I'd like to share a lesson which I learned today. I've known it intellectually for a long time but, today, I got to actually really feel and understand it.
I wanted to go long ROCM on the morning of 09/20/07. I noticed a 5 month resistance on the daily chart, around $17.10, with a massive convergence of the fast stochastics (12,3,3) with the price. Intraday, the 30min OR happened to line up roughly with this resistance ($17). It broke out and pulled back to test twice. Instead of using a buy limit to get as close as possible to this support I thought, " let the price bounce off of there to prove it's now support". I bought $17.20 with a sell stop 1 cent under this support (I know, no room, no "wiggle")
If you look at the chart you'll see what happened later that day. I was stopped out by 5 cents only for the price to flat line then shoot up $2 later that day.
My conclusion is: if you know where the Bulls and Bears are battling it out (trendline) why not get in as close to that area as possible?? If you're wrong, you're going to be wrong regardless of whether you lose $X or $2X. It's better to know this with a smaller loss. That way, more of your risk can be dedicated to wiggle (instead of trying to cut back the potential loss by cutting out wiggle because you got in too far from the trendline therefore losing $14 less but missing $550...*wink*)
Just a lesson learned by a budding trader!
Comments
The second thing I do sometimes if price moves higher from my entry point is place a stop under the low of a breakout day or large body candle. Having 2 stops set is another strategy I have used, keeping the initial stop on half and the new stop on half.
I feel the best way to snag profits is to scale out as the stock moves higher. Saying the stock pulled back from 50 and you buy at 45, I may sell half at 50, ½ of the remaining at the next breakout and the last ½ once the stock looks to be rolling over.