Sunday, August 23, 2009

An example of trend following giving you a big winner

Here is a chart of another good winner (click on the image to enlarge). This shows how trading (and sticking) with the trend can pay big dividends. I purchased this stock in early June, which as you can see on the chart is one of a series of breakouts to new highs since the beginning of May. It is important to note that I purchased this stock after a rise of approx. 33% since the original entry signal at the $3.60 area.

Each new high can be used as an entry point for a new position, or a point at which to pyramid an existing position. Some people like to enter only on the original breakout - I try not to subscribe to that. If a stock is strong enough you could miss out on significant profits.

In this case, my reward to risk ratio as of today's date is in the region of 10:1, even though I missed the original breakout.

Of course, a trend follower won't know how high a stock can go - they simply hop on for the ride, control their risk and see what happens. The stock may breakout to a new high again tomorrow and then promptly reverse. The thick black line is my trailing stop, which has kept me in the trade for the best part of 3 months now.

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