How To Handle Reversals

M

mgregor

I'd like some input on how to best handle a reversal entry. For example, let's say you're trading your favorite stock. You see it approaching an established support level and go along 1/4 above support.

Then the terrible happens, your trade goes against you by let's say $1 and you're stopped out of your position. Now, assuming that you wish to now reverse your position and go short, what's the best way of going about in doing this?

My logic for the position reversal would be that support should turn to resistance. How far below support does the stock have to sink in order to say that the level has truly been breached?

I would think if it goes $1.50 below support that would mean it is no longer a valid support level. Now, do we wait for it to come back up to that support level and bounce down, confirming that support has now turned to resistance? Or do we just go short when the stock drops over $1.50 from previous support levels?
 
Personally, I would wait to see if it moves back up toward what now would be resistance before going short, rather than chase the price on the way down. If it doesn't come back up and I miss my entry, then I simply let the trade go rather than take the chance on a bad entry.
 
I'd have to agree with zboy, you'll notice many times a stock will break support tank pretty fast and hard and then experience what they call a throwback. If I were going to reverse my position and look to go short I would no doubt wait for a throwback to the new resis before shorting.
 
I just wanted to thank everyone, especially Zboy and Commisso for your very helpful suggestions.

Commisso, by using the advice you gave me in my thread, "When Should One Take A Profit", I am in a very profitable trade in QCOM as I write this.

I shorted 300 shares of QCOM today at 59 3/8, just under established resistance. By using your suggested trailing stop, I currently have $1,006.25 in closed profits, and $406.25 open, on my remaining 100 shares.

My initial stop loss on this trade was at $1 above my entry.

For those of you interested, here is the advice Commisso gave me:

"Say I was in chkp yesterday...after looking at the chart if i sold short where u did I would have taken 100 (1/3) off as soon as it traded over a prior bar on the 5's (after I got at least 1 1/2 times what I risked)which would have been 69 1/8 which would have more than given u 2 times what you risked and then I would have let the stock bounce and place a stop for the other 200 a 1/4 above the latest swing high which would have been 70 3/4... and then continued to trail the rest with whichever technique I felt fit the trade and the action the best. After the stock closed so weak it now looks as if it would test the latest lows @ 59-57 level.....I would have closed 1/3 out @ the close in order to minimize my overnight exposure and carried the other 100 over in expectation of the downward pressure following thru."

Hopefully soon, I'll be able to contribute some advice to other aspiring traders.


 
I don't remember who to give credit for it, but the quote, "Gamblers create risk, speculators manage it," is an appropriate observation of your trade management in the QCOM trade. By limiting your risk, but leaving yourself open to almost unlimited gain you can really win in this game. Congratulations.
 
Your very welcome, and I am glad you are prospering with it. I've been writing a trading plan, sort of just like a business plan and I have a section or page at least that I wrote on my scale out techniques and i also recently made a scale out matrix. If your interested email me and i'll reply with spreadsheet and page.

PEACE, Commisso.
 
Zboy,

I was wondering if you're ever short in one stock and long another at the same time? Yesterday, while I was short QCOM, CHKP came down to support levels. I didn't take the trade because I was having a great day and didn't want to be both short and long at the same time.

However, looking back it would have been a profitable trade. Just wondering what you think about being both long and short at the same time.

Thanks!
 
I honestly am not usually on different sides of a trade in two different stocks very often (perhaps a couple of times). Most of the stocks I follow are in similar sectors, so usually if the trend is down, they all are headed that way. This is not to say that you couldn't do what you suggested. Basically as long as you stick to proper stop management and have good entries, why not?

One thing that's in a somewhat related vein that I'm crazy about doing lately (especially with the prospect of the market being rangebound for some time) is selling naked calls and puts on the same index or stock. For instance, I sold 3 of the MNX (CBOE's mini NDX) April 200 calls for $10 per contract, and a couple of days ago sold the April 160 puts for $10 per contract. The beauty of this strategy is that I took in a total of $20 per contract, and allows me 400 NDX points for the index to stay within for me to pocket the entire premium. Even if it moves above 200 or below 160, I also have an additional 200 point cushion above and below both those levels for me to still turn a profit or break even. Therefore, as long as the NDX stays within 1400-2200, I make money. The same strategy can be applied to stock options, and allows you to profit even when a stock doesn't move much.
 
ZBOY,,,
I have read all the posts here for the last 4-5 months. Still a newbie.. But after reading your last post on this thread,,,, I realized that I actually know so very little about the market internals,,, And it dawned on me how so many people can get into this knowing absolutely nothing.. I realize how valuable the info that you just gave is,,,but,,,I don't understand it like I should,,,, But your opinions and insights make so much sense,,,along with so many others on here,,,(too many to mention).... So I will be spending the next six months or so reviewing,learning series 7 material.... I want to know the internals... In am in no hurry to lose money.. Not going to be taking a test ,,,,just wannna know it... good idea ????
 
squirrel,

Learning all you can is always a good idea. The best of us are always still trying to learn, and even then we all have our share of losing trades. I personally have gotten to the point I am by first getting in there and learning through the school of hard knocks (aka losing money), while reading and studying all I could about technical analysis. I then read Tony Oz' book "Stock Trading Wizard", and subsequently studied with him in a seminar. This really helped solidify my TA skills, as well as hone my stop management.

I then began branching into the world of options, and have found them to be a tremendous tool for augmenting stock trading and taking advantage of high leverage situations with low risk. In case you're interested here's the link to a basic starter series on options, which is what I actually read when I was starting with options, and gives you some great layman's explanations of the mechanics of them.
http://www.investmentools.com/tutorials/options/options1.shtml
 
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