This week’s
investment strategy is actually a continuation of a
strategy that was introduced two weeks ago titled
"Buying Stocks on
Breakouts". Oftentimes investors can
identify a trend and get themselves into a good
trade but fail to recognize when the trend is
coming to an end and could potentially reverse. This
failure to recognize the reversal of a trend can
many times turn a winning trade into a substantial
loss. For those investors who have not read our
previous strategy it may be beneficial to do so
before continuing on. Click
Here
In the previous
strategy we purchased Apple Computer (AAPL)
while the stock had just broken out of a trading
range. Now that we own the stock and have a trade
that is going in our favor, the next decision that
we have to make is when to take our money off the
table and lock in our profits. In the following
discussion we will cover the proper steps that an
investor should take to identify weakness in a
stock and exit the trade.
Step
One: The first thing that we need to know
about our stock is the strength and momentum of its
current trend. The current strength of the trend can
be identified by the angle of incline that the stock
chart is forming as it progresses on its journey. An
up-trend is defined by a stock that is making higher
highs and higher lows. To help us visualize the
current trend we will want to draw a line on our
chart connecting the lowest points of the higher
lows. This line is known as a trend line and will
help us identify a possible slowing in
momentum of our stock's current trend.
