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Take Cues From Failed Patterns

Chart patterns [1] are great for selecting trade entries, but rarely do I see them being discussed from the perspective of risk management. One of the best things about them in my opinion is that they show me clearly when I should be in or out of a trade. When they fail, the signals are clear and I can limit my loss. What else could I possibly want when I’m wrong??

Take SOLF for example. This stock recently tripled in just a few short weeks, putting it on the radar of every momentum trader around. With ample liquidity and lots of strength, it’s no wonder it hit my watch list. I particularly liked the symmetrical triangle [2] pattern it formed as it consolidated recent gains, creating a nice pivot point for an entry on the long side.

I bought it on Friday morning for a trade as it cleared $27.25 at the upper trend line of the triangle, but the stock couldn’t hold the breakout and failed soon afterward. I took a loss of 2% on the failed trade (I’ve certainly had worse). Although a losing trade isn’t any fun, I definitely felt the setup deserved a chance, and if faced with the same opportunity again I’d take it. However, I limited my loss because the pattern failed.

The stock is now 10% below my exit price just one session later. Taking my cue from a failed pattern really prevented additional pain, allowing me to move on to the next trade and protect my capital rather than babysit a stock which had reversed and hope for a comeback.

Here’s a look at SOLF and the failed symmetrical triangle pattern:

SOLF_12_17_2007.gif [3]
(Click for full-size image, courtesy of TeleChart [4])

Trade great setups which offer big potential rewards when you see them, but be sure to let the patterns you’re trading guide your exits as well.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com [5]

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]