Advent Software, Inc. (ADVS) is on the move today after an upgrade was issued earlier this morning. The stock is up over 6% in early morning trading on volume larger than the average. ADVS was added to the MSW Index three weeks ago at $28.42 as a 200-day moving average play (similar to STRL – up over 40% in two months as another 200-d m.a. play).

Below is the analysis over the past three weeks as the stock has been on the index.

4/15/06
ADVS – 28.18, up a penny this week as it continues to hold the 50-d and 200-d moving averages. The trend buy is now with anticipation of a short term move above $30 (towards $34). Hold (always sell on a breakdown below your sell stop – below the 200-d m.a.)

4/8/06
ADVS – 28.17, sitting on the 200-d m.a. on the weekly chart and slightly above the 50-d m.a. on the daily chart. A trend buyer could enter right now with anticipation of a move higher (similar to STRL). Rating Buy to Hold (always sell on a breakdown below your sell stop – below the 200-d m.a.)

4/1/06
ADVS – 28.42, I bought the stock myself. I don’t know if it will work out but I placed money on the idea and have rules to protect the downside. As you have been noticing, I have been making several 200-d m.a. momentum buys in recent months. A twelve month price target will be from $38-$40 (FYI: I got in lower than the Index price as I bought on Thursday).

It will be interesting to see where the stock goes from here as I am looking at a short term target of $34 and a longer term target above $38 towards $40.

Piranha

Here is a link to a simple position sizing spreadsheet that I put together that also includes a few trailing stops (based on the retracement method explained in the previous post).

Position Sizing and Stop Calculator Spreadsheet

Try this link also for a direct download (people that don’t use windows XP):
Position Sizing and Stop Calculator Spreadsheet

I will have a new page created and added to MSW with the calculator but this link should be sufficient for now. Click the button highlighted in the image to save the spreadsheet to your own computer.

Piranha

Most investors and many more market pundits continually talk about setting stops; they range from physical stops to mental stops to trailing stops to support stops to retracement stops or even moving average stops. It is easy to set a stop before you enter a position based off of your money management rules such as position sizing and expectancy. If you have a $25,000 account and want to risk 2% of the account on a $50 stock with an 8% stop; we know that the trade will allow you to buy 125 shares with a worst case scenario sell stop of $46.00 (assuming a 1-R risk of $4). This is wonderful but what should a trader do once the position gains 20%? Where should the stop be placed at that point to eliminate the chance of losing that quick 20% gain?

Several books attempt to explain how to take profits and many traders of the past have offered advice in books but most of it is fluff and subjective to opinion. I have heard people claim that they take a third of the position down after making a 20% or 30% gain while other traders take down half the position once a gain reaches 50%; but is this the correct way to manage money and positions? I thought so several years ago but have developed a more mechanical system that gives me precise exits at any time during an up-trend. It is a combination of a trailing stop and a retracement stop based upon the actual gain at any point in time. In a bull market, I will allow the system to loosen itself so I can handle a healthy pull-back without selling before a possible large move. For now, let me focus on my method for locking in profits without giving back too much.

For the sake of this article, I will continue to use the trade suggested above as the round numbers should be easy to follow.
Account Size: $25,000
Risk: 2%
Stop Loss: 8%
Share Price: $50

Shares to Purchase: 125 or $6,250
Sell Stop: $46.00
Worst case loss: $500 or 2%

If you are unsure how I came up with the numbers in this example, please go back and read these blog articles first:
Position Sizing - Why Losing Isn’t Everything

Position Sizing Examples (simplified)

We buy the stock and it is up over 20% after the first three weeks of trading. What should I do to protect the profit I have already made?

Scenario #1:
At $60, I will set a stop based on a 30% profit retracement.
To do this, you need to multiply the profit of 20% (or $10) by a 30% stop: $10*30% = $3
At this point in time, I will look to close the position and lock in gains if the stock drops more than $3 from the $20% threshold ($60 in this case). My trailing stop is now $57 which guarantees me a total gain of 14%.

Scenario #2:
At $65, I will set a stop based on a 25% profit retracement.
As my profit grows, my stop tightens so I don’t give back too much. Again, this can loosen in bull markets and is also subject to longer term support and/or resistance lines. For the sake of this article, we will ignore all other variables.

To do this, you need to multiply the profit of 30% (or $15) by a 25% stop: $15*25% = $3.75
At this point in time, I will look to close the position and lock in gains if the stock drops more than $3.75 from the $30% threshold ($65 in this case). My trailing stop is now $61.25 which guarantees me a total gain of 23% if the trailing stop is violated.

Let’s do this one more time with a 40% gain:

Scenario #3:
At $70, I will set a stop based on a 20% profit retracement.
As my profit grows, my stop tightens so I don’t give back too much. As you can see from the three scenarios, my profit retracement has dropped by 5% as my profit has risen by 5%.

To do this, you need to multiply the profit of 40% (or $20) by a 20% stop: $20*20% = $4.00
At this point in time, I will look to close the position and lock in gains if the stock drops more than $4 from the $40% threshold ($70 in this case). My trailing stop is now $66 which guarantees me a total gain of 32% if the trailing stop is violated.

Please understand that I use these numbers since I like the separation of advances to be at least 10% from one retracement stop level to the next. Any investor or trader can substitute the numbers with something that makes more sense based on your own system and money management rules.

Outside of these selling rules, I also employ additional selling rules that use the long term 200-day moving average and long term support levels and trend lines. In a bull market, I will loosen the tight stops and look for longer term sell signals such as the moving average, a channel breakdown or even strong volatility movements that don’t agree with the overall pattern (these may be obvious reversals on the daily and/or weekly charts). Other times, I have a specific price objective when placing the trade and will close the position if the objective is reached (even if the trend is still higher). A great example of this are the options I purchased in Tenaris (TS); I sold at $45 per call contact, yet they are now trading at $80 per contract. I bought above $10 per contract and had an objective to sell when the stock reached $145 which it did, so I sold my calls and moved on. Looking back, I got out much too early but didn’t violate any of my rules which is more important than the additional gains. If I violated them on this trade and it worked out; what would stop me from violating them in the future and getting slammed with a heavy loss. I hope you get the point.

As I said last night, I am going to upload a simple excel spreadsheet that will allow you to play with position sizing setups and the type of stop that is described above. The stops are integrated into the spreadsheet to show you where to take profits and can be tweaked to your own parameters within your own system. Once I decide where to host the spreadsheet, I will post a link that will allow you to download it.

I will follow-up this article with anther in-depth article that uses a real time trade that I currently have in my portfolio to show you where I will close the position if the price drops. I hope to have the spreadsheet uploaded by that time so you can plug in the numbers to understand on a deeper level.

Piranha

I posted a blog entry last month about SWN and the possibility of a short based upon the overall trend of crude oil. That post can be found here: Southwestern Energy Short?

If you scroll down to the bottom of that entry, you will find a chart I uploaded of crude oil showing where the resistance plays a major role. If crude fails to make a new high without surpassing the resistance, I will start to look at several short term shorting opportunities within the sector (SWN being one of them). If SWN reverses and closes below the moving averages, the short will be on (in my case, I am buying put options to follow my idea).

This link takes you to an article that talks about the possible push to new highs for crude oil: Oil retreats to $68 after falling short of record

Piranha

Tower Group Inc. (TWGP) was up over 14% on volume 225% larger than the 50-day moving average as the stock broke out of the cup with high handle base; above the pivot point of $24.56. I have been covering TWGP over the past month and have listed the analysis I provided for TWGP on the MSW Index each week since March 4, 2006. The close above $26 takes the stock half way to the projected target of $30 I gave one month ago at $20.

The MSW Index has been on fire and stock after stock continues to breakout of properly formed bases giving all of us ample opportunity to take profits out of the recent run of individual stock leaders. There is no reason why MSW members should not have caught at least one of the several breakouts this past week as I have been covering them all since their bases were forming and their potential pivot points became apparent. Below is a quick history on the stock over the past month on the MSW Index (weekly screens).

The chart in this blog post also shows you that we started to cover TWGP last October but targeted the stock a bit earlier than I wanted. The stock never violated the pivot point from October but I cut the coverage from the MSW Index. When the recent base became apparent, I immediately placed the stock back onto the MSW Index before it took off with the recent 30% gain in 4 weeks.

• 4/1/06:
  TWGP – 23.10, the slight drop is welcomed as we may be forming the start to a possible handle formation. The new pivot point is now $24.56 with support lower at the moving averages. Rating: The new buy is above the pivot point – CANSLIM rules
  3/4/06: 20.95

• 3/25/06:
  TWGP – 23.39, Up another 6.71% this week as the stock managed to make a new all-time high. A handle hasn’t formed but the stock is up over 10% on MSW in three weeks. Rating: I would like to see a handle and exact pivot point to form

• 3/18/06:
  TWGP – 21.92, up over 7% this week as the right side of the base looks to complete its formation and start a handle pattern. If a handle starts to form, we can target an exact entry area. Rating: look for cup base to build right side properly with handle

• 3/11/06:
  TWGP – 20.37, the stock was down less than 3% this week as it closed sitting on the 50-d m.a. (gaining support on Friday). We may see a deep 9 week cup shaped base forming which would change the ideal entry point. Rating: look for cup base to build right side properly
• 3/4/06:
  TWGP – 20.95, A former MSW Index stock for nine weeks from October 2005 to January 2006. When the correction started, we removed the stock from the index but it is back on recent strength and support. It was up this week on the largest volume ever! The buy is now with a target of $30 in the next six months.

Piranha