July 4, 2012

Using the 4ema to Stay In a Winner

At some point in trading, the fruits of the trader's labor will pay off and the trader will get in on a big winner early.

In the last year, I learned about the 4ema from two different traders, Dan over at http://www.patientfisherman.blogspot.com/ and Tumbler at http://www.followtumblertrades.com/. They use the 4ema on different time frames, but they got me started watching the 4ema more. After a while I gained some comfort with it. Over time, it has shown itself as a good tool to help a trader stay in a big winner by using it as a trailing stop on a closing basis as areas to take profits.

This strategy may goes against the idea of selling on strength, which I have normally used at least as an initial profit taking strategy, sometimes a sell all strategy, when trading momentum. But when you get into a stock that is about to make a big run, the 4ema can help keep a trader in the trade for most if not all of the run up. I still believe in taking profits on strength, but when a stock makes a big run after initial profit taking, the 4ema can help catch it.

I have posted two sample trades below, each making 40%+ by using the 4ema as a trailing stop. Assume selling in either 20% or 25% increments.

First is AAPL. This is an actual trade that I still hold 20% of after 4 sales of shares along the 4ema. This was a long term purchase in my 401k, so when I entered I had no plan to use the 4ema as an exit tool. But after the gap up on earnings, I began to look for exit points. I thought it may continue its run, so I used the 4ema as my selling point and held through pullbacks. The stock moved from $395 to $644, a 63% gain. Using the 4ema, I caught 44%, so more than two-thirds of the move was captured.


The second example is on a trade I entered but sold on initial strength for a quick gain. Hindsight is 20/20, but take a look for yourself what I missed after my little 7% gain. The stock was CALL, maker of the MajicJackPlus product. in mid-December, they announced that sales of the product were so good, they were cancelling a secondary offering. Sales went through the roof (I even bought it), and the stock doubled. Using the 4ema, I could have made 48% instead of 7%.



It's just one more way to skin the cat, but if you find yourself in a stock with 50% potential and it makes a big run, you can use a moving average as a trailing stop. IBD does this with the 50-day average with the volume requirement. The difference here is that using the 4ema will have you mostly out by the time stocks like this pullback to test their 50-day averages. Some traders use the 6-day, some use the 10-day or the 8-day. It's all about comfort and the trader's style of trading.

Happy 4th and happy trading.

5 comments:

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