Protecting the gains in a stock position is just good investing. You bought that asset to realize a gain at some point in time in the future. The current bull market is over 8 years in length and it has helped push asset values to new highs. So, you might ask “what type of plan should I have?”

My strategy is really very straight forward. The tools that I use have worked in the past and continue to do so. There is no need for me to re-invent the wheel, so to speak.

I’m going to present you with a case study of a company named Cutera. In 2016 you could have bought the stock between $10 to $15 a share. I’m not going to discuss how you made that decision, I’ll save that for another time.

Step One

Any time that you make an investment, you need to have a price target. I do this with the aid of point and figure charts. (To learn more about point and figure charts you can click here)

Point and Figure Charts

Most stocks go through periods of accumulation, that are often identified as a trading range. It is during this time that professionals have identified a reason to own that stock and they spend a period of time purchasing shares. They can’t do it all at once since they would affect the stock price, so they slowly accumulate shares in the stock.  The trading range represents the Cause and the subsequent price movement the Effect. You need a sufficient cause to satisfy your objective.

What Cause Have I Identified With Cutera?

I now have a price objective!

 

Step Two

Trend Line Analysis

“The Trend is Your Friend”

You really want to limit your losses and let your profits run. We’ve identified our price objective, but, things can change. The outlook for the company may become clouded or the general stock market outlook may change. These changing conditions can effect the price action of the stock that you own. Remember, that when demand exceeds supply prices rise and when supply outpaces demand prices fall.

To create a trend line you connect the lowest points in two successive reactions

I’ve marked two trend lines, and you can see where the trend has accelerated. So one of my price objectives is approaching (36), but, there is a higher objective (45) is still out there. I would be looking to see if there is more accumulation at these levels. More than likely the stock will move into a trading range to build another cause. You can usually tell if accumulation is going on. The rallies will have expanded volume and the declines within the trading range will see contracting volume. The stock needs to be monitored.  .

There you have it!

If you live in Mexico and want a free consultation just click here.

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