Everyone has heard the saying “Let your profits run”. This is one of the
basic approaches to trading. How does a trader “Let profits run” and know
when to enter and exit? The use of moving averages is the choice of many
traders.
Most of the time most stocks are in a trading range. When a trend starts,
it can last a long time producing superior profits.
Moving averages are one of the oldest and most popular technical analysis
tools.
A moving average is the average price of a security at a given time. When
calculating a moving average, you specify the time span to calculate the
average price for X number of periods. For example, 20 periods. These
periods may be 5 minute bars, 15 minute bars, 60 minute or daily bars.
The classic interpretation of a moving average is to use it to observe
changes in prices. Investors typically buy when a security's price rises
above its moving average and sell when the price falls below its moving
average.
The moving average crossover method calculates two moving averages, each
based on a different number of periods of trading data. When the
shorter-term (fewer periods) average crosses above the longer-term average
from below, this is a buy signal for the next bar’s open. When the
shorter-term average crosses below the longer-term average from above, this
is a sell signal for the next bar’s open.
The current charts we are using calculate a 5-period and a 20-period
exponential MA of the closing prices on 60 minute bars. If the 5-period MA
crosses above (becomes greater than) the 20-period MA, you would buy the
next bars opening because the system is saying that an uptrend has begun.
You maintain this long position as long as the 5-period MA is greater than
the 20-period MA. When the 5-period MA crosses below the 20-period MA, the
trend is now down and you would liquidate your long position and establish a
new short position on the next bars open.
Let's look at Lycos Inc. (NASDAQ:
LCOS)
Here is an example of a stock that gave a moving average crossover Sell in
early October.
A trader short from the 60’s would have a very nice trade.
Now, LCOS is flashing another sell signal after a small whipsaw the other
day.
Is it too late to short LCOS here? I don’t think it is. LCOS looks ready
to also break new lows.
I would Short LCOS on any unchanged or down opening.
I would place a stop at 39 �.
Do NOT take the trade if the stock gaps up.
Let your profits run and when an exit signal occurs, then and only then,
exit your trade. Take the next trade, as you never know which ones will
work out.
