We’ve all scanned charts and seen graphs of the “one that got away”. Don’t despair. I’m going to show you a way to find entries and exits for single stocks that are starting trend.
They say, history repeats itself. In trading, that is very true. Each stock has a personality of it’s own. Learn the quirks and it’s possible to trade a single stock for a long time, year after year.
And yes, I’m speaking from experience. I traded AAPL (Apple) for many years. My confidence was so great that I even owned AAPL LEAPS.
This technique is very logical, simple, and effective.
Find a stock that is in a stable uptrend. I’ve chosen APKT (Acme Packet).
This is a daily chart of APKT. The stock has risen from $10 to nearly $60 in less than a year. The move was a very steady rise.
When I find a stock that has started to trend my first thought is finding the best entry and exit.
To do this I want to look at some history.
The question I want answered is, “how did this stock trend in the past?”
- Find a prior trend and make some notes about price action.
There are three up trends on this compressed daily chart. That should give plenty of study material to make some good observations about how to trade APKT.
Notice the boxed area on the chart. I don’t consider this a valid area to study. Price made an enormous gap up and then leveled off before declining. That is not a trend.
A closer look at the first arrow in mid-2007 follows. The chart has the following indicators: a 20 simple moving average (blue) and a 50 period exponential moving average (red). Both MA’s are on the price bars. There is a 20 simple moving average on the volume bars.
The area within the circle is the trend. Since my preference is trend trading, my concentration is the overall move, not so much the swings.
The price chart shows bars that move continuously upward once price moves above the 20 MA (dashed blue line). That’s clue #1.
Once the trend started, price seldom closed below the 20 MA. Notice how the volume was higher than the 20 MA of volume. That’s a good sign this move has support.
The bright blue bar marks the first close below the 20 MA in mid-September (#1). Not only did price close below that average, it opened below it.
The next bar (#2) was a huge, wide-range bar that opened below the 20 MA, probed below the 50 EMA and then closed at the top of the bar’s range just barely below the 20 MA.
Bar’s #3 and #4 show price opening below the 20 MA again. Price did move above the line, but never recaptured the prior high. Then it fell below the 20 MA and eventually, the 50 EMA. Once price broke the 50 EMA a serious move to the downside was underway.
Lots of good information from that trend: price tends to stay above the 20 MA. When it breaks below the 20 MA it is a warning that price may trade to the 50 EMA. If price drops below the 50 EMA then it is likely the beginning of a correction.
This is the second up trend and it’s not very smooth. Volume was above average at the inception of the move. Again, price closing above the 20 MA looks like a good signal for an entry (dashed blue line).
Point #1 shows a move below the 20 MA, but a quick recovery and then the upward climb begins.
#2 is a price bar that crashes below both of the MA’s. The next bar recovers the lost ground and really adds to the price. (Just an aside — those enormous up and down bars can signal exhaustion. You can see from the follow price bars that price was exhausted and could not exceed the huge bar’s high).
Bars #3 and 4 are the breaks below the 20 MA and then the 50 EMA. Once the 50 EMA gives way, price corrects dramatically.
New information from this second trend is this: the stops should not be set too close to the 20 MA. The evidence is this: when there is good volume to support the move up, a stop too close to the 20 MA may create a whipsaw. Price is likely to recover and move up even if it does close below the 20 MA.
So far the clues are:
- a close above the 20 MA may make a good entry signal
- heavier than average volume should confirm the price move
- price breaking below the 20 MA is a warning
- below the 50 EMA starts a severe downturn
This is the third and last up trend before the long move that began in early 2010. Again, the signals are very similar: a close below the 20 MA is a warning. Price closing below the 50 EMA means “get out of Dodge”
With a better understanding of how APKT trends, my trading rules for trading it would be these:
- look for heavier than average volume on the signal bar — the price bar that closes above the 20 MA
- go long above the bar that first closes above the 20 MA
- sell 1/2 of the position if price closes a few cents, maybe a dime or so, below the 20 MA
- sell the remainder of the position when price closes below the 50 EMA
This last chart is the current move of APKT from early 2010 to the present. Now’s the time to see if studying the prior up trends have helped to create trading rules for this stock.
You don’t need a lot of stocks to make money. Find a few, learn their behaviors, and develop a trading system specifically for them and you can stash a lot of cash!
