Trading All-Time Highs
When trading all-time highs the trader does not need to concern themselves with resistance levels as everyone who owns stock has an open profit. Traders typically look for a good entry point and one off the best is a pullback to the 50-day moving average in a strongly trending stock.
Trading a pullback from an all-time high is illustrated with a sample trade in Sun Communities, Inc. NYSE:SUI as shown below with a daily bar chart.
Chart 1. Position trade setup for SUI
The sample trade for SUI shows a stock that has pulled back to its 50-day moving average and closed near the days high.
The position trader can place a stop buy order to enter. A stop buy order is simply a stop-loss order used in reverse. The order is only activated if the stock trades above the trigger price. The stop buy order can be either a market order or a limit order. With a limit order the trader knows the price they will pay but if the stock gaps up the order may not be filled.
Generally it is a good idea to view a longer term chart so that the position trader gets a sense of where this stock has traded in the past.
The historical price action of the stock can be easily checked by eyeballing a monthly bar chart for SUI as shown below.
Chart 2. Monthly chart for SUI
As can be readily seen from the above monthly chart, SUI has been in a long downtrend and is trading at a ten-year high.
The position trader should now consider how the proposed trade will be managed.
Trade management involves determining likely profit levels and setting stops to exit the position.
The likely profit that is achievable is useful to know in advance as the position trader can then determine whether the proposed trade is worth taken based on the dollar amount risked. The amount risked is determined from the initial stop-loss level selected.
The likely profit is determined by adding the last rally to the low of the current pullback. The last rallied started at 94.50 (label A on the chart) and peaked at 119.50 (label B). This 25.00 rally when added to the 114.00 low of the current pullback (label C) gives a target of 139.00.
The initial stop can be placed below the low of the current pullback at around 113.00.
If SUI trades below the current pullback then the stock is not ready to rally and the position should be exited.
A likely entry price for the trader placing a market order to enter would be around 117.50.
The risk-reward can now be determined.
Likely Entry = 117.50 with Initial Stop = 113.00 and Profit Target = 139.00
Profit = 139.00 - 117.50 = 21.50
Risk = 117.50 - 113.00 = 4.50
Risk-Reward ratio = 21.50 / 4.5 = 4.8
The risk-reward is very good at 4.8 as the trader can potentially make nearly five times the amount risked.
The trade exit now needs to be considered. The previous rally can be used as a guide when determining what stop method to use. The previous rally progressed higher with a sequence of minor rallies and minor pullbacks. The pullback low trailing stop method would be a suitable stop method.
The trade management is illustrated below in Chart 3.
Chart 3. Position trade entry & exit - SUI
Referring to Chart 3. SUI starts to rally and pulls back. The stock then rallies again. When the stock trades above its previous rally high, the trailing stop is raised up to Stop1.
The procedure is to only raise the trailing stop after the stock rallies again after the pullback and the stock trades above the high of the previous rally.
The raising trailing stop procedure continues through to Stop4. The stock then rallies strongly and pulling up off the 50-day moving average which places the stock at risk of the next pullback. The stock price has traded well past the profit target of 139.00.
The stop is raised to Stop5 after a slight pullback so as to place the stop closer to the price action and lock in a substantial profit
Stock Analysis for Finance Students and Investors