From the April 01, 2012 issue of Futures Magazine • Subscribe!

Stocks and the Juggernaut Surge

In terms of actual entry, your buy order should be centered around the stock’s upward movement on the weekly charts but tightly focused on price movement that trades past the former price high. Typically, a stock pulls back before resuming its upward momentum, so you want to enter the stock with a buy order just above the former price high. As a stock gathers strength and trades upward through this previously seen level, the buy order will be triggered.

Once filled, manage the trade by using an adjustable stop-loss order. Only you can define your risk based on your personal tolerance and account size, but there’s no need to get complicated. Generally, placing the stop just underneath price lows or some reasonable variation of the stock’s average-true range (a technical measure of volatility available in nearly all charting programs) is effective. 

Fortunately, this strategy can be implemented in as little as 10 to 30 minutes a day. If you are a manual trader, begin by flipping through weekly or monthly price charts and looking for any strong price movement. Once you spot a setup in play, analyze the company’s fundamentals and price history according to our fundamental criteria. Once a quality stock is identified, let the stock’s price prove itself by hitting your buy order. If it doesn’t, then you simply step aside and move on to the next setup. Alternatively, some charting packages can scan the market for specific fundamental conditions, as well as the price surge itself.

Also, it’s worth noting that if the price surge occurs anywhere on the timeline — at the bottom of the stock’s price low or while price is a period of expansion — then the setup condition still applies. You just have to wait for it to make a one-year or all-time price high before taking a position. 

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Embrace the surge

While this trading approach is effective, it is not common. You must be patient and adhere to the price surge of 50% or greater within an eight-week time frame because that is fundamental to everything that follows. The design of the setup is to allow yourself the opportunity to enter price trends on a larger scale — a scale that is easier to manage and profitable. 

This system is not designed to identify tops or bottoms, and you won’t get many trades over the course of a year, but when you do the potential is enormous. However, if you ignore the setup conditions, then the only thing setting up is the likelihood of substandard performance and frustration.

Many traders come to the market with a small stake and big dreams but no working plan for effective action. But using a smart approach to build your account without sacrificing the realities of work and family can allow you to take advantage of the stock market’s own dynamics and potentially have the best of all worlds.

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