Heyer Capital, LLC

investment management and timely advice from a local CPA (Fox Valley, Wisc.)

How to Play with Fire

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A question came up the other day at the Investor’s Business Daily Meetup: How should I invest in stocks that are screaming ahead?

Let’s call it what it is: playing with fire. Well, maybe that’s not entirely accurate since there’s no real upside when playing with fire, but there can be upside when investing in stocks that are screaming ahead.

I do not suggestion “buying on the dips.” A stock that has just advanced 25% may be ripe for a pullback, but after it has slipped a few bucks, the short term trend is against you. It can keep going down.

Instead – if you want to play with fire – wait for the stock to drift sideways for a few day especially if it meet resistance against a certain price point. The idea is to wait (keeping capital safe) until the stocks resumes its move upward.

I strongly suggest keeping a rolling stop loss order underneath your entry price. Keep it tight – just a percent or two. If the stock reverses from the breakout, protect your capital. As the stock advances, keep your stop loss trailing upward, but give the stock a bit more wiggle room.

Here is a visual reference and example. Click on the chart to make it larger.

dril-quip-drq.jpg

Trade away.

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Written by heyercapital

April 30, 2007 at 8:05 am

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