New Buy:(ARST)

Since I sold (ARST) for a 20% gain earlier this month I've been watching the stock closely. It couldn't have been any more 'by the book' in the way it's behaved. It advanced just over 20% from it's buy point and then began correcting. Over the course of a few weeks it pulled back to the 50 dma, on progressively lower volume. Once it reached the 50 dma it traded below it intraday a few times, but always closed above this level - a clear indication the stock is finding support.

With the stock acting so well I decided I would purchase it again on any big volume move up. This came around noon on Friday, as the stock exploded for a 13% gain. I got in a bit late around $15.60, but that's fine. I took my time and made sure the volume was coming in as it should. I don't worry much anymore about buying a bit high - if I'm right about a stock a couple percent here or there shouldn't make any difference.

The stock closed above $16 and I'll add to my position if it makes a new high above $17.26.

Market still looks good to me - closed up Friday on higher volume than Thursday with a powerful move in the last fifteen minutes. Still watching the Nasdaq 50 dma which could cross the 200 dma as soon as this week.

Addon Buy:(FUQI)

I had been concerned that (FUQI) would pull back today and stop me out after making such a dramatic move over the past couple of weeks, but instead it gapped up at the open again and never came back to yesterday's close. In fact, it ran up to almost $13 before closing at $12.34. I adding to my position with my second and final buy at $12.10. I'm prepared for this type of volatile action, after all the stock has doubled in two weeks, plenty of traders are going to want to take profits. What I'm trying to look for is the stock to find some sort of temporary support area and ideally consolidate it's gains before pushing higher.

The stock is almost twice it's 50 dma and 200 dma, and that's why I'd like to see it take a bit of a break. The 50 dma is about to cross the 200 dma and they are both trending up, which is also technically bullish.

IBD has featured (FUQI) several times with various comments to the effect that the stock hasn't formed a proper base. I knew this was true when I purchased, but I tend to value clear accumulation in a chart far more than a perfect pattern. I'll learn over time whether or not that's a mistake.

The general market still offers reason to be concerned, five distribution days on the Nasdaq is nothing to ignore. However the other indices are doing well, and there is a particular setup that I'm watching with great interest. The Nasdaq 50 dma line is about to cross the 200 dma. My understanding is that many technicians look for the 50 dma to be above the 200 dma and the price to be above the 50 dma as a green light to buy stocks. Though the markets have been consolidating gains for the past few weeks, they could get a push higher once the moving averages line up this way in the next week or two. I'm anxious to see how this plays out.

New Buy:(FUQI)

I made a new purchase today with an initial buy of (FUQI) at $11.75.

This stock appeared on my high relative strength screen and I was impressed with the massive volume the stock has seen as it's exploded out of the right side of it's base. It's now the top industry group in IBD.

I have to admit though that the chart is ugly. I'm reading it as a nine month cup with an $11.75 buy point, but it could also be seen as a double bottom with a $7.99 buy point. The stock has never traded over $11.95 and if it can break that level has no over head resistance. That said, the chart is deep and the stock has made a massive move in a short time. Not only that, it's a small cap and a Chinese ADR. These factors point to high volatility and with my 5% stop losses I don't have much room. The stock closed a few percent below my purchase price today, so there's a good chance I will stop out tomorrow.

If I do I will continue to keep an eye on this stock though - I'd like to own it if it gets above $12 a share.

Market action was good today. The distribution days are still out there and it's hard to read much into a holiday trading week, but the Nasdaq retook it's 200 dma and the S&P 500 is getting close to that level too.

Sell Stop:(LFT)

Unfortunately, I'm making this post from the future.

I try to make all my trade posts the same day the trade occurs, but life doesn't always allow that.

Yesterday I added to my (LFT) position as it pulled back, and today I stopped out for a 5% loss on my cost basis for the entire position. Fine looking stock but came back on heavy volume and I'm fine being out of it.

In fact, the market is looking ripe for a correction and I'm content being all cash right now. I'm not seeing any good buying opportunities on my watchlist so I'll wait for one to come along and keep an eye on the overall market action for now.

Sell:(ARST)

I've been waiting a long time for the post I get to make tonight.

A long, long time.

Today, I sold (ARST) for a 20% gain.

The CAN SLIM system works on the premise that with the high quality of leading stocks you're purchasing, even if you are only right 40-50% of the time on your picks you will still be well off booking a 20% gain for every one or two 5% losses. Studies show that most stocks consolidate after an advance of 20-25% beyond a proper buy point, which is the reason for the 20% profit target.

The problem is that due to a variety of factors I haven't worked the system well at all. For one thing, I started investing at the tail end of a bull market. The odds were already against me. For another thing, I'm new to investing - again this stacks the odds against me.

I've made more than my fair share of mistakes, but tried always to learn from them. I've seen signs of progress along the way, and I know that I'm more effective today than I was when I began almost three years ago. Still, it was disheartening to look back and see that October of 2007 is the last time I sold a 20% winner. Between then and now I've lost a lot of my capital on losers. Some were legitimate trades - it's been a tough market and there's nothing wrong with nibbling at new rallys. However, many were just boneheaded plays like my recent attempt to short the S&P 500 - all that served to do was nullify today's profits!

Slowly but surely I'm getting it though. I needed to fail in order to succeed. I needed to feel the sting of losses to learn how valuable my capital is, and how skeptical I should be of any new purchase. Which is not to say that because of today's success I now see myself as having 'arrived.' I just recognize some progress.

Ok, so back to the reason for my reflection. I sold (ARST) at $16.74 today - 20% above the pivot point of $13.85 from several weeks ago. I believe this stock will go higher, and in fact it took off so quickly this morning I almost missed the opportunity to sell - I'll need to consider sell limit orders in the future, which is what I ended up using today. The important point is that I didn't rely on what I believe or think about this stock - I took the gain. I realize how difficult a 20% gain can be to come by, and I'm no longer looking for a 'home run.' I'm more than satisfied to make a 20% profit and consider that a successful trade, no matter what the stock does from now on. Of course I'll keep my eye on it for another buying opportunity. It will base sooner or later.

My previous sell rule was a 5% trailing stop when a position gets up 20% and I've scrapped that - if I'm going to sell I'll sell, there's no need to goof around and risk giving back some profits.

Setting Your Own Objectives - Part 3:Trading Ideas

I'm still working my way through 'Trade Your Way to Financial Freedom,' fortunately I'm getting to a more interesting part that deals with trading and not as much with if I cry at weddings...

What kind of markets do you want to trade? Is it appropriate to specialize? Do you want to trade only liquid markets, or are there some illiquid markets you'd like to trade?

• I want to trade common stocks listed on the NASDAQ or NYSE with a price greater than $10 and average shares traded daily greater than 300,000. I'm not interested in anything else.
• It's appropriate for me to specialize in this area because of my limited experience, the availability of resources, and there is just no need for me to try to get 'fancy.' There is plenty of opportunity for me in common stocks.

Do you want any conditions to set up before you enter the market? If so, what are those conditions?

• I will only buy stocks when the market is in a confirmed rally by the CAN SLIM system definition.
• I will not ALWAYS buy stocks when this is the case, I also look for strong, clear market leadership to emerge. I identify this by watching the number and quality of leading stocks breaking out, which is necessarily subjective.

What beliefs do you have about entering the markets? How important do you believe entry to be?

• I believe I will only succeed when I invest with the current market trend.
• I believe entry is critical, particularly in respect to the health of the overall market at the time of entry, the purchase of a stock as close to the proper buy point as possible, and correct position sizing to maintain the proper risk exposure.

Given your goals in terms of returns and draw downs, what kind of initial risk stop do you want? If it's close, will you be able to get right back into the market so that you will not miss a move?

• I think the second question is flawed, and a bit strange. Fear of missing a move is not a strong quality for a trader to have, in my opinion. I fear loss of capital.
• My experience with stops is that when I allow myself a range (this percent to that percent is acceptable) I almost always harm myself moving the stop around from the initial point I choose. CAN SLIM dictates you never lose more than 8% on a trade, and I've never violated this rule. However, I'm leaning toward a set 5% stop on every trade. If a stock drops much more than 5% below the buy point, I'm not sure I'm interested.
• Stops get more complicated as I average up into a position. This raises my cost basis, and I have to then reconsider the stop loss. If I make my initial purchase at the pivot point and my next purchase 3% above, my cost basis is now above the pivot point. If I set my 5% stop loss off of my cost basis, then I'm not giving the stock as much room to work - I can get shaken out by a healthy pullback. On the other hand, I don't want to risk additional capital on a trade from averaging up, that is contrary to the purpose.
• Considering all these factors, my decision is that I will never let my stop loss order exceed 5% of my cost basis in a stock. 5% is a loss that I can live with. If I see a number of successful stocks shake me out and move on to big gains, I will reconsider this decision.

How do you plan to take profits? Reversal stops? Trailing stops? Technical stops? Price objectives? Contrary to popular opinion, much of your emphasis should be in the area of stops and exits.

• Answer - all of the above! My rules follow below.
• Stop Loss order 5% below purchase price
• If the market tallys five Distribution Days in four weeks, sell stocks up less than 20% immediately, order a 5% trailing stop on those up over 20%
• Trailing 5% stop if the stock is up 20% in more than three weeks from the breakout
• If the stock price rises 20% in less than three weeks move the stop-loss order to break-even and try to hold the stock at least eight weeks. This may be the most subjective sell rule I have, and what I will look for is does the stock find support at the 21 day moving average.
• Sell on Climax Top action as defined in 'The Successful Investor'
• Sell if the stock loses 21 dma and fails to recover it within a day or two
• Penalty Box - No trading allowed for three weeks after three consecutive failed trades

What do you do in terms of position sizing?

• My initial purchase is as close to the buy point as possible, for 33% of my total capital.
• My secondary purchase is 2.5-3% above the buy point, for 16% of my capital.
• With the current amount of capital I have, I will not own more than two stocks at one time.
• As my capital grows, I will adjust my position sizing plan accordingly.

New Buy:(LFT)

Before addressing my latest trade, I want to spend a few moments on the past week, as it was quite a roller-coaster ride.

I made the mistake a couple of weeks ago buying (TNDM) within a week of it's earnings announcement. I was so enamored with the stock that I just wanted to own it, even with the additional risk involved. I'm not a lucky person, so I need to keep the odds on my side. I lost money on that trade.

I bring this up again because the next stock that really caught my attention was (BWLD). This stock had the ingredients I look for most - strong fundamentals, leading relative strength line, obvious signs of accumulation, and a price near an all-time high. The setup was almost perfect.

Almost.

(BWLD) broke out before earnings day. It did so explosively, advancing 10% past the buy point. It was difficult to sit on the sidelines when I had been targeting this stock, but every rule I have has a good reason behind it and is designed to help me succeed in the long run. As it turned out, (BWLD) disappointed the market with it's earnings report, and promptly gave back the earlier gains. The important thing is that I stuck to my plan.

My next prospective buy was (GMCR), which showed up on my new favorite screen Wednesday night. I want to digress for a moment and talk about this screen.

A few weeks ago my coworker and fellow CAN SLIMer (you can visit his blog here) brought up to me that he had been working with a new screen based on stocks with high relative strength. We had been noticing so many so-called 'leading stocks' lag the broad market that this was idea was brilliant in it's simplicity. This screen got right down to the real leaders, based on their price action (what else matters).

Within another day or two I saw on http://www.investors.com an old statistic that something like 85 to 90% of the greatest performing stocks of all time had an EPS rank of 90 or better and a Relative Strength rank of 95 or better at the time they began their run. At this point I got the message.

I threw together my own very simple screen, adding some basic criteria:

Earnings Per Share (EPS) Rating
From 90 to 99
Relative Price Strength (RS)
Rating
From 95 to 99
% Change in Latest Quarter's EPS vs. Same Quarter
Prior Year
Greater than or equal to: 25
% Change Latest Quarter's Sales
vs. Same Quarter Prior Year
Greater than or equal to: 25
Company's
Industry Group Rank
From 1 to 80
Current Price
Greater than or equal
to: 10.000
Current 50-Day Average Volume(1000)
Greater than or equal to:
300

Out of the thousands of publicly trade companies, this screen has not returned more than six in the few weeks I've been using it. The companies that do make it through this screen are performing very well, almost without exception. Some day I will try to base my mechanical trading system on this screen - but that is a post for another day.

So, I'm very positive on this screen and Wednesday (GMCR) made the cut after being adjusted for the earnings released that day. This setup was just as close to perfect as anything I'd ever seen. The stock was already rallying, earnings and sales were accelerating, the product is booming, the company beat estimates, raised guidance and announced a distribution deal with Walmart. If there ever was a no-brainer, this was it.

The stock had recently cleared a three weeks tight buy point and pulled back during normal trading on Wednesday. After hours it was up 20%, and there was no doubt it would gap up at the open. The buy rule on a break-away gap up open is that you can buy up to 10% beyond the pivot point (normally you don't buy more than 5% beyond this point). I set a buy limit order at $61.

The stock opened at $63 and never looked back. It traded as high as $79 on the day, a gain of 50% from the prior day's close. It was gut-wrenching. I felt as bad missing that buy as any time I can remember investing. I've had my fair share of struggles, I've made so many mistakes, and I've lost money - my family's money - that I intended to make returns on. I badly wanted a success, something positive to build on.

The only way I'm able to come to terms with it is to imagine a big league batter facing the best closer in the game - one he's had no success against. He takes the first pitch - a strike - and now the count is 0-1, he's behind. He flails at the second pitch - now 0-2 - he's further behind and in danger of pressing. Instead though, he calls time and steps out of the batter's box. He gathers himself and remembers his training. He calls upon the hours he's devoted to practicing his art. He shuts out the noise and steps back to the plate. He sees the pitch, and it's like the pitch he waited for his whole life. He connects and the sound and the feel are perfect - it is a home run, there is no question. As he rounds first base, he looks up to see the strong winds carry the ball just outside the foul pole. The home run never was - he heads back to the plate.

How does he respond?

There are going to be many ups and downs in my trading career. The best thing I can do is try to level these out. Bad is never as bad as it feels, and good isn't either. It's a business, and I won't be successful with every outing - that's why I'm building a business plan to make sure I'm successful more often than not.

Which brings me to today's purchase. Last night I scanned my High RS screen again and of the five stocks on the list one was within buy range - (LFT). The stock found support at the 50 dma Wednesday. I thought that I could catch it back near the 21 dma around $23, but it opened above $24 and never looked back. The pivot point was $26.09 and my buy stop was filled at $26.15. The stock made a run to $27 and pulled back to close above the pivot point, up 10% on the day on twice it's normal volume.

(LFT) is a Chinese ADR and could be volatile, but has a lot going for it. It's an IPO public less than two years. The fundamentals are strong, it's already had a 40% advance from an ugly cup pattern, and it shows plenty of signs of accumulation. The overall market is due for a pullback, which gave me pause, but until I can see the future I'll buy good stocks at proper buy points and take my chances with the overall market direction.

(ARST) had a low volume pullback this week. It was a very orderly move, but I'm a bit nervous as it's getting closer to my stop loss order. If it finds support at the 21 dma my position should be secure, but if it pulls back the the 50 dma again I will get stopped out for a loss of 1%.

This weekend I hope to find time to do some more work on my trading plan. The more homework I do the more confident I feel.