Andre (Nov 6, 2003 4:31:09 PM)
Today we're pleased to welcome Bryan Castleberry and the folks from CyberTrader to the Elite Trader Chat Room.
Andre (Nov 6, 2003 4:31:21 PM)
Today's chat will focus on managing winning trades. We'll discuss techniques for setting profit targets prior to entering a trade, and then ways for locking in or maximizing profits when holding winning trades.
Andre (Nov 6, 2003 4:31:31 PM)
And we'll wrap things up with a discussion on trading psychology and how you can develop the mentality to become a more profitable trader over time.
Andre (Nov 6, 2003 4:31:47 PM)
Bryan, welcome. Thanks for joining us today.
Bryan Castleberry (Nov 6, 2003 4:32:25 PM)
I would like to thank everyone for attending.
Please note: A slide show accompanies this presentation. Please launch the slide show at http://media.cybertrader.com/chat/profit_taking_strategies.htm
I will give everyone a minute to launch the show.
Andre (Nov 6, 2003 4:32:59 PM)
http://media.cybertrader.com/chat/profit_taking_strategies.htm
Bryan Castleberry (Nov 6, 2003 4:33:09 PM)
thanks andre
Andre (Nov 6, 2003 4:33:35 PM)
I hate when extra things get copied in the url!
Andre (Nov 6, 2003 4:33:52 PM)
It takes a minute to open...
Bryan Castleberry (Nov 6, 2003 4:34:16 PM)
You can turn off the outline by clicking “Outline” at the bottom left of the page. You will probably want to “Restore Down” and/or resize both windows to be able to follow along with the text in the Elite Trader chat room and the slide presentation at the same time. You will proceed to the next slide by using the arrow button at the bottom center of the presentation. Again, I will give every one a minute to set up.
Andre (Nov 6, 2003 4:35:01 PM)
Gee, Bryan... do we have to read all the fine print? ::grins::
Bryan Castleberry (Nov 6, 2003 4:35:16 PM)
Welcome to Profit Taking Strategies, a presentation created specifically for the active trader.
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Bryan Castleberry (Nov 6, 2003 4:35:28 PM)
Please take a moment to read the disclosures associated with this presentation.
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Bryan Castleberry (Nov 6, 2003 4:35:49 PM)
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Bryan Castleberry (Nov 6, 2003 4:36:04 PM)
Everyone should now be on slide 4
• Now we're ready to delve into our set of guidelines to help traders become more successful. These guidelines center around sound strategies traders can easily implement to help them maximize gains on winning trades
Bryan Castleberry (Nov 6, 2003 4:36:23 PM)
• We'll begin by discussing techniques for setting profit targets prior to entering a trade, then discuss techniques for locking in or maximizing profits when holding winning trades.
Bryan Castleberry (Nov 6, 2003 4:36:34 PM)
• We'll then wrap things up with a discussion on trading psychology and how to develop the mentality to become a more profitable trader over time.
Bryan Castleberry (Nov 6, 2003 4:36:44 PM)
Next slide
Bryan Castleberry (Nov 6, 2003 4:37:11 PM)
• The first step to profit taking involves setting a profit target before entering a trade.
• Setting profit targets begins by asking yourself two things:
• What do I think the profit potential is of this trade?
• Where am I going to close the trade if it starts to go in the wrong direction?
Andre (Nov 6, 2003 4:37:44 PM)
For folks just joinnig us, a slide show accompanies this presentation. Please launch the slide show at http://media.cybertrader.com/chat/profit_taking_strategies.htm
Bryan Castleberry (Nov 6, 2003 4:37:51 PM)
This gives you a clear perspective of where the trade is headed and provides a framework to help evaluate whether a trade’s potential reward justifies its potential risk. It gives you a good basis to proceed.
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Bryan Castleberry (Nov 6, 2003 4:38:18 PM)
There are different techniques available to help you determine your profit or price target. We’ll review several techniques for setting targets and will start with fixed targets since it’s the most basic and commonly used strategy adopted by traders. Fixed target techniques employ static price or percent parameters.
There are three types of fixed targets: Fixed Price, Fixed Percentage and Measured Moves.
Bryan Castleberry (Nov 6, 2003 4:38:43 PM)
Fixed Price Targets
Calculated by adding or subtracting a dollar amount to or from the trade entry price.
For example, you’re goal is to make 3 points on a trade. You add 3 points to the entry price to determine your target on a long position.
Bryan Castleberry (Nov 6, 2003 4:38:59 PM)
Fixed Percentage Targets
Calculated by adding or subtracting a percentage amount to or from the trade entry price.
For example, you’re goal is to make 8% on a trade. You subtract 8% from the entry price to determine your target on a short position.
Measured move targets are calculated by utilizing the trading range of a security as a guideline to set your profit target.
Bryan Castleberry (Nov 6, 2003 4:39:32 PM)
Measured Move Targets
Long Targets: In an uptrend, measure the prior up leg and add that value to the low of the most recent pullback to arrive at a price target.
Short Targets: In a downtrend, measure the prior down leg and subtract that value from the peak of the most recent rally to arrive at a price target.
For example, you’re goal is to make 2 points on a trade based upon the activity and trading range of the stock. You add 2 points to the entry price to determine your target on a long position.
Let’s review an example of how we might implement one of these strategies.
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Bryan Castleberry (Nov 6, 2003 4:40:09 PM)
Here is a chart of Amgen. In this example, notice the entry point of the long trade is at 57 in March.
Bryan Castleberry (Nov 6, 2003 4:40:24 PM)
Fixed Price Example: If you are looking for a $5 price gain, add $5 to the entry price of $57 to get the price target of 62.
Bryan Castleberry (Nov 6, 2003 4:40:53 PM)
Fixed Percentage Example: If you were looking for a 10% gain, you’d add $5.70 to the entry price of $57 to get the price target of $62.70.
Next slide (slide 8)
Bryan Castleberry (Nov 6, 2003 4:41:14 PM)
Now, let’s look at an example of a measured move.
In this example, notice the stock has moved in several up legs. To set up a measured move target, evaluate the previous leg to determine the target exit.
Bryan Castleberry (Nov 6, 2003 4:41:46 PM)
You can see here that the previous up leg (from November into December) has a 7 point move from 51 to 44. Use that activity to help you determine the potential of the next leg. To set the target, add the move of the previous leg, to the bottom of the next leg to establish your target. In this example, the bottom of the next uptrend is 47. Add $7 to $47 to set a target of $54.
Bryan Castleberry (Nov 6, 2003 4:42:19 PM)
Fixed targets are a great place to start when setting profit targets. They are quick and easy methods to employ with your trading strategies.
Bryan Castleberry (Nov 6, 2003 4:42:37 PM)
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Bryan Castleberry (Nov 6, 2003 4:42:50 PM)
Now, let’s look at a more complex method to setting price targets, Technical Targets.
Technical Targets: Targets based on the measures of supply and demand--price trends, support and resistance, and chart patterns
Shifts in supply and demand create chart patterns which may be utilized to set price targets. Let’s define the most common types of chart patterns used in setting technical targets. The types of chart patterns include: Trading Ranges, Continuation Patterns, and Reversal Patterns.
Bryan Castleberry (Nov 6, 2003 4:43:19 PM)
Types of Chart Patterns
Trading Ranges: Sideways trends
Continuation Patterns: Signal trend extensions
Reversal Patterns: Signal trend shifts
Bryan Castleberry (Nov 6, 2003 4:43:37 PM)
Technical targets are often not reached or are sometimes exceeded. A complete profit-taking strategy involves both setting an initial price target before entering a trade and evaluating your exit strategy. The key is to exit a winning position when your reasons for holding that trade have changed. We will discuss exit signals derived from technical indicators later in this workshop.
Bryan Castleberry (Nov 6, 2003 4:44:02 PM)
Let's start by talking about trading ranges--namely, how traders can use support and resistance to help them set sensible price targets.
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Bryan Castleberry (Nov 6, 2003 4:44:18 PM)
Trading Ranges are sideways trends. Support and resistance levels within a range are drawn as parallel upper and lower lines that capture the price lows and highs of that range. Lower range support is where buyers control supply and demand (at $12.75 in this example), and upper range resistance level is where sellers control supply and demand (at $15.50 in this example).
Bryan Castleberry (Nov 6, 2003 4:44:43 PM)
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Bryan Castleberry (Nov 6, 2003 4:44:59 PM)
In a Trading Range, supply and demand remain in balance between two parallel, horizontal lines--upper range resistance and lower range support.
A Trading Range Breakout indicates a shift out of this balance in the direction of the breakout.
Range Breakouts occur when a shift in the forces of supply and demand takes place.
Bryan Castleberry (Nov 6, 2003 4:45:23 PM)
Long Signals: Breakouts above upper Range resistance
Short Signals: Breakouts below lower Range support
An upside breakout suggests the buyers are in control (bullish signal).
A downside breakout suggests the sellers are in control (bearish signal).
Bryan Castleberry (Nov 6, 2003 4:45:50 PM)
Target Setting Strategy
Measure the height of the prior Trading Range, then add or subtract this value to the Range breakout price to arrive at a price target.
Let’s look at an example.
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Bryan Castleberry (Nov 6, 2003 4:46:14 PM)
Let’s go back to the Cisco example from earlier.
At the very end of April or May 1, the stock begins trading above the range resistance level of $15.50. This suggests that the buyers have won this battle between supply and demand, and the buyers on the demand side are going to push the stock up.
Bryan Castleberry (Nov 6, 2003 4:46:37 PM)
To set a price target, measure the range of the consolidation zone (15.50-12.75=2.75) and add that to the top of that breakout (15.50) to get the price target of 18.25.
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Bryan Castleberry (Nov 6, 2003 4:46:58 PM)
Let’s take a look at another pattern, continuation patterns.
A Continuation Pattern suggests a temporary pause in a longer-term trend, after which the existing trend will be resumed. The pattern is considered complete once price breaks out of the formation in the direction of the prior trend.
Common types of continuation patterns include Flags, Pennants, and Triangles.
Bryan Castleberry (Nov 6, 2003 4:47:33 PM)
Flags and Pennants: Short term (1 to 3 weeks)
Takes one to three weeks to form on a daily chart
Triangles: Intermediate term (1 to 3 months)
Takes one to three months to form on a daily chart
Let’s begin by discussing the use of Triangle patterns for setting price targets.
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Bryan Castleberry (Nov 6, 2003 4:48:03 PM)
Triangles are continuation patterns displayed as two converging trend lines--an upper resistance line and a lower support line.
A Triangle Breakout in the direction of the prior trend completes the Triangle pattern, signaling a new leg in the trend.
Bryan Castleberry (Nov 6, 2003 4:48:21 PM)
Long Signals: In an uptrend, price breaks above the Triangle’s upper resistance line.
Short Signals: In a downtrend, price breaks below the Triangle’s support line.
Bryan Castleberry (Nov 6, 2003 4:48:37 PM)
Target Setting Strategy
Measure the height between the Triangle’s high and low prices (the “base”), then add or subtract this value to the Triangle breakout price to arrive at a price target.
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Bryan Castleberry (Nov 6, 2003 4:49:08 PM)
Here is a chart of Wells Fargo.
A triangle forms in January to February, 2003. You can see there's a sharp move up in the middle of the month. Then towards the end of the month and continuing into late February, the stock reaches a high, comes down sharply, bounces up to a lower high, then bounces down to a higher low. You can see the lines forming the lower highs and higher lows that make up the triangle pattern.
Bryan Castleberry (Nov 6, 2003 4:49:37 PM)
Towards the end of February it breaks that downtrend line. Measure the pattern base on the left-hand side 47.50-44.75=2.75, and add that value (2.75) to the point where the stock breaks out, which gets you a price target of about $49.75 (47 + 2.75).
Bryan Castleberry (Nov 6, 2003 4:49:57 PM)
You have a couple of different forms, such as symmetrical, ascending and descending triangles. Once the stock breaks out, you can get an idea of where the stock is headed in the next move higher by applying the triangle’s high-low spread to the triangle breakout price. Now, let’s move on to a shorter-term continuation pattern--flags.
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Andre (Nov 6, 2003 4:50:05 PM)
If you're just getting here, a slide show accompanies this presentation. You can launch the slide show at http://media.cybertrader.com/chat/profit_taking_strategies.htm
Bryan Castleberry (Nov 6, 2003 4:50:24 PM)
Flags are continuation patterns displayed as two parallel trend lines sloped in the direction opposite that of the prior trend.
In a flag, you're going to see a sharp run up in price. That's the pole for the flag. Usually, some good news comes out and the stock jumps in price. Then there's a little consolidation pattern as people start to evaluate the affect on the news on the stock.
Bryan Castleberry (Nov 6, 2003 4:50:50 PM)
A Flag Breakout in the direction of the prior trend completes the Flag pattern, signaling a new leg in the trend.
Long Signals: In an uptrend, price breaks above the Flag’s upper resistance line.
Short Signals: In a downtrend, price breaks below the Flag’s lower support line.
Bryan Castleberry (Nov 6, 2003 4:51:12 PM)
Target Setting Strategy
Measure the height of the move prior to the pattern (the “pole”), then add or subtract this value to the Flag breakout price to arrive at a price target.
Let’s review an example of a flag pattern breakout.
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Bryan Castleberry (Nov 6, 2003 4:51:41 PM)
Here's a chart of Abbott Labs.
Flags tend to occur about halfway up in the move. Hence, the “flag flies at half-mast”.
You can see the sharp price run-up in March that essentially forms the pole of this flag.
We've got the two parallel lines drawn in April. It's that slope down and the clarity of those parallel lines that really make this stand out as a great flag example.
Bryan Castleberry (Nov 6, 2003 4:52:33 PM)
The distance on the way up is about four points (41-37). The top of the pole is about 41. So when the stock breaks through that downtrend line at 40, you add those four points to the breakout point and you get a target of about 44.
Continuation patterns help traders in identifying trends and establishing targets and can be used in your target setting strategies to make you a more successful trader.
Bryan Castleberry (Nov 6, 2003 4:53:04 PM)
Now, let’s move on to defining the use of Reversal Patterns for setting price targets.
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Bryan Castleberry (Nov 6, 2003 4:53:17 PM)
A Reversal Pattern suggests that an important change in trend is taking place. The pattern is considered complete once price breaks out of the formation in the direction opposite that of the prior trend.
The trend reversal obviously comes at the end of a long trend. You don't know it's the end of a long trend until you watch the patterns
Bryan Castleberry (Nov 6, 2003 4:53:59 PM)
Common Types
Double Tops & Bottoms: “M” and “W” patterns
Head & Shoulders: Well-known topping patterns
Head and shoulders is probably the best known of all chart patterns.
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Bryan Castleberry (Nov 6, 2003 4:54:22 PM)
Double Tops & Bottoms are reversal patterns displayed as two peaks or troughs at the top or bottom of a prior trend. Between the peaks or troughs is a middle dip or peak.
Bryan Castleberry (Nov 6, 2003 4:54:32 PM)
A Double Top/Bottom Breakout in the direction opposite the prior trend completes the reversal pattern, signaling a trend reversal.
Bryan Castleberry (Nov 6, 2003 4:54:43 PM)
Long Signals: At the end of a downtrend, price breaks above the middle peak of the Double Bottom “W” pattern Double bottoms occur at the end of downtrends. As a new low is established, the stock bounces up then back down to that same low again. After establishing the two lows at or near the same price, the stock then breaks out above the middle peak within the “W” formation. That's your completed double bottom reversal pattern. A target can be projected upon the breakout by measuring the difference between the pattern’s lows and it’s middle peak, then adding this spread to the pattern’s breakout price (just above the middle peak price).
Bryan Castleberry (Nov 6, 2003 4:55:53 PM)
Short Signals: At the end of an uptrend, price breaks below the middle dip of the Double Top “M” pattern.
Double tops occur at the end of uptrends. As a new high is established, the stock bounces down then back up to that same high again. After establishing the two highs at or near the same price, the stock then breaks out below the middle dip within the “M” formation. A target can be projected upon this breakout by measuring the difference between the pattern’s highs and it’s middle dip, then adding this spread to the breakout price
Bryan Castleberry (Nov 6, 2003 4:56:19 PM)
Target Setting Strategy
Measure the height between the tops/bottoms and the middle dip/peak, then add or subtract this value to the double top/bottom breakout price to arrive at a price target.
Bryan Castleberry (Nov 6, 2003 4:56:45 PM)
Now, let’s review a double bottom example.
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Bryan Castleberry (Nov 6, 2003 4:56:54 PM)
Here is an example of Varian in a double bottom formation.
From May into July of 2002, the stock declines sharply from 47 to 33. There is a rapid advance to 38 in just a few days from that 32 low. Then, the stock bounces off and goes right back to 32. As you can see, the decline took place over several months, while the double bottom formed very quickly (approximately 1 month).
Bryan Castleberry (Nov 6, 2003 4:57:25 PM)
Double Bottoms tend to form more quickly than Double Tops.
Once the double bottom is formed, add the range of the double bottom (which here is 38-32=6) to the point where the stock rallies (at 38) to get a price target of 44 (38+6).
Next slide (21)
Bryan Castleberry (Nov 6, 2003 4:57:49 PM)
Head & Shoulders Tops are reversal patterns that display as three prominent peaks at the top of a prior uptrend, with the middle peak (the “head”) higher than the other two peaks (left and right “shoulders”). The trend line connecting the dips between the head and shoulders represents the “neckline.”
Bryan Castleberry (Nov 6, 2003 4:58:12 PM)
A Head & Shoulders Breakout below the neckline completes the Head & Shoulders topping pattern, signaling a reversal of the prior uptrend.
Bryan Castleberry (Nov 6, 2003 4:58:24 PM)
Target Setting Strategy
Measure the height between the top of the head and the neckline, then subtract this value from the neckline breakout price to arrive at a short price target.
Bryan Castleberry (Nov 6, 2003 4:58:48 PM)
Let’s look at a Head and Shoulders example.
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Bryan Castleberry (Nov 6, 2003 4:58:52 PM)
Here is a chart of BEA Systems.
The stock had a rally into the end of 2002. Take a moment and look at the high in December (left shoulder), the ultimate high in January (the Head), and then the decline (right shoulder) towards the end of January.
Bryan Castleberry (Nov 6, 2003 4:59:13 PM)
Patterns represent the change in investor emotions. The stock price moves up because new money keeps coming in wanting to buy that stock. The balance shifts between the buyers and the sellers and starts to roll over. The head--in this case, the January high--represents a weakening of the uptrend. The right shoulder, which is the little rally towards the end of January, is another signal of that weakening in the dominance of buyers over sellers.
Bryan Castleberry (Nov 6, 2003 4:59:45 PM)
Draw a trend line across the two lows between the shoulders and head to create the neckline. The head and shoulders top is confirmed when the stock price breaks the neckline, signaling a trend reversal.
Bryan Castleberry (Nov 6, 2003 5:00:11 PM)
Head and Shoulders Top/Spread: Measure the height from the neck up to the top of the head (14-11.50= $2.50).
If the stock breaks down below the neckline: subtract the head to neckline spread ($2.50) from the head and shoulders breakout price (11.75) to arrive at a price target on the short position of 9.25 (11.75-2.50)
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Bryan Castleberry (Nov 6, 2003 5:00:32 PM)
One of the most demanding aspects of trading is managing winning trades once you’re in them. This is when your emotions can cloud your judgment. There are several techniques that may be used to manage winning trades to help lock in or maximize profits.
Bryan Castleberry (Nov 6, 2003 5:00:55 PM)
Here are 3 questions to ask yourself about common profit-taking mistakes, followed by techniques you can use to help avoid these mistakes in the future:
How often have you had large gains on a trade, only to watch these gains evaporate because you didn’t exit the position soon enough?
Technique: To avoid letting your profits turn into losses, utilize profit taking tools, such as trailing stops, to avoid leaving yourself unprotected. It is vital to never leave a profit on the table.
Bryan Castleberry (Nov 6, 2003 5:01:27 PM)
How often have you held on to a stock that is going nowhere, while the rest of the market experiences a strong up trend?
Technique: Watch carefully for signs that the trade is not meeting your expectations and/or is underperforming relative to the market or sector. Close the position and move on to something that’s more attractive.
How often have you sold a stock too soon, then watched it soar to new highs immediately afterwards?
Bryan Castleberry (Nov 6, 2003 5:02:11 PM)
Technique: When to exit a trade is always a difficult question. This is a decision that takes perhaps even more skill than selecting what stock to buy and where to buy it. Have a plan. Utilize technical target setting techniques to evaluate the profit potential of a trade, then revise this target as conditions warrant.
There are two types of profit taking tools or techniques that can assist you with taking profits--trailing stops and technical exit signals.
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Bryan Castleberry (Nov 6, 2003 5:02:45 PM)
Trailing Stops are designed to follow or “trail” a stock’s price as it moves up or down. They work by calculating a new stop price, either in dollars or percentage increments, each time the stock reaches a new high or low during a trading session.
It is always great to know at what profit level you should exit your position before giving profits back to the market. That's why adjusting your stop price in the direction of your trade is so key.
Bryan Castleberry (Nov 6, 2003 5:03:27 PM)
Trailing Stops allow you to protect from losses and maximize your gains through the continual tracking of that stock—without manual intervention from you!
Bryan Castleberry (Nov 6, 2003 5:03:42 PM)
Trailing Stop Strategies
Long Positions: Alert occurs when price trades a specified amount below the high price of a session.
Short Positions: Alert occurs once price trades a specified amount above the low price of a session.
Next, let’s review the next group of profit taking tools, technical exit signals. These tend to require more involvement and management from the trader.
Bryan Castleberry (Nov 6, 2003 5:04:00 PM)
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Bryan Castleberry (Nov 6, 2003 5:04:09 PM)
Profit taking strategies that utilize technical analysis exit signals allow you to more actively evaluate your winning trades.
Technical Exit Signals can help traders recognize or confirm a change in a stock’s trend or pattern. Technical traders typically look for a combination of technical indicators to signal when to exit winning trades.
Bryan Castleberry (Nov 6, 2003 5:04:32 PM)
Types of Technical Exit Signals
Trend Line
Moving Average
Candlesticks
Volume
Oscillators
Bryan Castleberry (Nov 6, 2003 5:04:50 PM)
Let’s begin with Trend Line Exit Signals.
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Bryan Castleberry (Nov 6, 2003 5:04:56 PM)
A Trend Line is created by connecting a series of higher lows or lower highs. Trend Lines often act as areas of support or resistance within longer term trends.
Trend Line Signals are generated when price crosses above or below a given Trend Line.
In trend lines, you're watching a trend as it develops. When the stock breaks out of that trend, whether its a downtrend or an uptrend, it’s time to reevaluate.
Bryan Castleberry (Nov 6, 2003 5:05:30 PM)
Trend Line Exit Strategies
Long Positions: Exit when price breaks below a key support Trend Line.
Short Positions: Exit when price breaks above a key resistance Trend Line.
Let’s review an example.
Next slide (27)
Bryan Castleberry (Nov 6, 2003 5:05:57 PM)
Here is a chart of the Nasdaq 100 Trust with 3 trend line breaks:
The first one occurs in March of 2002 when the trend line breaks at 35. It runs up to 39 before it rolls over, then starts heading down again.
The next low point is in May at 28.5. The trend line doesn't break until 32. The stock doesn't rally much beyond that point.
Finally, there is a trend line break at 23 at the bottom in August.
Bryan Castleberry (Nov 6, 2003 5:06:23 PM)
Short Exit Strategy : Exit upon breakouts above a downtrend line
Next slide (28)
Bryan Castleberry (Nov 6, 2003 5:06:39 PM)
A Moving Average is a mathematical technique that smoothes out jagged price data. Moving Averages are commonly used to determine trend direction, confirm support/resistance levels, and identify possible trend reversals.
Bryan Castleberry (Nov 6, 2003 5:06:53 PM)
Moving averages are very adaptable. There are several different ways of calculating a moving average. For example, a 10 simple moving average is an average of the last 10 days closing prices.
You can also draw different time frames (10, 20, 63 or 200 day moving averages). So you can have different time frames represented on the same chart.
Bryan Castleberry (Nov 6, 2003 5:07:14 PM)
Moving Average Signals are generated when price crosses above or below a given Moving Average.
Bryan Castleberry (Nov 6, 2003 5:08:02 PM)
Moving Average Exit Strategies
Long Positions: Exit when price crosses below a key supporting Moving Average line.
Short Positions: Exit when price crosses above a key resisting Moving Average line.
Let’s review an example using Moving Average Signals to exit a long position.
Next slide (29)
Bryan Castleberry (Nov 6, 2003 5:08:31 PM)
Here is a chart of Citrix Systems.
Bryan Castleberry (Nov 6, 2003 5:08:40 PM)
From the October low, the stock crosses above the 20-day simple moving average (SMA) and stays above that moving average until the end of December. Since the 20-day SMA appears to be supporting the stocks uptrend during this timeframe, a break below it might provide a sensible exit signal.
Long Exit Strategy: Exit upon a break below a supporting Moving Average
Next slide (30)
Bryan Castleberry (Nov 6, 2003 5:09:05 PM)
Candlesticks have been in use for hundreds of years in Japan, but are fairly new to the Western Hemisphere. Candlesticks use the same information that a bar chart uses: open, high, low, and close. But they display this information a bit differently. Some traders believe that candlesticks provide a little extra insight into the balance between supply and demand for a trader.
Bryan Castleberry (Nov 6, 2003 5:09:25 PM)
The middle box is the real body, which displays the difference between the open and close. If the day’s close is above the day’s open, the box displays as one color (white in our example here); if the day’s close is below the day’s open, the box displays as another color (red here). The part of the day's trading that sticks out above the top of that box and below the bottom of the box is called the shadow.
Bryan Castleberry (Nov 6, 2003 5:09:51 PM)
Let’s discuss the main types of single-day candlesticks.
Next slide (31)
Bryan Castleberry (Nov 6, 2003 5:09:55 PM)
Four basic types of single day candlesticks include Dojis, Spinning Tops, Hammers (and Shooting Stars), and Engulfing Patterns.
The doji and the spinning top candlesticks show supply and demand roughly in balance
The hammer and shooting star candlesticks are reversal candlesticks that indicate a stock may be near the end of a trend.
The engulfing patterns, both bullish and bearish, are reversal candlesticks that occur when the current day’s real body wraps around the prior day’s and reverses the prior price direction.
Bryan Castleberry (Nov 6, 2003 5:10:30 PM)
Next slide (32)
Bryan Castleberry (Nov 6, 2003 5:10:36 PM)
Here is a chart of JetBlue Airways.
JetBlue displayed back-to-back hammers in March. A hammer is a day when the stock opens up at a given price, goes down sharply in the middle of the day, but closes fairly close to the open price.
Bryan Castleberry (Nov 6, 2003 5:10:50 PM)
Short Exit Strategy: Exit upon appearance of a Bullish Reversal Candlestick day
Since we’ve reviewed an example of a bullish candlestick signal, let’s move on to an example of a bearish candlestick signal.
Next slide (33)
Bryan Castleberry (Nov 6, 2003 5:11:07 PM)
Here is a chart of Varian Medical.
You can see from the chart that the stock was in an uptrend from March through the end of May. At the end of May, a shooting star is displayed, an early indication that the uptrend may be nearing an end. A shooting star is a day when the stock opens at a given price, goes up sharply in the middle of the day, but closes fairly close to the open price.
Bryan Castleberry (Nov 6, 2003 5:11:29 PM)
The next day is a bearish engulfing pattern. If you're in an uptrend, you don't expect the bears to make much progress on the way down. This bearish engulfing pattern means that the stock opened above the previous day's real body, then proceeded to close below the previous day's body, engulfing the body of the prior day. An engulfing candlestick is another sign of a trend reversal.
Long Exit Strategy: Exit upon appearance of a Bearish Reversal Candlestick day
Bryan Castleberry (Nov 6, 2003 5:11:54 PM)
Next slide (34)
Bryan Castleberry (Nov 6, 2003 5:11:59 PM)
Here is the same chart again. For added confirmation of the candlestick signals, you’ll apply other technical indicators to the chart. For example, moving averages, stochastics and other oscillator-type indicators.
Bryan Castleberry (Nov 6, 2003 5:12:11 PM)
Notice that in the days following this bearish engulfing pattern, the stock breaks down through the two moving averages (20-day and 50-day SMA’s), and the stochastics start to roll over and head below the overbought range.
Bryan Castleberry (Nov 6, 2003 5:12:28 PM)
All the characteristics of the uptrend that were in effect for months come to an end very soon after that bearish engulfing pattern.
Bryan Castleberry (Nov 6, 2003 5:12:50 PM)
Next slide 35
Bryan Castleberry (Nov 6, 2003 5:12:53 PM)
Volume is considered a secondary indicator used to help confirm price action.
Volume Signals that confirm price action are generated when Volume expands sharply in the direction of a chart pattern breakout.
Bryan Castleberry (Nov 6, 2003 5:13:02 PM)
Volume can be very useful to look at when a stock is in an upside breakout.
A breakout with expanding volume levels tends to indicate a greater degree of interest or strength.
A breakout with very low volume tends to indicate a smaller degree of interest or strength.
Bryan Castleberry (Nov 6, 2003 5:13:23 PM)
Volume Exit Strategies
Long Positions: Exit upon big volume down days that coincide with prior high resistance (and/or other technical signals).
Short Positions: Exit upon big volume up days that coincide with prior low support (and/or other technical signals).
Next slide (36)
Bryan Castleberry (Nov 6, 2003 5:13:42 PM)
We're back to the BEA Systems chart.
This stock basically moves sideways for four months. Specifically, notice the early May and early June attempts to make new highs. After that March low, the stock runs up and makes a high, which matches the February high right around $12 a share. Price comes back down in early April to support above the March low, then runs back up. In the beginning of May, the stock is back up to that $12 high reached in March. The stock is attempting to break out of the trading range and get above the March high. You'll notice that the candlestick here is red, meaning that the open is higher than the close.
Bryan Castleberry (Nov 6, 2003 5:14:20 PM)
Notice that the volume at the early May high is the highest volume in two months. This is a key indicator in reversal patterns when prices try to break out. A breakout and close above the $12 resistance, combined with heavy up volume, would be considered a bullish confirmation. However, in our BEAS example, price fails to breakout and sells off on heavy volume. The same thing happens in early June when the stock goes back up then resists at that same $12 level. Failed breakout attempts on high volume days are significant exit signals.
Next slide (37)
Bryan Castleberry (Nov 6, 2003 5:14:50 PM)
Oscillators reflect when prices have risen (“overbought”) or fallen (“oversold”) too sharply, and are thus vulnerable to a trend reversal. Oscillators are considered more useful during trading ranges than trends.
Bryan Castleberry (Nov 6, 2003 5:15:01 PM)
Common Types
Relative Strength Index (RSI): Price divergence signals
Stochastics: Overbought and Oversold signals
RSI compares the internal strength or weakness of a stock to itself – not to other securities. RSI is plotted on a vertical scale from 0 to 100. When RSI is below 30, the stock is considered to be oversold. When RSI is above 70, the stock is considered to be overbought. A divergence reversal signal may be generated when price continues to trend up while RSI is beginning to trend down, or when price continues to trend down while RSI is beginning to trend up.
Stochastics measure the strength or weakness of a market by comparing the closing price relative to its price range over a given time period. Similar to RSI, stochastics are plotted on a vertical scale from 0 to 100. When stochastics is below 20, the stock is considered to be oversold; when it’s above 80, it’s considered overbought.
Bryan Castleberry (Nov 6, 2003 5:15:55 PM)
Oscillator Exit Strategies
Long Positions: Exit when oscillator turns bearish; confirm the signal using other indicators
Short Positions: Exit when oscillator turns bullish; confirm the signal using other indicators
Next slide (38)
Bryan Castleberry (Nov 6, 2003 5:16:16 PM)
Here is a chart of Legg Mason. In May of 2002, price ran up from the April bottom. This high in May just reaches the March high before reversing course—confirming a potential resistance level. Notice how the stochastics indicator at the bottom rolls over out of the overbought zone, without the stock breaking to a new high--a clear sell signal for long positions. Where would your target be, once the price begins to fall?
Bryan Castleberry (Nov 6, 2003 5:16:48 PM)
A sensible answer might be to target the prior low that supported twice in April.
The stock proceeded to fall from the May high and through the April lows, then established a double bottom reversal pattern in late July and early August before moving sharply higher.
Bryan Castleberry (Nov 6, 2003 5:17:29 PM)
Legg Mason then resisted an old support level (now serving as resistance) in late August and early September, while at the same time stochastics reversed from overbought to oversold.
Using price and stochastics together can help confirm your exit point.
Exit Strategies: Exit longs when Stochastics turn bearish, or shorts when Stochastics turn bullish
Bryan Castleberry (Nov 6, 2003 5:17:49 PM)
Next slide (39)
Bryan Castleberry (Nov 6, 2003 5:17:51 PM)
I would be delinquent in my role today if I didn’t discuss how important it is for all of us to have the right trader psychology.
The psychology of the trader is of utmost importance when deciding to take profits. It is key for traders to ignore their emotions of fear and greed, and follow a disciplined exit strategy geared towards maximizing profits.
Bryan Castleberry (Nov 6, 2003 5:18:12 PM)
Let’s take a few minutes to talk about the trader emotion, the trader head set, what you're thinking about when you trade.
Emotions are the main enemy of the active trader. Fear and greed run the markets. This is part of human psychology. They key is to try to curtail any obstacles that may cause emotions to enter into trading (e.g. your knowledge of your trading platform, order routing mechanics, and trading techniques). Plan out trade entry and exit points ahead of time
Bryan Castleberry (Nov 6, 2003 5:18:38 PM)
Finally, it’s extremely important that you understand yourself. Use a journal to track your trading activity, and utilize that data to determine strategies that work best for you (e.g. the time of day you take most of your profits, or areas you still need to work on). Learn to anticipate your reactions to success and failure
Bryan Castleberry (Nov 6, 2003 5:18:57 PM)
That wraps up our discussion. Hopefully this seminar has helped shed some light on Profit Taking Strategies, and has provided you with some very actionable tools and techniques you can use in order to become more successful.
I encourage you to practice these techniques to enhance your trading success.
Good Luck and Happy Trading!
jeffduyndam (Nov 6, 2003 5:19:17 PM)
thank you
Bryan Castleberry (Nov 6, 2003 5:19:18 PM)
I would now like to open the chat for any questions.
Andre (Nov 6, 2003 5:19:34 PM)
Yes, very thorough, Bryan. Thanks.
Andre (Nov 6, 2003 5:19:55 PM)
I'll have to re-read the log.
serpico (Nov 6, 2003 5:20:02 PM)
I really enjoyed that presentation
Bryan Castleberry (Nov 6, 2003 5:20:24 PM)
Thanks
stockswatch (Nov 6, 2003 5:20:49 PM)
When do you realize your target is failing?
Bryan Castleberry (Nov 6, 2003 5:21:56 PM)
what indicator are you using?
stockswatch (Nov 6, 2003 5:22:30 PM)
way too many at times
stockswatch (Nov 6, 2003 5:22:32 PM)
and they offer conflicting signals
CT Wadie (Nov 6, 2003 5:23:29 PM)
understand. it is important to streamline your approach if you feel that its working against you. start with what makes most sense to you and work from there.
stockswatch (Nov 6, 2003 5:24:17 PM)
it is the classic problem with whether to wait longer for your target or not..
CT Wadie (Nov 6, 2003 5:24:43 PM)
do you use time stops in addition to your entry / exit points?
stockswatch (Nov 6, 2003 5:25:15 PM)
time stop is not too reliable
Andre (Nov 6, 2003 5:25:49 PM)
Could it be perhaps that you're using too many indicators?
stockswatch (Nov 6, 2003 5:26:15 PM)
definitely too many
cvragel (Nov 6, 2003 5:26:30 PM)
when using the stochastics indicator, do you have specific parameters that you recommend?
Bryan Castleberry (Nov 6, 2003 5:27:43 PM)
watch: it's best to simplify. try a one at a time and see what works best for you. you could try trading in a "demo" mode.
Bryan Castleberry (Nov 6, 2003 5:29:31 PM)
cvr - i am not in a position to tell you what's best for you. i can say that a consistent disciplined approach could be the most effective. you do not want to become subjective in your application of technical analysis
Andre (Nov 6, 2003 5:29:58 PM)
As many of you know, CyberTrader is a Direct Access broker and subsidiary of the Charles Schwab Corporation.
Andre (Nov 6, 2003 5:30:07 PM)
Designed for active traders, CyberTrader offers clients increased control over trading with choices in execution for equities, options and futures trading as well as a comprehensive package of tools to display market direction at a glance.
Andre (Nov 6, 2003 5:30:21 PM)
We've got some of their tech and sales folks with us today, now's a good time if you have any questions... and we've got a few.
tjones (Nov 6, 2003 5:30:42 PM)
Can you trade futures now at CyberTrader?
Bryan Castleberry (Nov 6, 2003 5:31:03 PM)
absolutely. e-minis.
tjones (Nov 6, 2003 5:31:16 PM)
Do you have any specials for new accounts?
Bryan Castleberry (Nov 6, 2003 5:31:33 PM)
30 free trades. 15 equity and 15 options.
Andre (Nov 6, 2003 5:32:21 PM)
Bryan, you were telling me of some of the new features you had rolled out recently. Why don't you tell us a little but about them...
CT Wadie (Nov 6, 2003 5:33:19 PM)
point and figure charts,sector tools, overnight trailing stops ...
Bryan Castleberry (Nov 6, 2003 5:33:21 PM)
advanced options capabilities, persistent alerts
Andre (Nov 6, 2003 5:33:56 PM)
Great.
CT Rob (Nov 6, 2003 5:33:57 PM)
pivot point charting, vwap charting
stockswatch (Nov 6, 2003 5:34:16 PM)
what are the advanced option cap?
Bryan Castleberry (Nov 6, 2003 5:34:20 PM)
tabbed navigation on charting
Bryan Castleberry (Nov 6, 2003 5:34:45 PM)
spreads, straddles, nakeds
Bryan Castleberry (Nov 6, 2003 5:34:51 PM)
bullets
Bryan Castleberry (Nov 6, 2003 5:35:38 PM)
For more information please visit: http://www.cybertrader.com/offer/offerdirect.asp?offer=ELTREFER&url=/
Andre (Nov 6, 2003 5:36:08 PM)
That's great.
Andre (Nov 6, 2003 5:36:32 PM)
Folks... there comes a time when we simply have to let our guests go. And that time has come. Bryan... thanks so much for joining us today.
Andre (Nov 6, 2003 5:36:54 PM)
We will have a log posted soon at: http://www.elitetrader.com/ch/index.cfm
CT Wadie (Nov 6, 2003 5:36:58 PM)
happy trading to you all.
Andre (Nov 6, 2003 5:37:03 PM)
This is a good one to re-read.
Bryan Castleberry (Nov 6, 2003 5:37:04 PM)
Andre and all...thank you for your time. If you have any questions please call us at 877-594-2596.
Andre (Nov 6, 2003 5:37:34 PM)
The log will be up indefinitely and the slides at the CyberTrader site, as well.
stockswatch (Nov 6, 2003 5:37:42 PM)
nice presentation, tks
im412b (Nov 6, 2003 5:37:46 PM)
Great explanation on target setting!
brighella (Nov 6, 2003 5:37:52 PM)
ty that was very helpful
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