Have you ever been in a position in a stock and found the market dip for two or three days so you sold and then the stock rebounded even higher than before the dip? Ever wonder what was happening? You were a victim of the shake out.

The big players drive the stock down for various reasons, sometimes simply profit taking, then jump back in and drive the stock back higher and higher since the fundamentals of the stock hasn’t changed, a good stock is a good stock. This dip only takes place for two to three days, which is usually enough to get the people who are unfamiliar with it to jump out of the stock position and sell their shares. Now the big players buy this cheap stock at a better price. They drop the share price using simple supply and demand and usually there is no real news to warrant such a drop in price. A person who owns shares but is not committed to the position will run scared and sell on the dip.

This type of trading is common to every stock but the defense to this is to watch the volume and wait until the fourth day of a dropping stock on higher volume before you sell. This takes heart, to hold a position that is losing money. It will, however, come back with the absence of any material changes to management, products, competition, technical supports reached or earnings news. if the fourth day is not reached.

Most of the time on the third or fourth day the stock will rebound higher on higher volume. This signals the move back into the stock by the institutional players. If you want to invest with the big boys, you have to learn their rules.

Good Luck!

Matt Fox is a private investor and entrepreneur. He is currently writing a series of investment books giving advice and suggestions about trading different markets and making wise choices at the right time. He is finishing a book about entrepreneurship and you can check out his blog for daily tips at http://www.bizmaker.blogspot.com

In a bull market, it is not difficult to generate wealth from investing in stocks and shares. The general trend is up and you can benefit from this.

Trading now is easy - open an online account and the total cost of the buy and sell is small if not negligible.

It is worth noting this: the low cost of the buy and sell means that it is pretty possible to supplement your income by a few hundred or thousand dollars a month. Of course we know that people make millions in the markets, but they also have to risk millions. Take Warren Buffet, his profit from the dollar decline may be making him billions, but it cost him a billion to make the bet.

I’m pretty risk averse and I like to calculate my earnings in hard cash at the end of each month. So it is not unusual for me to cash out everything after only a month and start again, even if the stocks are doing well and I lose out a little in the transaction charges. This approach has many other important benefits, including:

a) it keeps me unemotional. The stock (they call it a share in England) is just an entity that I trade and each month i’ll risk my money on that or any stock that may give me the best return.

b) I don’t fall into the trap of leaving my money somewhere where I’ll forget about it and hope that one day it’ll be worth much more.

c) I get used to the process and always have my eyes on the market. I get to know how strong or weak my stocks are at any point in time. In other Words, I’m keeping an eye on my money.

I’ve started a newsletter to share my experiences: www.wanttosaysomething.com

15th May 2006

Shares crashed today. Apparently due to a predicted rise in interest rates, but also the weakening dollar and the unknowns of the Iran situation. This just goes to show the benefit of diversifying, but also the fact that no one knows anything.

Normally the strategy is to attempt to make your capital appreciate quickly, which inevitable means investing in higher risk stocks. But on days like this, it is the "blue chips", [which grow incredibly slowly] that retain most value.

Still, days like today are a good time to buy. Problem is knowing where the bottom is. Do I risk buying today when they could fall again tomorrow. Best strategy is to wait and see what happens tomorrow. If I see red, I’ll wait. If I see green…well you know what that means.

Learn more…

Click to view the new online newsletter: http://www.wanttosaysomething.com/

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Share my investing experiences at WantToSaySomething.com

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I have been watching as a several people on a forum discuss, argue and lend their ideas about entry techniques. They are going crazy over what the proper entry should be and why one chart pattern is better than the other. One person has even said how they purchased massive amounts of software to help them enter the market. Now don’t get me wrong, I always use techniques to get me in the market but I understand that this is the least important factor weighing on an investor’s overall success. I use technical analysis every day and I study patterns that allow me to enter with the ideal buy point (what I believe to be the ideal entry) but I know that strong up-trending stocks give me just as good a chance to make money as stocks breaking out of a cup with handle pattern. I am one that makes my living buying stocks making new highs so I can basically prove that the random entry strategy does work as long as strong money management and exit strategies exists.

By reviewing my personal trades and the coverage of dozens of stocks on the MSW Index over the past two years, I can tell you that my system with the highest expectancy is buying fundamentally sound stocks that are making new highs on above average volume. Where do I find these fundamentally sound stocks? I use multiple computerized screeners that filter out stocks with increasing earnings, high EPS ratings and increasing relative strength ratings. Once I find these stocks, I narrow them down using my own eyes by performing technical analysis. The process is simple as I am basically looking for stocks making new highs with decent to strong fundamental numbers. The process is almost random. To tell you the truth, I could probably narrow down my buy candidates each week to a list of 20 and throw darts at ten stocks to buy the following week and still have a profitable year because I do use position sizing and strict sell rules. Think I am crazy: think again as I explain what expectancy is.

I responded on the forum by saying: Entering at the right time is important and it can lower your risk and increase your overall expectancy but money management and exits are much more important than entry.

Studies have been done between random entry systems and specific systems that use entries based off of chart patterns with amazing results. The random entry system typically outperforms the structured entry system when it uses money management (position sizing techniques) and a strong exit strategy (assuming that the structured system doesn’t employ money management tools).

I love CANSLIM and O’Neil but the entry is not the most important aspect you should be focusing on, it is money management and exits. Most people don’t want to hear this and that is why so many “entry based systems” sell so well over the years. How many of those systems actually make their users money? CANSLIM does use a 7%-10% sell stop rule but it ignores position sizing and never explains the probabilities of the system when implemented in certain ways.

As I said, I make money using a system based from CANSLIM (an entry system) but it is heavily balanced with strong money management techniques and a strong exit strategy.

So what is expectancy?

Expectancy tells you what you can expect to make (win or lose) for every dollar risked. Casinos make money because the expectancy of every one of their games is in their favor. Play long enough and you are expected to lose and they are expected to win because the “odds” are in their favor. Most games at a casino are completed in a short period of time so they can increase their odds of winning. The same holds true for investing. If your expectancy is positive; you can make more money with multiple trades in shorter periods of time. If you told me this ten years ago, I would strongly disagree based solely on beliefs. Now with experience, I continue to move down the path to more frequent trading and a structured system that is run like a business. I now have massive amounts of data based on real trading that I have performed over the past several years.

Expectancy is your profit percentage per win multiplied by your win rate minus your loss percentage per loss multiplied by your loss rate. I will use examples from Trader Mike’s: Trading 101: Expectancy (tradermike.net) and Van Tharp’s Book: Trade your way to Financial Freedom:

Expectancy = (Probability of Win * Average Win) - (Probability of Loss * Average Loss)

Expectancy = (PW*AW) less (PL*AL)
PW is the probability of winning and PL is the probability of losing.
AW is the average gain (win) and AL is the average loss

So let’s do an example (assume $12,500 per position, a $100,000 portfolio using 1% equity risk):
If my trades are successful 40% of the time and I realize an average profit of 20% but I lose an average of 5%, my expectancy is $625 per trade.

(0.4 * $3,125) - (0.6 * $625) = $625

$1,250-$375 = $625

I lose 60% of the time yet I show a profit of $625 per trade. If I have a system that produces 65 trades per year, I would realize an annual gain of $40,625 (hypothetical scenario). A 40% gain on the original $100,000 (minus all commissions, fees, taxes and compounding).

Trader Mike (tradermike.net) offers an example geared towards a day trader: "As an example let’s say that a trader has a system that produces winning trades 30% of the time. That trader’s average winning trade nets 10% while losing trades lose 3%. So if he were trading $10,000 positions his expectancy would be:
(0.3 * $1,000) - (0.7 * $300) = $90

So even though that system produces losing trades 70% of the time the expectancy is still positive and thus the trader can make money over time. You can also see how you could have a system that produces winning trades the majority of the time but would have a negative expectancy if the average loss was larger than the average win:
(0.6 * $400) - (0.4 * $650) = -$20

In fact, you could come up with any number of scenarios that would give you a positive, or negative, expectancy. The interesting thing is that most of us would feel better with a system that produced more winning trades than losers. The vast majority of people would have a lot of trouble with the first system above because of our natural tendency to want to be right all of the time. Yet we can see just by those two examples that the percentage of winning trades is not the most important factor in building a system. "
- Trader Mike

Most traders look for three major factors when developing a system:
The right odds or positive expectancy
Multiple trades (opportunity)
Shorter holding periods to compound the profits

Let’s look at the calculation one more time using only percentages:
PW: 48%
AW: 10%
PL: 52%
AL: 4%

(48% * 10%) - (52% * 4%) = 2.72%

Using a trade size of $12,500, each trade would return you $340 or 2.72% (profit). Let’s say this system gives you 200 trades per year; your result would be a $68,000 profit with only 1% of equity risked or $12,500 on $100,000. This doesn’t include compounding profits with each successful trade.

A positive expectancy can come from an unlimited amount of numbers or scenarios. You could have a system that produces winners 30%, 50% or 80% of the time and each system could be positive or negative based on PW, AW, PL & AL. An infinite number of trading systems and/or number combinations can be used to find a positive expectancy system.

The one thing I have realized over the past few years as my account grows is the fact that opportunity must exist to make money with a positive expectancy system. Think of the casino; the more you play, they more they win. The same is true for trading; the more you play with a positive expectancy system, the more your odds are for that system to return the expected number.

I have been tailoring my system to produce more trades and opportunity so I can take full advantage of the mathematical odds. As many of you know, I graduated as an architectural engineer and love numbers since my courses were based in advanced math and physics. Numbers don’t lie; I love to play poker because I understand the odds so I am typically successful over long stretches of time at the table because I have the emotional stability to only jam the pot when the odds are in my favor. Like stocks, I do my best to let go of losing hands and losing positions (sometimes I follow a committed hand in poker or a committed position with stocks but the odds are no longer in my favor and more times than not, I lose the hand or settle for my maximum stop). I am attracted to games with numbers and odds and the stock market is the best game in the world (in my opinion). Poker is a close second.

I want you to think about one more example (provided from ARB Trading - www.arbtrading.com)

"You will be more profitable with $100,000 that you could "turn" 250 times per year, than $500,000 that was tied up in one trade for 12 months. As an example, let’s say we have one trade and that trade yielded a 50% return. You just had a great year - a $250,000 profit.

On the other hand, say you had $100,000 for stock purchases, and your expectancy was only 1.2% per trade but you turned over your stocks 250 times in the same year. This method ends up generating $300,000 for the year, and that assumes you never increase the position size as the equity grows. You just had a better year. And it is easier to get 1.2% per trade than 50%." - ARB Trading

Chris Perruna - http://www.marketstockwatch.com Market Talk with Piranha

Chris is the founder and president of http://www.marketstockwatch.com an internet community that teaches you how to invest your money with solid rules. We offer an extended no obligation monthly trial period starting immediately with two free weeks. We don’t stop at just showing you our daily and weekly screens, we teach you how to make you own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.

Loads are the most talked about fees that mutual funds charge. A "load" on a mutual fund is just another way of saying that the fund charges a sales commission for purchase, sale, or both. There are funds that charge loads and there are funds that do not charge loads (known as "load funds" and "no load funds" respectively).

Front-end loads are sales commissions that are paid up front at the time of your purchase. So, if you give a fund a $10,000 investment and it charges a front-end load of 5%, then the fund will take 5% of your investment (that’s $500) and pocket it right away. Only what is left over after the load has been deducted will be invested into the fund (in this example, only $9,500 is invested in the fund from your initial $10,000 investment)

Back-end loads charge their sales commissions when you sell (or "redeem") your shares. So, when you go to redeem your shares in a fund with a back-end load you will end up receiving whatever money the shares are worth minus the sales commission.

Mutual funds charge management fees in order to pay for the management services used to run the fund. In other words, these fees are used to pay the salaries of the fund’s managers and analysts. Management fees usually do not amount to more than one percent of the fund’s assets, and they are significantly lower for passively-managed funds, such as index funds, than for actively-managed ones. You should remember that a high management fee in no way guarantees a more skilful management team.

Front loads can be reduced if you are investing or planning to invest a certain amount of money. The load reduction schedules are called "break-points." For example, with most fund companies if you are investing over $100,000 or plan to within the next 13 months, you will get a 1% reduction on the front load. The more you invest, the greater the reduction in the load. For some fund companies the break-point reduction begins at $50,000 over 13 months, and with many funds, if you invest over $2 million there is no front load.

If you do not have $50,000 or $100,000 to invest over the next 13 months, you can still earn a reduction on the front load, through "rights of accumulation." Under accumulation rules you will receive fee reductions on the front load when your total investments with one fund family have grown past the break points. Therefore, if you only have $20,000 to invest today, that’s OK, someday soon it will grow past the $50,000 or $100,000 initial break-point and you will be eligible for the load discount on your further investments.

The turnover ratio for a mutual fund can provide you with useful information about how expensive a fund is and how it is managed. Turnover ratios measure the amount of trading activity in the fund’s portfolio. They are calculated by taking all of the fund’s sales for a specified period of time (usually one year) and dividing by the fund’s total assets. This number tells you how much the fund’s portfolio has changed.

You probably will want to exercise caution when investing in a fund with a high turnover ratio. High turnover means that the fund’s manager is buying and selling very often, and, since every sale and every purchase involves a commission, this means that funds with high turnover ratios often have high expenses. Some experts recommend focusing on funds whose turnover ratio is less than 50%.

Copyright 2006 Michael Saville

Michael Saville has over twenty five years experience in providing finance and investment advice. He has written a free five-part short course on ‘no load mutual funds’ which is available at http://www.buy-mutual-funds.com

Within two weeks, SPX reached a high at 1,326.70 and a low at 1,256.28. Consequently, a correction may be underway that’s not yet complete. The first three daily charts below show the SPX 1994 correction, the current 2006 SPX, and the initial SPX 2000 correction. Generally, the three charts show, not long after reaching highs, falls to around the 200-day MA took place. The two previous charts show bounces from the 200-day MA, over two or three weeks, and then pullbacks.

The fourth chart is an SPX weekly chart that shows over the past two weeks, SPX fell from the upper Bollinger Band to the lower Bollinger Band. Consequently, the steep fall created a severely short-term oversold condition. The lower weekly Bollinger Band, currently 1,256 3/4, is a major support level. Also, the 200-day MA is currently 1,257 3/4. Further support are the 2006 low and a multi-year Fibonacci level, both at 1,246.

SPX 1,275 has been a key support and resistance level. Generally, SPX may trade in the lower half of weekly Bollinger Bands, currently between 1,256 3/4 and 1,289 1/2, over the next two weeks. If SPX reaches about 1,290 short-term, it may pullback in Jun, perhaps to 1,246 or lower. The fifth chart is an SPX monthly chart that suggests a fall below the middle monthly Bollinger Band, currently 1,222, will indicate the end of the cyclical bull market.

Charts available at http://www.peaktrader.com Forum Index Market Forecast section.

Arthur Albert Eckart is the founder and owner of PeakTrader. Arthur has worked for commercial banks, e.g. Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds from 1999-00. Arthur Eckart has a BA & MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.

Mr Eckart has developed a comprehensive trading methodology using economics, portfolio optimization, and technical analysis to maximize return and minimize risk at the same time and over time. This methodology has resulted in excellent returns with low risk over the past four years.

Unless you have been in a cocoon, you most likely are aware that China will in all probability become the next economic superpower in the world. The country’s economy is on steroids, growing at close to double digits over the past few years and this is not expected to change.

And if you understand the vast size of the country’s economic engine, you would also understand that China is a place where you need to have some capital invested. Of course, at the same time, you also need to fully understand the risk factors associated in investing in a country where the economy and corporate structure is strictly under the control of the communist-led government.

The concept of an open economy in China is debatable as there is the constant threat of government intervention at any time to suit the political agenda. Yet the risk is probably warranted given the vast growth opportunities that lie in the country for both multi-national companies and investors looking for some diversification outside of their borders. This region of the world will become the next big boom in economic growth as long as the Chinese government is willing.

A report just published by the Development Research Center of China’s State Council estimates that the country will report GDP growth of about 8% annually from 2006 to 2010. Based on the numbers we have been seeing, this estimate seems to be reasonable.

The report estimates that China’s GDP based on 2000 prices will hit USD$2.3 trillion by the end of the current five-year period in 2010.

In the subsequent 10-year period from 2010 to 2020, the report calculates a decline in the annual GDP growth rate to around 7%, which is still quite respectable.

For investors, the estimated numbers are staggering but then China must be able to manage any inflationary and growth-related issues going forward as the country becomes richer.

The country’s middle class of several hundred million strong is booming as citizens move from the countryside to the cities in search of opportunities to increase their wealth.

As Chinese citizens make more money, they become more consumption driven. This in turn pumps up the demand for both domestic and foreign good and services. That’s why we are seeing such a mass flow of companies into China searching for growth opportunities.

The bottomline is you need to be in China at some point. In future commentaries, I will examine some of the key Chinese stocks trading as American Depository Receipts (ADRs) in the U.S.

George Leong is the founder of Investornomics.com (http://www.investornomics.com) - a provider of independent stock and option trading commentary. He has a degree in finance/economics and offers over 15 years of research experience in investing and trading.

During the Telecom Bubble many people thought it would continue to rise forever as companies like Global Crossing, World Com and others watched their stocks soar through the roofs. In hindsight later after it all came tumbling down many people said that World Com was a sham and those contracts for international communications with Global Crossing were not worth the paper they were written on due to the instability of the governments who had signed those contracts.

Nevertheless everything just kept going up. Some made warnings and even Greenspan had warned of Irrational Exhuberence a few years the prior, not necessarily towards telecoms, yet it really had not been that long since the bubble burst in Silicon Valley.

Personally, I saw that coming as the Telecoms bought hyper-inflated frequency allocations bids from FCC and/or winning bids from VC. There were all sorts of games being played on the brink of 3G wireless and other technologies and they should have paid attention and invested in the future rather than playing protectionism and following the broadband hype of fiber optic. Long story.

It is amazing how history repeats and sector rotations occur and move around in cycles. Some technical analysts of stocks can see it, when things do not make sense and corrections are long over do. Similar to the stock market as a whole which had one of the biggest drops recently in six years and gave back all the gains of this year. Consider all this in 2006 when picking stocks.

"Lance Winslow" - Online Think Tank forum board. If you have innovative thoughts and unique perspectives, come think with Lance in the Online Think Tank and solve the problems of the World; www.WorldThinkTank.net/

There is an old rule in the market, often repeated by Jim Cramer on his "Mad Money" program on CNBC: "Bears win, bulls win, pigs get slaughtered." This means that those who hold on to their stock to long end up losing money.

So, when you should sell your stock? Sell strategies are just as important as your buy strategy. It seems everyone has their preferred way to buy. Every investment newsletter lists stocks to buy now; your broker has her favorite "strong buy" list; your friend at work has his "can’t miss" stock to buy now; heck, even the taxi driver has their favorite stock idea. Let’s assume they are each right with their picks. You followed their recommendations and the stock has gone up. What do you do now? Do you keep holding, hoping it will continue to go up? Do you sell it all, or maybe sell some of it?

Well, these are all good questions, since you do not make any money until you sell what you bought. To bad none of these people told you when to sell. Up until now any gains you have are unrealized and exist on paper. Only when you sell do you actually realize any profits from your investments and trades. Now, if you only knew what to sell and when to sell it. Actually, there are five reasons to sell stocks that have unrealized gains:

The price has reached the predetermined target you established when doing your homework before you made your purchase;

The price drops back down to your trailing stop order that you have set according to your stop rules;

You need the money for some other purpose (to buy another more promising stock, to invest in some other asset or for some other good reason;

As a part of good capital management you wish to realize some of the gains and reduce your holdings of this stock; and

You have reached the end of the time you gave for this stock to perform and you believe there are better opportunities.

Today, let’s focus on setting your exit target. If you did your homework before buying your stock then you should have a good idea of the potential it has to grow. This means you went through a rationale process to set a target exit price. This target can be based on analysis of the financial statements and then project performance over a set period of time. You can also use one of several technical methods.

Fundamental Approaches

There are several ways to calculate the expected price per share of the stock including Discounted Cash Flow (DCF), a stock’s P/E ratio (Price Earnings ratio) or Earnings Yield, among others. Stephen Penman’s book Financial Statement Analysis and Security Valuation is an excellent source on understanding financial statements and then using them to develop stock valuations both present and future. It is a text book in many MBA programs. To his credit Dr. Penman does not focus on the accounting used to develop financial statements, but rather how to use them in your investment analysis and valuation.

Let’s look at a simple example. XYZ Corp’s revenue and earnings were growing at 20% per year, with current Earnings Per Share (EPS) of $1.50 and a PE ratio of 25 (stock is selling at $37.50). Based on your careful analysis, you believe the company will continue to grow revenues and earnings at the same or possibly higher rate for the next year. Multiplying EPS by the 20% growth rates gives us the forecast EPS in one year of $1.80, assuming no dilution in shares outstanding. You also assume that the PE ratio will not change over this year. As a result the value of the stock of XYZ is forecast to be $1.80 x 25 = $45. This is an 20% increase in the value of the stock, not surprisingly since the only variable that changes was the growth in earnings at 20%. Now, if your analysis showed that XYZ grew their revenues faster than costs, earnings would have grown faster than 20%, say, for the purposes of this example, 25%. You might have also decided that since earnings were growing faster the PE ratio would increase from 25 to 30. As a result, the value of XYZ in one year is forecast to be ($1.50 * 1.25) * 30 = $56.25, a 50% increase in value per share. A very nice one year return.

With these two forecasts for the value of XYZ Corp, you have bracketed the growth potential of the stock. This gives you a range to set your target exit price. You also can use the assumptions you made to help monitor the performance of the company, the sector and the economy. It is important to stay current on the company you own on a regular basis. I encourage you each week to spend 1/2 hour per week per stock reviewing recent press releases from the company and their competitors, the sector and the economy in general. You will become a more successful investor for it.

There are several things to keep in mind regarding these forecasts for the price on XYZ Corp. First, these are forecasts and they do not necessarily work out all the time. It is best to monitor the assumptions you made as time goes by to assess if your forecast is working as expected. Second, this projection in the value of XYZ stock is based on analysis of the company’s financial statements. Business conditions can and do change, sometimes for the worse. If you perceive a change for the worse, then it is best to close out your position. With today’s low cost brokers, you can always reestablish your position if the situation changes for the better. Third, while this type of analysis isn’t difficult, it does take some homework and time. It is best to try to keep your analysis simple, so you understand the key drivers of the business.

Technical Approaches

Your exit target can also be determined by using technical analysis. Some technicians use what they call the Measure Rule as a way to forecast their target exit price and as a result how much profit they can expect from a trade. The Measure Rule computes the difference between the highest high and the lowest low in the formation they are analyzing to give you the formation height. Then they add the formation height value to the highest high to get the target price for upside breakouts and subtract the formation height value from the lowest low to determine the downside target.

I know of no rationale explanation why the Measure Rule should work. However, since many technicians use this rule it is helpful to understand it and be prepared for some selling to occur at the measured target. I am aware of an article by Thomas N. Bulkowski that modifies the Measure rule by multiplying the result by the percentage that meet the price target based on his statistical analysis as presented in his book "Encyclopedia of Chart Patterns (Wiley Trading) ". This approach employs uses actual results to statistically set targets based on the past performance of the formation that is observed. Since it is based on the statistical performance of each formation in the past, this approach seems to work as predicted using the probability in the formula.

For more on applying statistical results please see Thomas Bulkowski’s web site here.

Other technicians set their target based on the next level of resistance they see in the chart pattern. Resistance is where the price reaches an area of new and increased selling that halts the rise in the stock. Often this is where some investors who have been in the stock for a long time will sell to either recoup their losses or to breakeven. It is also an area that traders may use to close out their positions after buying at lower support levels. All this selling causes the price of the stock to pull back. When setting your exit target, this resistance should not be considered a specific price, but rather a range. Often the price will not hit the exact former high, so it is best to use a range for your resistance area.

For example, using your favorite charting software, examine the chart for Earthlink, Inc. Assume you knew to buy ELNK at 6.5 in April 2003. Using the chart and your technical analysis skills you set your exit target at 11.3. We also set this price as the target in our sample portfolios, so you can verify your ideas with ours. In the middle of January 2004 ELNK reached your exit target and your position was closed out for a nice $4.80 per share profit or 74% gain over 8 months. Not bad.

There are two problems with using resistance as your target exit price. First, if the stock is reaching all time highs, then there will not be any resistance levels to use. As a result you will have to use another way to set your target. Second, resistance levels are also points of entry for many technicians if there is strong buying volume associated with the penetration of the resistance area. These breakouts can cause the price to continue its upward movement. When analyzing whether to keep your exit target, it is a good idea to monitor the volume the stock is experiencing as it reaches resistance. If the volume is strong, indicating good demand for the company’s stock, then you may want to move your exit target up to another level. Examine the chart of ENLK again, noting that the volume started to increase as the price neared resistance. Then it pulled back as it hit 11.3. This indicated that there was insufficient buying demand to push the price through this resistance level. Generally, I look for volume building and substantially greater (130% or more) than the 50 day moving average for volume as an indicator that the price has the strength to penetrate resistance. Otherwise it wise to sell at your target. You can also sell part of your position 1/2 or 3/4 to capture some profits and then let your trailing stop protect the rest of your profits.

Historical Point Move

Another way to set an exit target is to calculate the point move a stock has made over a recent time period, say the last year, and then use that number to calculate your target. Let’s say you are interested in Company ABC as a value play that is currently selling at 20. This price was at 30 one year ago. This 10 point difference becomes the number you add to your purchase price to set your target exit price. Assuming you decided to buy at 20 then your target price would be 30 (20+10=30). Since the time frame used to determine the gain value (10) was one year, you should assume that this trade will take that long to realize its potential.

Using the historical point move strategy is actually similar to the technicians’ use of resistance levels. The point move over a set time period, say one year, does not necessarily mean the historical price is a resistance level. However, this historical price does act as a sell point when investors use this approach.

Another consideration, is when tax consequences from taking profits becomes important. Assume you have a gain and you are approaching the one year anniversary of when you purchased the stock. Currently, short term capital gains are taxed at your normal tax rate, while long term capital tax rates are 15%. If you are in a tax bracket higher than 15%, then it may benefit you to sell your stock after the one year anniversary. Your specific tax situation can also influence when you should sell. Please consult your tax advisor to help assess your current situation.

My Preference

For all of my trades I look at the results of the fundamental and the technical approaches. Knowing the value investors place on a company’s stock to determine potential the potential sell price provides a disciplined process assess your own position. Using technical resistance as shown on the charts also provides a good indicator of what traders are considering as their sell targets. Blending of these two techniques provides the best way to create a target exit with confidence.

Hans Wagner
http://www.tradingonlinemarkets.com
An education and portfolio management site for investing and trading stocks. Our portfolios substantially beat the major indicies and include buy and sell suggestions.

If you are a stock trader interested in improving your ability to pick possible turning points in the stock market, consider using Fibonacci retracements when identifying trading opportunities.

Using Fibonacci in your trading does not need to be complicated. Identifying obvious highs and lows on a stock chart is what you need to focus on.

Start by looking at a daily chart of your favorite stock. One of the fastest ways to determine turning points using Fibonacci is to start with the shortest amount of time that you can easily identify one significant high and one significant low. Make certain to start with the current date and work back in time.

Once the high and low is identified, use a Fibonacci calculator to determine the 38%, 50% and 62% retracement levels. Make note of these price levels, you will need them for comparison.

A Fibonacci calculator takes the difference between the high and low prices and multiples the result by either 0.38, 0.5, or 0.62. The new number is added to the low (or subtracted from the high) to get the appropriate Fibonacci retracement level.

Now look for the next significant high or low, one or the other, not both. Now you should have either a significant high and two significant lows or two significant highs and one significant low.

An example will make this clear. Let’s assume you are looking for a buying opportunity. Starting on the far right hand side of the stock chart, find the most recent significant high. Next, find the first significant low. Finally, you want to look for another low that occurred before the first low you identified and is lower in price.

For the next significant high and low, determine the retracement levels.

Here’s where the magic of Fibonacci retracements comes in. Compare the first set of retracement numbers to the second set of retracement numbers and look for retracement levels that overlap. That’s where your best trading opportunities typically are.

For instance if the 38%, 50%, and 62% retracement levels for the shorter time frame are at $54, $51 and $48, respectively, and the retracement levels for the longer time frame are at $55, $49, and $43, then the price to focus on is in the $48 to $49 range.

Why is that? You have traders from the shorter time frame using Fibonacci identifying trading opportunities along with traders from the longer time frame identifying trade setups that coincide with each other. Your job is to find out where the most likely opportunity of a reversal is. Fibonacci analysis helps you identify the most likely turning points.

Dave provides a Fibonacci calculator for those interested in using Fibonacci in their stock trading.

In simple terms, stock is a share in the ownership of a company representing a claim on the company’s assets and earnings. The more the stock you acquire, the greater your ownership stake in the company.

Stocks are mostly traded on exchanges in two basic ways: on the floor of the exchange or electronically. The trading floor of an exchange resembles a picture of apparent chaos, with traders yelling, waving, talking on the phone, and sending wild signals to each other. The exchange where trade is executed electronically involves a network of computers.

A stock market that helps the exchange of shares between buyers and sellers is of two types: primary and secondary. In the primary market, securities are created by means of an “Initial Public Offering (IPO),” i.e., the first sale of a stock, which is issued by the private company itself. On the other hand, in the secondary market, investors trade previously-issued securities without the involvement of the issuing companies. It is the secondary market that people refer to when they talk about "the stock market."

The New York Stock Exchange (NYSE) is the most prestigious exchange in the world. Also known as a “listed” exchange, much of the trading in the NYSE is done face-to-face on a trading floor. Here orders come in through member brokers and flow down to floor brokers who go to a specific spot on the floor where the stock is traded. At this “trading post,” there is a "specialist" who matches buyers and sellers. Prices are determined through auction. Mind you, the human contact notwithstanding, computers do play a big role in the NYSE.

The NASDAQ is the second type of exchange, where trading is done through a computer and telecommunications network of dealers with no central location or floor brokers whatsoever. It is now home to many big technology companies, posing a serious challenge to the NYSE. There are several big stock exchanges operating in different parts of the world.

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