Trailing Stops

[Steven Vincent]

Chris Outwater writes:

Great show. I tuned in very late and will have to listen to the entire show from the archive widget. I rather like how you play bits and pieces from well known financial shows and their commentators---people we all know and love (or hate)---and then you comment from your point of view and you do not pull any punches. Bravo! It makes the show very alive and relevant for me.
Different subject: thanks to the rising tide you have discussed, I enjoyed some paper profits today. I would like to go in and update my trailing stops. What is a good rule of thumb for doing so? Thanks.

[Steven Vincent]

Thanks Chris.

Trailing stops are tough. Once you are in a profit situation you should never let the trade turn negative on you. So that should be your hard stop. As your profit grows you can move that up. Some like to use a percentage gain that they want to lock in. Others (like me) use technicals. For example, you could exit at resistance or the failure of support. Look at a chart and decide where short term or intermediate term resistance is and sell there or where similar support is and sell on a break. You do need to take profits and lock them in...what the market giveth it can easily take away.

[Chris Outwater]

Thanks. Here is what I think might be best---let's say you bought an ETF at 30 and today it is 35. You could leave a stop at 30 or 31, so you know you will not suffer a loss. I find if you set your stop too close, you almost always get stopped out and then the stock turns. Probably best to watch the action and see if the ETF loses some juice as it approaches resistance levels---as you mentioned. That sounds like a reasonable plan.

[Steven Vincent]

I find I always do best when I really respect what the charts are saying. If you are hoping or guessing you will usually pay for it. For example, today I was long for a daytrade when we hit what I had solidly determined to be important resistance at SPX 945. We ticked a couple of points above that and I thought we might get another extension. But we didn't and instead pulled back. If I had sold at my established resistance point I would have locked in a greater profit. Instead I "hoped" and took a smaller profit. Resistance levels are real and chart trendlines are real. If you really respect them and trade them it makes a big difference. Otherwise you are just hoping and guessing.

[Chris Outwater]

This quote is from the Spear Report and Commentary (it is free):

"New Normal
Mohamed El-Erian, PIMCO's CEO agrees that the violent developments over the last 12-18 months affecting markets, households, institutions and governments are unlikely to be reversed in the next few years. According to El-Erian, it is as though the global economy suffered a heart attack, with industrial production falling off a cliff edge that had been in place since post- WWII. El-Erian believes that the seriousness of the circumstances should not be minimized. He writes, "Put another way, markets are recovering from a shock that goes way, way beyond a cyclical flesh wound." He adds that trust can be lost quickly and takes a long time to restore.

In an interview on Bloomberg Radio this week, El-Erian opined that by this time next year, "the market will realize that potential growth for the U.S. is no longer 3%, but is 2% or under." He added, "We are transitioning to what we call at Pimco a new normal." This is not particularly good news as the last time the U.S economy grew at an annual rate of less than 2% for an extended period was in the 1930s.
In summarizing the conclusions drawn by the Pimco Secular Forum, El-Erian did not sound at all optimistic about a spontaneous and sustainable recovery in the global economy. Quite the contrary. He states that for those who are trapped in the dominant business-as-usual mentality, the new normal will feel like a huge shock."
We are currently riding on the make-believe cruise ship of rapid inflation and, of course, we have to claim our deck chairs for the journey. But the future looms in the distant frigid waters harboring massive, world-shaping financial icebergs. Enjoy the cruise!

[Steven Vincent]

Lots of truth here...but nothing is certain...if the massive liquidity spawns new growth industries (tech and energy) then there may be hope for the US economy yet. With regards to markets, just follow the trend until it changes. Don't try to guess or outsmart the markets. There is no way to really know how things are going to unfold...just educated guesses.

[Chris Outwater]

Listened to your show with Andrew Cardwell. Very interesting---of course I had heard of RSI for many years, but did not know any of the details. I believe that, as you said, it can be beneficial as another sign post to the trend trader as to when to get in/out and how much to risk on any potential reward. Having said that, I really do not understand exactly how to apply it. I mean I see 14 day RSI as a techical indicator on Yahoo charting, but really don't know how to implement this data in my decision making process. Due to your expertise, it sounded as if you got it right away. Will you be adding this RSI factor to your charting and commentary on TheBullBear? Thanks.

[Steven Vincent]

Hey Chris. Andrew will be back with us on Thursday and a regular guest. He's a really great guy.

I think there are simple uses of the RSI that are easy to understand and then there are more advanced uses and interpretations. Andrew takes it to the next level...and yeah it can take a while to absorb it...I have not really 100% internalized what he is showing us yet. You'll have more chances to ask him questions in the future. On Monday we have Harry Boxer as guest.