That means…
Buy at buypoint or at least within 5%. Stop no more than 8% below the buy point. Hold for 8 weeks if stop isn’t met. After 8 weeks sell if it’s up 20%, and if it’s not, wait until it’s up 20% and sell immediately.
Unlike ONeil, we will replace the stop of 8% with a 20% trailing stop once the stock is up 16%, and a 25% once the stock is up 35%. This will give the winners enough room to run if they start doing well right away, and as the stock goes higher, it will limit your losses until it finally gradually locks in the amount you gain if it eventually stops out.
I see that holding for a full 8 weeks allows those that gain over 20% room to run, but I believe the timeframe is limiting, and although to ONeil’s credit he does say “evaluate whether or not you want to keep for 6 months to a year after those 8 weeks if stock is up more than 20% in under 8 weeks” I find a problem with the idea of possibly immediately selling a stock that may have plenty of upside, while holding onto the stocks that have not advanced 20% ande holding them until they do. To me that runs contrary to the addage “sell your laggards and hold your winners”. But we don’t want any “evaluation” we want cold hard facts and a system that will run on it’s own. None of this sitting in front of your computer all day bullshit. So the solution is somewhat complicated at first, but once you understand it’s goals and how to execute it, you’ll really become a believer, I think.
So like we said, we will be having trailing stops or hardstops in, so after the 8 weeks are up, we need to determine how to adjust. If the stock is not yet up 20% we do still want to give it SOME time to reach it’s 20% mark. But we don’t want to give it an unlimited amount of time while this money is tied up in a stock that is underperforming our expectations and hopefully underperforming the rest of our stocks. So we will give this stock 8 more weeks at BEST. That means that we need to set a limit sell order for the amount that would put this stock up 20% from buypoint and leave it, if it sells off early, great. If not, we sell at the market 16 weeks after buying (8 weeks after the stock failed to prove itself to us)
Now what about stocks up 20% or more? I believe that you want to hold onto these stocks until they give you a reason not to. However, I don’t want to give away a 20% gain either. We break this into 3 categories. 1 up 20%-50% 2nd category up 50-60% and 3rd up 60% or more.
If the stock is up 20% to 50% we want to put in a hard stop at the up 15% to 30% mark. I leave this flexible because that way you can identify support or give your stocks up just over 20% some room, while putting the stop a little bit tighter to lock in more than 20% of your profits for those up closer to 50% if you like. You can break these rules by putting a higher than 30% stop for those stocks up 30-50% if market conditions give you reason to believe your stock isn’t going to continue to perform, but I don’t think just selling at the market it is a good idea yet. Now as soon as the stock is up 50% or more, we replace the stop with a 20% trailing stop, and then a 25% trailing stop after it’s up 60%.
If the stock is up 50% to 60% a 20% trailing stop will be placed instead of a hard stop.
If the stock is up 60% or more a 25% trailing stop will be placed.
Now the stocks that have performed have won theirselves our trust in them. As long as they don’t stop out, we want to give them an additional 8 weeks to prove themselves. This process will continue in the sense that stocks should be up more than 20% from the initial 8 week target price. This is the part that may seem a little bit complicated, but so you understand I will put a little cheatsheet of sorts so feel to copy and paste this to a word doc and print it out.
After 2 months:
If -8% to 20% range, put limit sell order @ 20% profit target for the next 2 months.
If up 20%-50% put a stop at 15-20%, then replace with a 20% trailing stop up 50%/25% trailing stop up 60%.
If up 50-60% put in 20% trailing stop and replace with 25% trailing stop once up 60%
If up 60% or more leave the 25% trailing stop in
After 4 months:
If the limit sell doesn’t trigger for stocks that were in -8 to 20% range after the first 2 months, sell @ the market.
If stock is up 44% or less, set a limit sell @44% (which is the same as a sell point 20% above the initial 20% rise)
If stock is up 44%-80% put stop at or around 44% target, then replace with 20% trailing stop up 80% and 25% stop up 92%.
If stock up 80-92% 20% trailing stop is in place. If stock up 92%+ 25% trailing stop.
After 6 months
If limit sell doesn’t trigger at 44% mark, sell @ market price.
If stock up less than 72.8%, set limit sell @ 72.8%
If up 72.8%-116% stop around 72.8% target, replace with a 20% trailing stop 116%-130.4% 25% trailing stop above 130.4%
After 8 months
If limit sell doesn’t trigger at 72.8% mark, sell @ market price.
If stock up less than 107.36%, set limit sell @ 107.36%
If up 107.36%-159.2% stop around 107.36 target, replace with a 20% trailing stop 159.2%-176.48% 25% trailing stop above 176.48%
after 10 months or more
Continue this process as long as the stock continues to appreciate at a powerful 20% per 2 months.
Think about what this system is doing. It is saying that we expect a stock to go up 20% in under 4 months, If a stock can do that, we are thankful and take gains at 20% and won’t push are look. If it cannot, we cut our “losses” and move on. However, we are looking to hold stocks that appreciate 20% or more every 2 months or less. If the stock can’t perform at this level, we would rather buy a new one at the buypoint, so we allow our stock up to 2 additional months in a “grace period” of sorts that it needs to reach the 20%. In the meantime, we hang on to stocks that can perform at this level as long as they continue to perform. All the while, we will not tolerate any stocks that go down 8% from the starting point, or that lose 20/25% from the peak of any rally, but within these confines we give the stocks the room and time to run.
This system is like trying to build a long term dynasty in Madden. In other words:
If a stock is up an average of 20% per 8 weeks the stock has exceeded our expectations. We don’t believe we can find a better stock to own at it’s rate of performance so we will hold on as long as we can and hope that our porfolio fills up with these and allows us to hold as long as possible… This type of stock is like a late round draft choice that has exceeded it’s expectations and continues to show noticable improvements every single year. He is young and has a long career with a long contract, and there’s no reason not to hold on.
If a stock is up less than 20% in 8 weeks, we need to replace it, but not immediately. It may still perform in line with our expectations, but so far is not doing well. We want a stock to exceed our expectations. It’s like a NFL draft pick or free agent acquisition that isn’t a star, is not getting worse, but not getting noticably better either and can probably be replaced with someone just as good that has just as much if not more potential. Currently we can still trade the player for a draft pick and try again, but we might as well wait closer to draft day and give him a chance to gain more trade value. As said before, we want a stock to exceed our expectations. So we will give it a chance to perform up to our expectations, and when it does, we will buy a new stock that has the potential to exceed our expectations.
If stock goes down 8% from our buy, or down 20-25% from it’s peak after a rally, we sell immediately and we can’t afford to hold onto a stock like this with all the other opportunties out there. The stock that is down 8% is like a player who fails to grasp your offensive or defensive system. May have worked with another team, and thus won’t cost you that much other than the time spent, but it’s time to move on before the player loses all value and can’t be traded. The stock down 20-25% from it’s peak is like a player who has performed for awhile and gotten better, but is starting to get older, and is considering retirement, or who’s contract is almost up and has been demanding more money than he’s worth. Or perhaps he’s starting to put an “I” in team and is a distraction. You are best off trading this player while you can before things get ugly and you can’t get anything in return.
I hope that makes things eaiser to understand and not more complicated, lol.
Anyways the next thing up to conclude the trilogy is portfolio management. So far we have individual money management and exit strategy for individual stocks. What we lack is how much of our cash should be invested? How many stocks at any one time should we buy? I hope to cover that in part 3, although I am open to suggestions as I am still tweaking the flag trading system.
Please be aware that this part 2 of this flag trading system is made to apply to any trading system. I believe the holding period and the exit strategies which are constantly adjusted are excellent and can be applied to any sort of trading strategy.
Introduction to flag trading systems
Part 1 how to identify high tight flags
Part 2 flag trading system rules
Part 3 Concluding the high return investments system.
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