Trading Stocks - Paul Takes On The MarketPeter and his family were spending a month in Europe with some close friends, so while he was away, Paul decided it was time to take some Stock trades on his own to show his mentor how much he had learned from their meetings. His paper trading had been going exceptionally well and he was keen to profit from his newfound technical analysis and trading knowledge. He looked through his watch list and found three likely candidates. For his first trade he chose Adecco (ADO) (see the weekly chart below), as it was trending strongly on the weekly chart and looked to offer the most promise. 
Source: Incredible Charts - www.incrediblecharts.com.au He waited patiently for a higher swing high, then a higher swing low on the daily chart to signal the beginning of a tradable uptrend. The Stock had made a potential double top on October 21 and November 3 at around $15.00, so he was waiting for this to be broken before entering. ADO made a higher high at $15.40 on November 7, then fell 6 trading days to November 17. Paul placed an order to buy 1,000 shares 8 cents above the high of each day of the reaction, and his buy order was finally filled on November 18 at the opening price of $14.90 (Point 1). 
Source: Incredible Charts - www.incrediblecharts.com.au He placed a stop loss order 20 cents below the swing low, as this Stock had a history of breaking swing lows by up to 15 cents while it was trending, and he didn't want to be stopped out of a good uptrend by a little bit of market 'noise'. The next day was a large range outside day, with a close below the open and the previous days close, but Paul wasn't worried - he was sticking to his plan. The trend was up and he was trading in the right direction. There was no need to worry. ADO had 2 days down to a higher low, then started to rally again. It rallied for three days, then had a 1 day reaction. Paul put an order to buy another 1000 Shares 8 cents above the high of this one day reaction, and his order was filled as the Stock rose the next day (Point 2). 
Source: Incredible Charts - www.incrediblecharts.com.au Paul placed his stop loss orders 20 cents below the most recent major swing low at $15.20 in case the trend changed and he had to get out of the trade. The Stock had another one day reaction and then continued to rally. Paul didn't buy any more Shares at this point because his second lot was not yet into profit, and he remembered Peter's lesson about only compounding his position when you are risking the market's money. ADO then fell for two days, breaking the most recent swing low, but not reaching his stop loss level. Because Paul had placed his stop loss orders 20 cents below this significant swing low, he wasn't stopped out and he congratulated himself for being able to sit through the pullback in price, remain calm and stick to his plan. The Stock formed a double bottom which will often provide strong support in an uptrend, so he placed an order to buy 1000 more ADO shares 8 cents above the high of the second day down at $15.68 (Point 3). His order was filled the next day as the Stock rallied. 
Source: Incredible Charts - www.incrediblecharts.com.au The Stock rallied strongly for three days, making a new high quickly. It looked like there was no stopping this up-trend. After a one day pullback, ADO had an inside day and again started to rally. But this time, things were different. The Stock price only went up for one day and then turned down, breaking the swing low it had formed the day before. Paul had moved his stop loss order up to 20 cents below the next higher swing low after the new high was made (Point 4), and was stopped out of his positions as the sell-off gained momentum (Point 5). He felt cheated by the market. He had held on through all of the recent gyrations, he had compounded his position as Peter had advised on each new higher low, and now he was out of the trade with a loss. He was bitterly disappointed. And to make matters worse, the Stock fell no further and then started to rally (Point 6). 
Source: Incredible Charts - www.incrediblecharts.com.au Paul waited three days for the Stock to pull back and make a higher low, but it just kept going up. Finally, he couldn't stand the pressure of watching the rally any more, and he bought his full complement of 3000 shares as the market opened with a gap on January 5th (Point 7). The rally continued for three more days, then on the morning of the fourth day, the Stock opened sharply lower, then rallied all day (Point 8). Volume was huge, at more that 10 times average volume over the last three months. Paul decided to place a stop loss order below the low of the big down day, in case the selling continued. 
Source: Incredible Charts - www.incrediblecharts.com.au If his stop was hit, he would be out at a break even point, so there was nothing to worry about. If the trend did continue higher, he was on board. If it didn't, he would be out square. He went to bed that night at ease and confident - he had no idea of the news ADO would release to the market overnight... To go to the second part of this story, please Click Here. |
