KNOW WHEN TO HOLD 'EM. KNOW WHEN TO FOLD 'EM.

Prior to entering any trade, a trader should have a goal in mind. That goal is - when to exit a trade. If you enter a store you had better be sure on how to get out in case of a fire, right?

I mentioned in a previous post that I use an 8% stop loss rule and take profits at 16% giving you a 2:1 win/loss ratio. Why? I cannot predict how far a stock will rise, but studies have shown that stocks that move out of an area of consolidation called a base and rise 20% to 25% and then consolidate again. This usually takes 4 to 6 weeks to move the 20-25%. So plan on holding onto a stock for at least one month after it breaks out of a base such as a cup and handle, double bottom base, or a pullback to the 50 day moving average. (Note that in the IBD article "Pullbacks To 10-Week Line Offer 2nd Chance", the 10-week line is the same thing as the 50 day moving average since there are 5 trading days per week for 10 weeks [5 x 10 = 50]). I could handle 20% per month. That would mean an annual return of 240%! Too bad all trades don't go as planned.

LTM is breaking out of a base as we speak. This base is called a cup and handle. IBD says that during consolidation, a stock "corrects" itself usually 20% to 30%. LTM corrected 19% from its $48.92 peak in May, 2006. It has now carved out the right side of the cup and is leaving its "handle". Notice how the cup and handle is outlined by the blue line. The previous resistance was $47 and that has now been surpassed. IBD says it is still OK to buy 5% past the previous resistance, thus making the top limit of buying as $49.35 ($47 x 1.05 = $49.35) So now set your price target of 20% above $47 which is $56.40 ($47 x 1.2 = $56.40).

I am having problems downloading the picture. Blogger just doesn't seem to want to place it so I will have to download it at another time. sorry. Best thing to do is to go to www.stockcharts.com and type in LTM in the symbol box.