interesting read on larry connors

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    if the charts don't work out which explains the article go to yahoofinance or try this link ;

    http://biz.yahoo.com/tm/030915/10674_1.html


    Monday September 15, 10:35 am ET
    By Larry Connors


    How To Lock In Profits (plus, adventures of a Little League softball manager)...Part 2
    Last week we looked at three ways to lock in gains when you have them. This week, let's look at some examples to help us further understand this process (and, incredibly, I'm still not an "idiot" Little League Manager (see last week's column). But, that will end for sure this Thursday night when we have our first scrimmage game. With 8 All-stars on the team, and only six infield positions available, I'm sure at least two parents are going to shoot me when I tell them their child is playing in the outfield and hitting near the bottom of the line-up. Ugh!!!).

    Looking At The First Rule

    1. You Need To Lock Pieces In

    Last week we discussed how important this is. You can live in one of three camps here. Two are correct and the third is wrong.

    The third camp (the wrong camp) is that you just exit your entire position as soon as you have a small gain. My guess is you will never be able to make money in the long run with this approach. Your gains will be too small to overcome the losses. In order to have a chance to be long-term profitable, at least some of your position must be given the opportunity to run.

    The other two methods are the better ways to proceed, as they allow you to potentially capture big moves. The first is that you look for outsized gains on all your trades. You're either going to capture a big move or get stopped out. You realize that the volatility of your portfolio is going to be high and that you are willing to assume large swings in the value of your account in order to have the potential to be there when these big moves occur.

    Today I spoke with (for the first time) a successful hedge fund manager who trades that way. He is highly intelligent and systematic in his approach and truly understands what he's doing. He has big returns many months (and years), but along the way he has had some big drawdowns. On a net basis though, his yearly returns have been tremendous. This is how he goes about his business, and he's fully willing to assume the responsibility (and pain) associated with the drawdowns in order to potentially be there for the bigger moves.

    The final camp is the one that I'm most comfortable with. It does not mean it's better than the previous camp. It just fits my personality better. I like to lock pieces in along the way. That means when a position becomes profitable, we systematically scale out of a position. Our feeling is that you do not know ahead of time if this, nor any trade, is going to move substantially. Therefore we play it safe. We start taking profits at specific levels that are pre-determined before we go into a position.

    Here's an example to look at. Here is a Windows set-up in eResearch Technology Inc. (NasdaqNM:ERES - News) from this past week.



    Charts by QCharts

    As you can see, ERES has a nice Windows pullback (found at www.tradersgalleria.com) in a strongly uptrending stock. Now let's move to the next day.



    The stock gaps higher Monday morning, triggering the long Windows set-up. As you can see, the stock moves higher through the trading day. Now, we don't care how pretty this set-up looks or just how high we "think" (actually I should say "guess") this stock is going to go. We start locking some gains in as it moves higher, no matter what. And the higher it goes, the more we lock in. At the end of the day, the chart looks great, and some people may say we were foolish to have taken some profits on such a strong moving stock (hindsight is 20/20) but that's the way we go about handling a trade. We do the same thing for every trade.

    Now let's go to the next day.



    Before you look at this, go back and look at the chart from September 8. Look at that close. Look at the follow-through from this pullback. It's perfect! You would think today has to move higher, right? Well, maybe. Maybe, because there are "no perfect set-ups." I don't care what a chart looks like, nothing has to follow-through the way it's supposed to follow-through. And that's why you use stops and it's why we scale out of trades. This day (September 9) should have been higher. If there really was heavy momentum buying behind this stock, it should have carried through. It didn't. And because we also use a time component to every trade (we scale out over a three-day period) we want to potentially lighten up further here. If the follow-through is done, our exposure is lessened. If it continues tomorrow, we'll be there for a piece of it. It's that structured, and it's that simple.

    Now let's see what happens the next day (this past Wednesday).



    Son of a gun. The momentum really did stop. On Monday night it looked like this was going to land in the "big gain camp" and unfortunately Tuesday and Wednesday fizzled out. But, the trade was profitable. Profits on a piece locked in on Monday, more locked in on Tuesday, and Wednesday we're out completely. When you trade like this, you continuously and systematically take gains off the table when they exist and put them into your account.

    The drawback to this approach? You miss the few times a quarter that positions go on a tear. And the stock of which you sold a piece for a one-point gain and two-point gain goes on to have a five-point gain or more. And you may (at best) be there with only a small position. Just as many successful traders are willing to assume greater risks to achieve greater gains (as the gentleman I mentioned earlier), many other successful traders are willing to risk missing bigger gains in order to lock multiple profits in.

    Finale

    As I said earlier, there is no "better way" with these two methods. You need to choose the one that fits your personality. Just make sure you don't jump back and forth. Much of trading success is consistency in execution and that's what you're shooting for in your profit taking.

    Next week we'll continue to build on this concept.

    Have a great week trading (and if you don't see my column next week, you know I was nailed Thursday night by an irate Little League parent)!

    Larry Connors




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    Laurence Connors is Chairman and CEO of TradingMarkets.com, Inc., a financial markets information company he founded in 1998. He is also managing partner of Connors Capital, a private investment company. Mr. Connors has authored a number of top-selling books on market strategies and volatility trading, including Street Smarts (with Linda Raschke), Connors On Advanced Trading Strategies, Trading Connors VIX Reversals and The Trading Windows Strategy. Street Smarts has recently been selected by Technical Analysis of Stocks and Commodities magazine as one of "The Classics" for trading books written in the past century. His books have also been published in German, Italian and Japanese. Larry Connors writes semi-weekly commentary for Tradingmarkets.com. Paul Taglia is head of trading at Connors Capital, LLC. He's also a Yankees fan, which drives his boss nuts.

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