The Wallstrip Edge: Using Trends to Make Money by Howard Lindzon

Author:Howard Lindzon [LINDZON, HOWARD]
Language: eng
Format: epub
Tags: BUS050020
ISBN: 9780446544436
Publisher: Business Plus
Published: 2009-02-18T05:00:00+00:00

Purchase Price—10 ATR = Exit Price

187.87—(10 x 4.94) = 138.47

An ATR stop accounts for the typical movement of a stock. Every stock has its own movement. As I write this, Google moves a lot more during any particular day than General Electric, so Google needs a wider price berth than General Electric. You likely won’t wake up to find General Electric down 50 percent, unless it is involved in some kind of company-killing fraud. It can happen, of course, but it isn’t likely. Google, however, is a different story. It is still in the hard-to-value stage of its life cycle. Once Wall Street figures out how to evaluate it, it could go down just as fast as it went up; faster, in fact, because stocks do fall faster than they go up. You could wake up one day and see that Google’s business model has changed drastically, and the stock could plunge 25 percent.

You should leave a stock like Google more room for movement. Because you have to give it more slack, you should not allocate the same dollar amount to Google as you would General Electric. Google is as inclined to fall 25 percent as General Electric is to fall 5 percent. Blackstar’s mechanical trend-following method would be difficult to follow at the total portfolio level because you would have to mathematically keep track of all the positions and stops and continually adjust prices.

Another widely used trailing stop-loss order is based on percentages. Using that method, you would instruct your brokerage firm to sell a stock if it falls a certain percentage. For example, if you bought a stock at ten dollars a share and set a 10 percent trailing stop-loss order, the stock would be sold if the price falls to nine dollars. If that stock goes up to twenty dollars a share, it would then be sold if the price falls by 10 percent of twenty, which is eighteen dollars. You might want to set a higher percentage for Google than for General Electric in order to give it more room. This method is less precise than Blackstar’s ATR method, but it is simpler to calculate and easier to follow.

Remember that you are creating boundaries and not hard-and-fast rules. You don’t have to panic when a stock price goes down near where it will be sold, but you do have to be on full alert to decide if the catalysts and the trend are still in place. Remember also that when you start really stretching those boundaries, bad stuff starts to happen.

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