January 14, 2008
ABC Stop Management in Current Pfizer Long
I introduced the “Arbitrary But Consistent” (ABC) stop management method using the IWO short as an example. Believing in the power of repetition, I thought we should look at how the ABC method would handle the current long trade in Pfizer (PFE).
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Long PFE above 23.03
Protective Stop below 22.69
Initial Risk ~0.34
Initial Risk Covered at 23.37 (move stop to breakeven if it reaches here)
Target: 24.41 to 24.66
Pfizer would have filled on Thursday and the moment the trade executed you should have put the protective stop in place, in this case below 22.69.
Read this post if you’re unfamiliar with stop and stop-limit orders. The worst mistake a trader can make is not having a protective stop order in place at all times on all his open positions. I am not a believer in “mental” stops, and I urge you to get in the habit of instantly placing a stop loss order the moment you open a trade.
Friday was a rough day for Pfizer and it looked like the trade would stop out for a loss, but it didn’t go low enough to trigger the stop.
The next Monday things turned around and PFE traded higher, forming an “up” bar, but didn’t hit the 1x initial risk level of 23.37. Since it didn’t trade to that level, you would have stayed with the original stop at 22.69. Remember that once the initial risk is covered, I suggest you move your protective stop to breakeven. This is an old habit from my daytrading days, and I think it’s a good thing to do with these swing trades as well.
Tuesday was another “up” day with price hitting not just the 1x level, but the 2x level as well. I define an “up” bar as a bar whose high is higher than the previous bar’s high and whose low is equal to or higher than the previous bar’s low. Once the 2x level at 23.71 was hit, we could begin to trail the stop below the low of that “up” bar.
On Wednesday another “up” bar formed so we’d trail the stop below the low of Wednesday’s bar. Again on Thursday we saw an “up” bar form, so the stop would be trailed below Thursday’s low.
Finally, last Friday we saw an “inside” bar form. An “inside” bar is one where the high is lower than the previous bar’s high, and the low is higher than the previous bar’s low. The range of the bar is completely within or “inside” the previous bar’s range: thus the name, “inside” bar. We only trail the stop below the low of “up” bars, so the stop will remain below Thursday’s low at 23.61.
The target we’re looking for is 24.41. One alternative to the ABC method is to move your stop to breakeven after the initial risk is covered, but then wait until the target is hit before you begin trailing your stop. When I get a chance to review all past trades, I’ll be able to say whether this is a superior method to ABC. Stay tuned.
If you have any questions, please leave a comment and I’ll answer them.
January 14th, 2008 at 12:51 pm
Hi CM,
If PFE reach its target, would you sell your position immediately, or continue with the ABC method?
January 14th, 2008 at 3:04 pm
lionel: I’d continue with the ABC method. The point about mentioning the target is that I’m now thinking it may be better not to trail the stop *until* the target is reached and then begin doing the ABC method. Moving the stop to breakeven once your initial risk is covered is very important and will *always* be a rule; the question is when to begin trailing.