The New Sell and Sell Short: How to Take Profits, Cut Losses, and Benefit from Price Declines, Expanded Second Edition

TRADING IN A DOWNCHANNEL

Sometimes you can catch a stock in a major uptrend or a downtrend soon after it gets into its groove. This does not happen with all stocks, but when you recognize this pattern, trading it becomes like going to a cash machine. I feel reluctant saying this because I do not want to create a false impression that trading is easy. Just keep in mind that sooner or later your stock will jump its groove, this pattern will disappear, and your last trade will be a loss. This is one of many good reasons to keep the size of your trades stable and to avoid increasing them in the middle of a trading campaign. If you keep increasing the size of your bet, the inevitable loss at the end of a trend will hit when you are maximally exposed, wiping out multiple profits. If perfect is the enemy of the good, then greed is the enemy of success.

An absolutely essential point to keep in mind is that all of these daily charts—the current one, the previous one, and the one that will follow— must be examined against the background of the major downtrend on the weekly chart. I simply refuse to look at a daily chart until I have examined the weekly and made my strategic decision there.¹² Every trader needs an edge. An important part of my edge is that I use stereo vision, looking at every stock in at least two timeframes, while most of the world looks at the markets with one eye shut.

Figure 9.10 Shorting in a Groove

SHLD daily (to 7/15/2008) with two moving averages and an ...