In 100/200, Double Trouble, Modified Double Trouble, and Top 20 Sector methods the concept is same. We want to capture a slice of a pre existing trend. Understanding that concept thoroughly is the key. If you understand that then the questions about stops will have context.
The concept of swing trading is to trade an upward swing in a stock experiencing a strong uptrend as defined by relative strength or sector stregth. Relative strength is a measure of price trend that indicates how a stock is performing relative to other stocks in the market.
The best points of entry in such stocks are not in the middle of an upward trend, but instead on fresh breakouts after a period of weakness or consolidation. The following figure illustrates this concept:
where 10%w represents periods of weakness where the gains in price were less than 10%, while the thick line shows period of more than 10% price gain.The idea of swing trading is to try to trade only the trending periods and avoid the non-trending periods.
A % breakout after 10% or less weakness indicates a probable start of a new upward swing. If your entry is successful, you will have a profitable trade.The problem with entering mid-trend is that your entry might be too late in a swing, and it may turn in to a non trending period. Also, if you study relative strength, you will find that long-term relative strength (1 year or more) is good. However, short-term relative strength (4-6 weeks) often leads to reversal.
In short, we want to enter a trading vehicle moving 100 miles per hour, but we want to enter it when it slows down a bit before accelerating again.
So where should we put stop. we put it somewhere closer to start of the thick line swing. Two day low is one option. It might be at low of % breakout day. Now how do we exit. Our objective is to capture part of the swing represented by the thick line. We should exit before the swing becomes another consolidation or weakness.
Now when selecting the vehicles, we have selected vehicles with high probability of making 20% plus moves after breakout from such consolidation. We are not buying a breakout on any random stock with % breakout. We are buying on stocks which have in the past exhibited a propensity to behave in certain manner.
So 20% is guideline, it also depends on your entries. So one operates with a target zone of 16 to 20% profit. You have to exit in that zone, while the swing is still going on. Exiting on strength is better. Because swings end with final strength.
Now how many days should it take to get to 20% is next question. Nature of swings are such that consolidation periods are longer and trend periods are shorter (ideal situation). So approximately the stock should make the move of 20% in around two weeks as we are selecting consolidation period of 4 weeks prior to entry. This is based on my experience and study of past trades. But market circumstances affect this. That is why if a trade does not move at intended speed, even if the stock has not hit the target, you should close and replace it.
Bottom line in these methods you should take profit at around 16 to 20% on strength. If you do not take it, in a day or two the stock can pullback or reverse and that profit vanishes. Trying to capture lots of 20% moves as against one big move is what these methods are all about. These are high frequency methods. These are for traders. not for investors. If you do not enter immediately on signal day, or hesitate to take profit, you should not trade these things.
To trade these things, you also need to keep focused on next breakout and not worry so much about missed opportunities or what might have happened if you have not exited. By using a combination of method, there is a constant flow of new breakouts and everyday, you have to come prepared to look for next 20% opportunity. You might often be wrong, miss good breakouts sometime, sometime judgement might prove wrong, that is all part of the game. All you have to think of is the next breakout.