Grad Call Summary 6-5-08

In the grad call we discussed stops and trade management options. While everyone has different preferences and opinions, we discussed some of the technical (charting) options as well as some of the mechanical functions (stops). Below is a summary of some of the options with their pros and cons.

Technical (charting) stops:

1. 5-day EMA: by plotting a 5-day EMA, one can use this as a trigger point to take profits. As long as a call play closes above the 5-day, one stays in the trade. If the stock closes below the 5-day, a mechanical stop should be placed to trigger a close of the position if the stock falls the next day. The same mechanics work for put plays. This type of play is very effective for trending stocks but very ineffective for playing bounces.

2. Support and Resistance: By identifying support and resistance levels, one can put price targets on trades. Generally a support and resistance level is marked by a price level with strong volume. This type of stop is very effective for sideways stocks moving from one level to another, but fairly ineffective for strong trending stocks.

3. MFI: The Money Flow Index (MFI) does a great job in identifying overbought and oversold levels on a stock. It works better than many other indicators for overbought and oversold because it takes volume into account on the calculation. When a call play reaches overbought territory, one should look to take profits and vice versa. A great article on the MFI can be found at http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:money_flow_index_mfi

*Charting stops help to take a lot of emotion out of trading by adding discipline to the trade. There is a risk of loss associated to volatile intraday swing in the stock price.

Mechanical Stops:

1. Straight Stop Loss: This is an order that one places to trigger a sell of a position on at a designated loss level. This protects one from major losses.

2. Trailing Stop: A stop order that moves with the price of the stock. The stop adjusts higher as the price of the stock increases. This order allows for riding trends and protecting profits, but can trigger a sell if the stock is highly volatile that day.

3. Contingent Stop: An order that is based off some designated criteria. Most contingent stops are placed on option trades and designed to trigger an option sell when a stock price hits a certain level.

*Mechanical stops are effective protection from large swings in stock price. They are limited in that they do not protect a position from gapping that can occur after hours.

Jeff Yaede