[Disclaimer: all the information in this series of articles is for educational purposes only. The author do not claim or guarantee that the readers may benefit from the information provided.]
The “Day of Ten”
After the share price breaks out and fills the entry, one shall observe its behaviour carefully. Ideally, the buyer wants it to go straight up after the purchase, but it seldom happens. Even if the breakout does not turn out to be faulty, the price will often retest the breakout level once or twice before resuming action.
If the purchase is a correct one, a “Day of Ten” shall soon appear within a month after the entry. A “Day of Ten” refers to a day which makes a new three-year high, and both of its volume and the closing price increase (in percentage) should be the highest in the last ten days. When it occurs, move up the stop loss level to one percent above the entry to ensure a break-even outcome in the worst scenario. On the other hand, if such a move does not appear within a month, and it does not hit the stop loss level either, then wait for another month. If it eventually goes to 20% above your entry, then take the profit and lock in the gains, else, close out the entire position immediately.
One may refer to Taser International (TASR) as an example. After breaking above the three-year high of $2.70 on 3rd October 2003, the price went sideways for two weeks or so. Then, on 21st October, a “Day of Ten” happened. It gapped higher and showed a gain of 13% at the end of the day, with a volume which was more than four times of the previous day. By the end of October, it closed at $5.23.
Trailing Stop
After a “Day of Ten” move has manifested itself, one shall trail the stop according to the following example. Suppose one buys a security at $10. Within ten days, it has a “Day of Ten” advance and goes up to $12 in a month. According to the rule in the previous section, the stop loss elevates itself to $10.10 to ensure at least break-even.
Then, after reaching a short-term peak at $12, it temporary retraces to $11, which is still above the entry level. After two weeks, it breaks above $12 again and stays above it. As soon as the price firmly closes above $12, move the stop from $10.10 to $10.89, or 1% below the reactionary low of $11.
Similarly, the price then moves to a brand new high of $14 and retraces to $13, and breaks above $14 again. When it happens, move the stop from $10.89 to $12.87, which is 1% below the latest reactionary low of $13, and so on.
Climax Selloff
The process goes on, and the price reaches a great height of $17 within half a year. Then it shows another “Day of Ten” surge and touches $20 in just three weeks. Everyone starts to get excited about the company. The pundits claim that it can go even higher. However, on the very next day of getting to $20, the price abruptly reversed to $18 in one day. It has the highest volume and most negative daily change in weeks, and it is called a climax selloff.
A climax selloff is a day when a massive selling follows an otherwise reasonably decent advance within the same day, and the daily range is at least the third highest in two months. It happens because the large holders are trying to get rid of their positions by selling into strength. It is a great danger signal because it hints that the driving force behind the run is no longer interested in continuing to do so.
When this happens, one shall move the stop to a percent below the selloff day’s low, which in the above example would be $17.82. If the stop does not get hit, then keep adjusting the stop as illustrated earlier. However, more often the selloff will continue and gets one out of the position very soon.
Summary
Here is a list of rules of exit:
1. If a Day of Ten does not happen within a month of purchase, either take profit at 20% or close out the position two months after the entry.
2. If a Day of Ten does occur, move the stop to one percent above entry, and trail the stop according to the following rule.
3. When a higher low and a higher high form, move the stop to a percent below the latest low.
4. When a climax selloff happens, set the stop to just below the selloff day.
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