TheStockBandit.com

I was just asked by a trader about how I determine my holding time for positions (trade timeframe).  Specifically, Brian asked:

If you buy a pattern breakout off the daily (chart), how do you know it will run? I “thought” you might take some of these and see where they go, meaning if it closes at the HOD you would hold for a swing/multi day move. If not, you might just bail and scalp it?

So what Brian is asking is whether I’m gauging the price action to determine my holding time. Stated another way, he’s asking if I am deciding on overnight positions based upon how well a stock is acting.

Here’s what I told him…

Hey Brian,
I identify my timeframe for the trade before entering, so I know how I’ll expect to manage it (tighter for day trades, a little more room given to swings) going into the trade. I determine this based on the quality of the pattern and the size of the pattern. The cleaner the pattern and the more time involved in the development of it, the longer the timeframe I think it’s valid for. The smaller the pattern, the less time I’ll trust it.

For example, a pattern like a bull flag….

One which has 3 sharp up days and then 4 rest days (flag), I’ll likely take for a shorter timeframe like a day trade.

Another which has 7-8 up days and then 10-12 days of rest to build the flag, I’ll likely take for a longer timeframe like a swing trade.

Basically, it’s a matter of trust and validity. The bigger patterns pull in traders of multiple timeframes, which can produce a longer-lasting move. On the flip side, the smaller patterns tend to pull in only traders on the shorter timeframes, which to me means the move should not last very long and I’ll need to bail after the initial move.

For me, deciding on my trade timeframe prior to entry also helps me size my position properly.  It’s not the only way to do it, but it is what works best for me.

Trade Like a Bandit!

Jeff White
Take a trial to our Stock Pick Service to get our trades.

Follow @TheStockBandit

I got an email this weekend from JM, a subscriber who asked:

Do you think it is safe to start establishing smaller size positions on dips like in the 1st quarter of this year (Jan-Mar 2012)? Thx, JM

The Jan/Feb/Mar rally was pretty nonstop, and he’s asking if the bounce from the November low looks to have the same kind of potential. Here’s what I responded with:

Great question, and I wish I had the answer. All I can say is what I’m doing, which is not making those kinds of buys just yet. I am wanting to see a pullback first, and all we’ve gotten so far after this big lift from mid-November is a pause/rest. While the latter isn’t a bad thing, it’s not (in my view) as good as the former (a pullback).

Once we’ve gotten a pullback, it will not only offer better prices, but I think it’s likely that it also sheds some needed light on the resolve of the bulls. The first bounce was impressive, no doubt, but I think it was combined with short-covering. After a dip, we will see better if the bulls are truly intent on defending the November lows, and that would give me greater confidence to start accumulating shares on the long side.  I think that’s somewhat likely, and it would make me intermediate-term bullish.

Back in Jan/Feb/Mar, waiting for the pullback didn’t pay because we never got one. And this time it may be the same, but my expectation is that since both bulls and bears combined to produce the first bounce from the November low, that we’ll see some kind of a battle before one side is declared the clear winner. That’s not a prediction, simply my expectation – which is subject to change based on the price action (as it should be!).

Trade Like a Bandit!

Jeff White
Take a trial to our Stock Pick Service to get our trades.

Follow @TheStockBandit