Q: Mitch, I appreciate your chart on STK; it looks very interesting. However, have you looked into some fundamentals on the company?

A: Thanks for your input. I must say that outside of a glance at the news to see if there is something specific moving the price, I do NOT pay that close attention to the fundamental stories that are associated with many stocks. The fact that STK had already plunged from a 51 high certainly indicates that something had gone wrong. Similarly, the recent surge through resistance and its 200 day moving average indicates that its problems have been discounted. While there are no guarantees, this is what the "technicals" imply, and generally, this leads the actual fundamental turnaround. A technician ideally will see this change coming AHEAD of the fundamental event. Perhaps this was what I saw coming as the stock began to recover.

It also helps to monitor a large universe of issues "technically" with a great deal of patience, so when significant changes occur, they are noticed very early. This too was what I consider to be an advantage in our never-ending search for good ideas. The Point & Figure (P&F) charting method lends itself perfectly to this process because it allows the experienced chartist to monitor a HUGE list of issues on a daily basis, without taking a tremendous amount of time. For instance, the universe of stocks that I watch and update (by hand) on P&F charts every day is 400-500. That is, I look over my entire list after every single trading day and update each stock when a change warrants it on its P&F chart. The entire process takes me about 45 minutes each night. Even with a very fast computer, doing this using other types of charts would take a much longer time to gain the same interpretive value. The larger the list, the more potential for trading ideas every day.

So, there is only so much time to gain the greatest amount of input. While I would not criticize others for using other methods, for me there is nothing more efficient than a P&F chart. While nothing is foolproof, I have found in my almost 20 years of professional trading that it offers all the objective data that I need in the clearest majority of times. Hope this isn't too lengthy, but your comments were a good opportunity to revisit what our purpose for charting is, in the first place.

Best Regards,
Mitch Harris, RIA

Q: Richard: I appreciate the rules you outlined. However, what rule do you use for taking profits on a winning trade? That is, you have entered a trade pursuant to your trading rules. You have been patient and the trade is profitable. Now the trade is going against you. When do you lock in your profits and get out? Also, when you enter a trade, do you set a stop loss? If so, at what level? Key support? A certain percentage of the entry price?

A: The rules mandate that on winning trades either the fundamentals must change, or a stop loss must be hit. As traders, we don't want to hit the exact high or low, for that is too difficult, and also keeps us timing the market in the short term. We don't like to pick tops or bottoms, for the major trends generally stay in place for a long time. However, stop losses tend to take you out on a non-emotional basis.

Stop losses are generally set as a percentage you are willing to risk on the trade every day or a technical level that must be broken - your choice. Reconcile the percentage drop you are willing to risk, and apply that to the support/resistance levels - compare and choose what is best for you. Also, these are not mental stops, rather they are entered on a daily basis. As soon as the trade is put on, a stop loss is entered.

Good luck and good trading,
Richard Rhodes