30/01/2003
Analysis of entering a trade .....
This article looks at the thought processes behind investing in C+W as part of a wider stock portfolio and how/when/why we got into this particular stock.
So, the thought process was:
Using the 10 period moving average (MA) and watching for when it crosses the 40 period MA, coupled with the 40 MA crossing the 100 MA along with the stock moving through a resistance level.
As u can see from the chart, through the latter part of December there was a support level in place around 44p, which continued to hold into January 2003. You will also note a short term uptrend between 30th Dec. and 6th Jan.
Looking at the start of January you will note the 10 MA crossing the 40 and the stock was holding the uptrend support line - we started to scale into the position. The 40 MA didn't cross the 100d - it tried on the 6th Jan, but failed. The stock also failed to break the 47/47.50p resistance level. However, we used the lower support level to give us an idea of where to place a stop loss - i.e. a couple of pennies through 44p.
We maintained the small long.
On the 9th we get three other signals - the 10 MA is above the 40 MA and the 10 MA crosses the 100 MA. The stock also breaks through resistance - the accumulation process continues, buying more stock and keeping the stop at the original level, since we're still in the sideways trading pattern.
On the 10th the stock breaks another resistance level around the 50p level and takes the 40 MA through the 100 MA - another two buy signals.
We add to the position and in this instance with the 10 MA above the 40, which is above the 100 we will stay in the position until the MAs give us a signal to start thinking about lightening up on the position. Also the 100 MA will be used as a stop indicator level.
Moving along the chart - on the 20th the 10 MA gives us a warning signal as it tries to 'kiss' the 40 MA - but note it doesn't cross. This is just a pull back and we trail our stop loss up around the level of the 100 MA. The MAs keep us in the trade.
Even with the volatility seen on 22nd Jan - note the 100 period MA is not breached and the 10 doesn't cross the 40 ma. This keeps u in the trend and note how the discipline of constantly moving the stop higher in line or close to the 100 MA enables you to profit from the move. It keeps going and only a signal that it may be ending will cause us to chop out of the whole position. There's nothing to stop us lightening up on the position by selling some along the way, but the strategy keeps us with a core holding that evolves over time.
Of course, you can't legislate for one off events which hit the stock price, but I reckon that this style of trading wins in the long run because it's disciplined and the technicals back up and enhance the original thoughts around the stock and the price action seen over past couple of months !