The following information is provided to assist you in
understanding the basics of
Step #2 - Observing Exit Signals.
In these FAQs, we cover . . .
What
is an Exit Signal?
What
is a Stock Configuration?
What
are the Components of a Stock Configuration?
How
are Moving Averages calculated?
How
are Stock Configurations used to determine Exit Signals?
What
are the major Stock Configurations that serve as Sell Signals?
What
do we do if we receive a Sell Configuration Signal?
What
are the major Stock Configurations that serve as Cover Signals?
What
do we do if we receive a Cover Configuration Signal?
What
is a Stop Trigger Point?
What
do we do if a Sell-Stop or Cover-Stop is triggered?
Why
do we utilize a “Three Strikes – You’re Out” philosophy with Sell-
and Cover-Stops?
Why
is the observation of Exit Signals so important?
Where
can we learn more about Exit Signals?
Ready?
Here goes . . .
What
is an Exit Signal?
Answer: An Exit Signal is a sign that tells us it is time to
terminate (or close) all
or a portion of a position in our portfolio. We use two key types of indicators for this purpose:
-
Stock Configurations – a
calculation-driven measure that tells us specifically whether a stock’s price movements
are likely to continue to travel in the desired direction. These Exit Signals
take the form of “Sell” and
“Cover” Configurations, and;
-
Stop
Trigger Points – a price-point-driven limit which exists to represent our
personal tolerance for adverse price movement of a
stock. These take the
form of either “Sell-Stops” or “Cover-Stops”.
What
is a Stock Configuration?
Answer: A
Stock Configuration is a combination of several Moving Averages of a stock's
weekly closing price.
What
are the Components of a Stock Configuration?
Answer:
A Stock Configuration consists of four Components, as follows:
-
Price of
the Stock - as of the most recent Friday's close;
-
5
week Moving Average of the subject Stock’s weekly closing price
– utilized to monitor short-term movement of the Stock;
-
15 week Moving Average of the subject
Stock’s weekly closing price –
utilized to monitor intermediate-term movement of the Stock;
-
40
week Moving Average of the subject Stock’s weekly closing price
– utilized to monitor long-term movement of the Stock.
The most important things to know about the four Components are:
-
rank
- the value of each Component in
relation to the value of the other three Components (i.e., which
Component's value is Highest,
Center, or Lowest, etc...),
and
-
direction
- whether each Component moved UP or DOWN (increased or decreased in
value) in relation to where it was the previous week.
So, as an example looking at
the hypothetical “ABC Stock”, if the . . .
-
ABC
Close was at $24.00 the previous week and is at
$27.00 for this week (i.e., it is the HIGHEST of the stock’s Components and it moved UP), and the
-
ABC
5wk was at $21.80
the previous week and is at $23.30 for this week (i.e., it is the LOW-CENTER
of the stock’s Components and it moved UP), and the
-
ABC
15wk was at
$24.60 the previous week and is at $23.10 for this week (i.e., it is the
LOWEST of the stock’s Components and it moved DOWN), and the
-
ABC
40wk was at
$26.20 the previous week and is at $25.00 for this week (i.e., it is the
HIGH-CENTER of the stock’s Components and it moved DOWN),
. . . then the ABC Stock
Configuration for this week would look like this:
|
Current ABC Stock Configuration |
ABC Close - UP
ABC 40wk - DOWN
ABC 5wk - UP
ABC 15wk - DOWN |
How
are Moving Averages calculated?
Answer: Think
of Moving Averages in the convention sense. Moving Averages have a tendency of
smoothing-out the ups and downs in fluctuating data. Let’s look at an
example for the “ABC Stock”:
| Friday's Date |
Weekly Closing Price
of ABC Stock |
5 week Moving
Average |
| Jan 7 |
$20.00 |
- |
| Jan 14 |
$22.00 |
- |
| Jan 21 |
$22.00 |
- |
| Jan 28 |
$21.00 |
- |
| Feb 4 |
$24.00 |
$21.80 |
| Feb 11 |
$27.00 |
$23.20 |
In the
table above, the average for the 5 week period ending February 4, is $21.80
(that is, the average of $20, $22, $22, $21 and $24 = $21.80). The average for
the 5 week period ending February 11, is $23.20 (that is, the average of $22,
$22, $21, $24 and $27 = $23.20). It can be said that the 5 week average for ABC
“moved” from $21.80 to $23.20 from February 4 to February 11. Thus the term,
Moving Averages.
How
are Stock Configurations used to determine Exit Signals?
Answer: Thanks
to Zahorchak, Stock Configurations have been rather neatly
classified into groupings to correspond with their appropriate Market Direction.
We have taken Zahorchak’s work a bit further by labeling the Stock Configuration groupings in such a way
as to correspond with what we have identified as the 5 major “Stages” of Market
Direction. In
addition, thanks to Weinstein, we know we can participate in stock trading
during both Bullish and Bearish Market conditions. We have applied some of
Weinstein’s theories about our ability to Short and Cover, to Zahorchak’s
Moving Averages methodology, thus making Stock Configurations bi-directional.
Bottom-line,
by knowing the Stage of the Market (i.e., Market Direction) and by knowing a
Stock's Configuration, we can determine whether we should be Selling or
Covering the position at this time.
What
are the major Stock Configurations that serve as Sell
Signals?
Answer: The
Stock Configurations that serve as Sell Signals are laid-out in reference tables
at:
Stock
Configurations - Sell Signals
What
do we do if we receive a Sell
Configuration Signal?
Answer: If
while we are holding a stock we Bought (i.e., a Long position) and we receive a
Sell Configuration Signal, we Sell the entire position.
What
are the major Stock Configurations that serve as Cover Signals?
Answer: The
Stock Configurations that serve as Cover Signals are laid-out in reference tables
at the following link:
Stock
Configurations - Cover Signals
What
do we do if we receive a Cover
Configuration Signal?
Answer: If
while we are holding a stock we Shorted (i.e., a Short position) and we receive a
Cover Configuration Signal, we Cover the entire position.
What
is a Stop Trigger Point?
Answer: A
Stop trigger point is a pre-established point at which we are going to feel uncomfortable
about continuing to hold a position. This discomfort would occur because the
weekly closing price has gone lower (in the case of a Long position) or higher
(in the case of a Short position) than we really want it to.
Stop
trigger points (or Stops) take one of two forms:
-
Sell-Stops: utilized to represent a point below which we do not want our Long position of a stock to travel – if it does, it is time to Sell,
and;
-
Cover-Stops: utilized to represent a point above which we do not want our Short position of a stock to travel – if it does, it is time to Cover.
Stop
trigger points are determined initially as part of Step #3 and are occasionally
updated as part of Step #4.
Stop
Trigger Points reduce risk -- initially by limiting losses -- ultimately by
locking-in profits.
What
do we do if a Sell-Stop or Cover-Stop is triggered?
Answer: Just like
baseball. Three strikes – YOU'RE OUT!!!
If
while we are holding a stock we Bought (i.e., a Long position), a Sell-Stop is
triggered for the first time, we Sell half of the position and re-examine the
Sell-Stop level. If during a subsequent week, a Sell-Stop is triggered again
(i.e., second time on the same position), we again Sell half of the position
and again re-examine the Sell-Stop level. If during another subsequent week, a
Sell-Stop is triggered again, (i.e., third time on the same position), we Sell
the entire remaining position.
If
while we are holding a stock we Shorted (i.e., a Short position), a Cover-Stop
is triggered for the first time, we Cover half of the position and re-examine
the Cover-Stop level. If during a subsequent week, a Cover-Stop is triggered
again (i.e., second time on the same position), we again Cover half of the
position and again re-examine the Cover-Stop level. If during another
subsequent week, a Cover-Stop is triggered again, (i.e., third time on the
same position), we Cover the entire remaining position.
Why
do we utilize a “Three Strikes – You’re Out” philosophy with Sell- and
Cover-Stops?
Answer: Recoveries.
A stock, having triggered a Stop level, can and sometimes will recover and proceed back onto its desired path. In these cases, holding half
or a quarter of the original position is better than holding none of it.
Why
is the observation of Exit Signals so important?
Answer: Very simply, it is just as important to know when to get out
of a stock as it is to know when to enter the position. Exit strategy is paramount to
reducing loses and maximizing profits from stock trades.
Where
can we learn more about Exit Signals?
Answer:
There is much to learn about Exit Signals. Go to Learn More.
That
concludes the Step#2 FAQs
Next:
Back to
Tutorial Step #2
Continue to
Tutorial Step #3
Continue to Step #3 FAQs
Learn More
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