Let the Winners Run using the Weekly Chart

This is a GUEST POST by Steve LeMoine and was originally posted at JackRabbitTrader.com and is reposted here with permission.

Throughout a trading career there are always going to be a series of obstacles in your path to profitability.  Most of them can be overcome with a little practice but one that always gave me trouble personally, as I’m sure it has with many of you, is letting the winners run.

There is a fine line between placing a stop too close and giving your trade enough room to work but I’ve found a pretty good solution to help set them just right.

How many of you have had this happen in any of your trades?  You enter the trade, place your stop just to watch the stock come down to your stop, trigger your stop and then reverses as if to say “Haha mother f@$!#%, I took your money”.

To which a normal response is a keyboard through the wall and then second guessing if you can actually make it in this business.  This inevitably transforms into tweaking your system or revenge trading, which without realizing, just compounds the problem.

It’s happened to me and I guarantee it will happen again at some point.  The key is understanding that it’s just bad luck now and not an intended outcome.

As trend followers one of the hardest parts of managing a trade is sitting there and watching some of your hard earned profits be returned to Mr. Market, knowing that it’s part of the process to really capture those big winners.

Part of the problem is new traders try to catch the big winners by zooming in and trading bigger positions…usually not a recipe for success.

Instead zoom out and capture the big winners with the big trends.

Big trends that you can identify on a WEEKLY chart, not the DAILY, not the HOURLY and sure as hell not the 1, 5 or 15 minute chart.

Let me repeat that…big winners come from longer holding periods and long term trends, not the other way around.

So concentrate on mastering the WEEKLY chart…not the DAILY.

Take a look at these examples in Apple (AAPL), Adobe (ADBE), Illinois Tool Works (ITW) and Marathon Oil (MRO)

These examples illustrate my point perfectly.  Zooming out and letting the trade run with a few simple management rules is the key to success.  It’s also the key to keeping losers small and letting winners run.  It always sounded harder to do but it really isn’t when you actually have a process.

So how do you actually master the weekly chart.  Here are a few rules I use in trading the weekly chart that help me stick with the trend and not get knocked out too early…or too late for that matter.

  • Stops are triggered at the close of each bar
    • Since each WEEKLY bar represents a full week of trading those whipsaws that usually accompany a daily trade are not as evident.  Not saying a weekly bar can’t get you out at the lows but it happens less often.
  • Stops are trailed higher on new WEEKLY breakouts
    • Again this is more of an avoidance strategy of over-managing a trade inherently built into trading weekly charts.  Since it takes five days for the bar to close there is no way you can know where to trail a stop to unless the bar is closed even if you wanted to.  It would be like trying to hit a moving target.  I have a simple rule, a new breakout triggers the potential to add to the trade and moves the stop.  It’s almost like a brand new trade.
  • Sit on your hands
    • One of my biggest issues with trading the daily charts was always feeling like I had to do something because every day I got a new bar to compare against the previous one.  By trading the weekly chart the only possible time you can take action is after the bar closes which is typically over the weekend and there are three simple outcomes.
      • Move the stop and add to the position if a new breakout is triggered
      • Exit the trade if a trailing stop level is hit
      • Nothing
  • Ride the cruise liner (WEEKLY) vs. speed boat (DAILY).
    • Not sure how true this is but from a psychological standpoint I always envision the weekly charts as cruise liners.  Harder for the ocean to steer, harder to push off course and harder capsize because they are so big and have so much weight.  I’d rather be on a cruise liner in a storm than a speed boat. The weekly chart helps me ride the waves without losing my lunch.  Essentially there is less emphasis on the day to day movement of the trade and more on the overall trend.  That’s where the profits are.

So why don’t more traders use the longer term trends?  Because they’re not sexy. A 3R (3x the initial risk) profit in four months is far from sexy and definitely won’t make the headlines but it will increase your account value.  Which is more important?

Just look at all the typical headlines this industry is littered with…

“I made 35% in a day”

“How I made $10,000 in 30 minutes”

“I quit my day job after making $50,000 this week”

What they don’t tell you is how they lost twice that amount the next day.

These headlines sell because human instinct is always looking for immediate results.  Trading is a long term game and one that takes patience and consistency.

The weekly charts provide consistent and smooth long term growth potential if you just establish some simple rules to trade by.

I am all about 100% transparency and would never guide you down the wrong path.  The above are my holdings as of the day this post was published.  Just look at the overall P&L for all my open positions (8.09%).  8.09% from following a simple system that I can execute in 20 minutes a week by riding the longer term trend and managing risk. Again it’s not sexy, but it is effective and I will gladly take an annualized return of 20% over a year.  Compound those returns and you are doubling your money every 4 years.  That’s how you build wealth…slow and steady.

Until next time, remember

Stop Predicting and Start Reacting

-Steve Lemoine

You can follow Steve LeMoine  on twitter at @JackRabbitTrade.