Hurry Up and Be a Patient Trader
02/17/2011 3:00 am EST
Step back to a larger time frame; the set-ups may take longer to develop, but the more lucrative rewards are fair compensation.
The major indexes have been breaking away from key Fibonacci levels and 100% returns from the bottom. It is not surprising that there has been a bit of noise, played out as sideways consolidation, as this process has occurred. But as the dust settles and markets continue higher, it will be important to act as a patient trader. This does not mean sitting on your hands if a stock hits your target or even widening your stops.
The Patient Trader
The concept of a patient trader is quite simple: Instead of focusing on the minute details of daily charts, take a step back in your time frame and look at weekly charts for a while, discovering set-ups that may take longer to play out, but can be more lucrative as well. Sure, there will continue to be short-term breakouts, but longer-term dynamics will gain more importance. Let me walk through an example below using American Express (AXP).
Daily Chart Analysis
AXP is trying to break out of a triple top formation. It has approached the top from a higher low each time. If it gets through the top at $46.67 this time, it could run to $53, assuming symmetry with the move from $37 to $47 repeating now, this time from the low of $43.
That is not a bad find. But pull back and look at a longer chart on a weekly time frame and it gets even juicer.
Weekly Chart Analysis
Now you can see that AXP has been in a 16-month channel and a breakout higher would set a target of at least $61.50. Without looking at a more patient time frame, you may have taken off your trade at $53 if it consolidated there for a day, and potentially missed more upside potential.
Even if this trade is missed or doesn’t come through by the time you read this, it’s an excellent example of why even short-term traders should be watching long-term charts every day.If this market continues to move higher through these key areas, the next key area will be that much further away. The trend will start to play a bigger role in all names in the shorter time frames.
I believe that is what people are getting at when they say the “easy money” has been made. Those who can step back and see bigger-picture opportunities will be winners in this new market. Start practicing now to gain a head start.
By Greg Harmon of DragonflyCap.com