Trades

Most of our trades fit in the following categories:

1)  breakout of resistance long
2) breakdown of support short
3) resistance short
4) support long

but we also have one more strategy we like to use called a "target trade".   If you've followed this blog for the last four years you've seen us make this trade countless times -- most recently on XME 53 and GS 148.5.

Basically a target trade means you take a position well under the actual alert with the conviction that the alert will at least trigger.    You don't know whether the break-out will fail or be successful but you do have conviction that it will at least trigger.

To make this strategy work well you have to make sure several  conditions are met:

1) the alert spot is very clear and has many eyes looking at it.

2) done in a benign trending market

3) you're buying in a range-bound base that is not extended and has support near-by (so you have a natural stop relatively close by on a swing basis). 

To look at specific examples look through the XME GS links above but to sum it up -- here's an example:

Stock HCPG is basing very nicely under 50 -- it's come close to touching that number several times and you have had an alert there for weeks.   The market acts well and the sector to which HCPG belongs has been acting strong.  The stock is not extended.    You have a good feeling that 50 will trigger -- however it's becoming a crowded trade and you know there's a chance of break-out failure.  You have conviction that 50 will trigger but you are not sure whether the break-out will work or not. What shall you do?   Get in before.  So you buy a swing position at 47.89 within the range of 46-50 with a stop under 46.    If you are a new trader we recommend just having a pre-defined stop.  If you've been doing this for a while then we recommend the same as what we ourselves do, and that is to trade around the position in order to be able to withstand pain and not get chopped out.  If the market weakens, put on short index hedges. 

The next day market gaps up and stock HCPG makes a fast run for 50 on the opening bar.    If the set-up is excellent and the volume is significantly above average, and it's a sector move, then if you wish you can add to the position and move stop up to above break-even.    However most of the time all ducks do not line up and what we prefer to do is to take some off into the number to lock in profits.  Why?  Because our conviction was about the stock actually hitting the alert, not what came after it.   This is what we did on XME 53 (which worked well since the breakout actually failed) and this is what we've done on GS 148.5 ( a move we've telegraphed for our readers for the last 6 days on the trend-line break).    Remember that once the alert actually triggers your primary goal has been met -- therefore after a trigger, NEVER let the trade become a losing position.   

Remember -- spots which are technically very clear serve as magnets -- in our experience they almost always trigger.   What happens after they trigger however is much less clear.   

It's a strategy that works very well if you're patient enough to use it only when the conditions of the trade are met.

Daytrader tip: In extremely benign trend days with excellent breadth what we also often do is to simply go through our alert list and buy whatever is close to triggering.  Why?  Because alerts (based on support and resistance), act as magnets.   Hop on the steel ball rolling towards the magnet, take some off when magnet meets ball.