Cut your losses early and let your profits run

1. Momentum stocks

 

Transaction entry

  • Monitored companies belong to the investment universe (fundamental criteria).
  • Stock price must have reached a recent 52-week high.
  • Stock price must be above its 20-day moving average.
  • 20-day moving average must be above the 20-week moving average.
  • 20-week moving average must have a positive slope.
  • Wait for a price pullback: a retest of the 20-day moving average.
  • Stock is bought above previous day's high, 1 to 3 days after that retest.
  • If dynamic is too weak to take previous day's high, stock is removed and replaced by another stock.

 

Transaction exit

  • When price hits the 20-week moving average, a stop will be set a little under that week’s low.
  • Stop is removed if stock hits a new high.
  • Transaction is closed when stop is hit.

 

Illustration

IPGP: sold 10 months after purchase when it moved under previous week's low after a retest of the 20-week moving average. Recorded gain: in excess of 60%. This shows how some stocks can become very directional in some period of time.

Ipgp

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2. Recovering stocks

 

Transaction entry

  • Monitored companies belong to the investment universe (fundamental criteria).
  • Stock price must have reached a recent 52-week low.
  • Stock is monitored, but not bought as long as it remains under its 20-week moving average.
  • If price breaks above its 20-week moving average, wait for a retest of the 20-day moving average.
  • A purchase is considered if both moving averages have a non-negative slope.

 

Transaction exit

  • When price hits the 20-week moving average, a stop will be set a little under that week’s low.
  • Stop is removed if stock hits a new high.
  • Transaction is closed when stop is hit.