Forum Archive Index - November 2002

[Phaedrus <Phaedrus@techemail.com>]

Bill,
     Breaking a trendline is not quite the same thing as a change of trend. To 
break the current confirmed downward longterm trendline, the Index would only 
have to move above the Red trendline, maybe to 2100 or so. To reverse the 
longterm downtrend (ie begin a new longterm uptrend) the Index would have to 
make a higher high after a higher low by moving above 2636.

You say that "Logically when buying a stock one should have the selling price 
sorted out before buying, in case of it reversing on you". There may be 3 
separate parameters in that statement.
(1) A Stop-loss
(2) A trailing Stop
(3) A profit target

 As you rightly say, a stoploss level should be decided on before you buy - 
before your ego gets involved. Decide what the price would have to do to make 
your buying decision wrong, and make sure you exit if that point is reached.

 A trailing stop can be used to protect (lock in) gains, once a trade has moved 
into profit.

 A profit target is a predetermined point at which you intend to take your 
profit and exit the trade. Some people do this all the time, and such targets 
form an integral part of their system. I disapprove of profit targets on 
principle, and never use them. I take the view that since you do not know how 
high a stock will go, it is foolish to limit your gains by imposing an 
arbitrary limit on them. Why sell a stock that is still rising?

 Most people make two common mistakes. They hold their losers too long, and 
sell their winners too soon. Using stop-losses helps avoid the first mistake. 
Using fixed profit targets CAUSES the second.

          Phaedrus.

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