My job as a trader is to risk one to make two or more. That is it. This alone will put me in the top 10%. Anything less will put me in the 90% of people who give money to the top 10%.
So how do I go about achieving this??
I look for a company that has good fundamentals and a rising share price that has pulled back to monthly support. I have no interest in daily moving averages. I like to look at the monthly 20SMA, if the price has pulled back to the monthly 20SMA, I am interested.
A trend reversal in its simplest form would be a higher low followed by a higher high on a significant time frame. This will usually take up to six months to play out.
Here’s a couple of examples from two story stocks that people have fallen in love with.
The first is Gulf Keystone. I waited six months for this to come into the sweet spot that would give me great reward to risk with my stop being tucked below the last visit to its monthly 20SMA. All that oil and still a retraced 67% of the previous move. I don’t follow fib levels but basic math will tell you that if it retraces around 2/3rds of the move, this will give you 2 to 1 reward to risk if it gets back to its highs with your stop below the previous low.
The second example is Quindell.
I didn’t trade this but it makes for a good example. This company had the same price action on the way up, a higher low followed by a higher high on the weekly chart. Now this time we have two chances to go long with the second being a huge winner. You have a rising monthly 20SMA (green) and price found support on the monthly 200SMA (red) both giving great reward to risk by placing your stop under the previous monthly low. You even have a higher low followed by a higher high on the daily chart to confirm the reversal.
The big question for Quindell is…. is this a normal retrace?????
I’m not interested in the story, what it does…. Would I make a huge call to go long at this price?? First my stop would have to be under the previous low around 70. That would give great reward to risk if the price could return to its highs. Is the trend intact?? Well technically it is making higher lows and higher high’s.
But…as with Gulf Keystone it has just had a huge blow off top. Also the monthly 20SMA is rolling over. The simple fact is the last big move took a couple of years to setup and with this being a story stock. So many people got trapped at higher prices and this means huge supply. For me personally I would move on to the next good looking chart.