Adaptation

We've been having some interesting discussions on the Trade to Retire forums and I wrote a post there that I'd like to put here on my blog as well as it highlights my thoughts and approach to this currently rally.

Here's how I handle market analysis - it's one thing to have an opinion about the market (it's gone too far too fast, etc.) but it's another to act (trade or not trade) on that opinion. I try to separate the two. If the market is in an uptrend and I see a stock I like in a position I like then I will buy it - whether or not I think a rally is extended. This probably adds to my risk, but I'm just not good at picking market tops, so it's best for me to let the market posture and/or my three strikes rule handle that for me.

Now on the other hand, I do think it's important to adapt to the current environment. Standard CAN SLIM buy points have not worked for weeks. They just haven't. The stocks have closed below the buy point, shaken out holders, then turned and advanced. They advance 10 or 15% from traditional buy points and pull back to a moving average instead of the 20% one could historically count on. I saw this through the middle of the year (it was a very expensive lesson) and since I've adjusted my buying strategy I've managed to survive for a few weeks. I would NOT attempt any buys on breakouts/new highs at this time UNLESS the 50 dma/10 wk line were within about 8% of the buy point - that would allow me my standard stop order while giving me the cushion for the stock to pull back to support ((HMIN) did this).

Better yet, I'm looking to buy around the 10 wk line if I like a stock. I think (PWRD) is setting up perfectly for this, and I will look to purchase this if it dips under $42 (assuming nothing else changes). This position would allow for a tighter stop around 4 or 5% and let the stock work up the moving average or just stop out if it can't hold that area. This is how I bought (EJ) and it allowed me to ride out a lot of volatility.

I've decided to conduct the following exercise. I will go back to August 21st on my watchlist and pick my favorite five stocks, then look at the charts from that day and see what would've happened if I'd picked them up around the 10 wk line (within a percent or two - I bet most or all of them touched off this line since August 21st) with about a 5% stop loss order. I'll bet about 75% of these trades would've yielded a 20% gain, possibly before the stock even made a new high. Furthermore, I'll be I could still own the stock today and be in good shape - in fact I do still own (EJ) from that type of purchase around that time.

Short version is this - I think in the current market, traditional CAN SLIM thinking has had me buying when I should be selling (around the new highs) and selling when I should be buying (stopping out around the moving averages). I don't think it's ALWAYS going to be like this and I firmly believe in CAN SLIM, but I also believe in reviewing past trades and adapting as necessary.