Pick Six? Here is a trading tactic that worked on Six Flags (SIX), and that will work for any breakout. (April 08, 2016)
SIX SIX
I want to look at Six Flags ( NYSE:SIX ) here. Six Flags ( NYSE:SIX ) Magic Mountain, where I actually played one time, in my band, back about 19 careers ago, and probably 35 years ago. Anyway, Six Flags ( NYSE:SIX ), this was the high. This has been in this consolidation pattern after peaking here, and here it was bumping against this. Now, we got a low and then a higher low, both in absolute terms, meaning price terms. And then also relative terms, meaning relative to this lower Bollinger Band. So this was kind of a buy signal. By the way, this video is really kind of more of a tutorial video than a pound the table, buy Six Flags ( NYSE:SIX ) right now. But it’s important to understand this setup. This had been the high. The stock had bumped up against this and didn’t hit it, didn’t go through. Bumped against it too on 28th and on the 29th, it was right there. Now, by the way, you’ve got to be watching this stock, you have to have it on your watch list. This is not a real obvious trade, but it is an obvious lesson here. So, after the market was closed there was an article that was on a virtual reality coaster that they’re going to be unveiling, whatever (roller coasters aren’t my thing, they move around too much). So then the very next day the stock broke out.
Now, a lot of traders have a hard time buying these breakouts for a couple different reasons, first of all, regret, you wish you had bought lower. Second of all, kind of fear and concern, you don’t like to feel like you’re chasing because you’re afraid of getting whacked, which has happened quite a bit lately with stocks, it’s a tough deal. Okay, so the stock breaks out here and you’re hesitant about getting in because you’re afraid the stock is going to reverse. You also wish maybe you had bought a bit earlier, but you didn’t. So what do you do? The main issue is, you want to make money, you think the stock is going higher, but it’s too risky. Well I’m telling you it’s not too risky if you define your risk. I talk about this all the time. And you know what guys? There’s a reason why I talk about it all the time. Because it’s the number one rule of trading, manage your risk, don’t lose your dough, that’s Fitzpatrick’s first rule of trading. So it’s the number one rule of trading, it’s the one that basically who used to trade, forgot. They didn’t figure that out, which is why they lost all of their dough.
So here’s what you do: Consider this as the resistance level here, once the stock breaks through here, like it did on the day after that article was published. Then suddenly this resistance level, once it breaks through, that kind of becomes a buy zone. And then what you want to do is, decide, “Okay, I’m buying this stock because I think it is breaking out. I think it’s going to continue to move higher.” But I want an ‘Oh crap’ stop. I want some kind of stop that is going to contain my risk in case the stock falls. So you can do a couple of things: First of all you can just draw a nice trendline here, a very reliable trendline, it’s been tagged several times. And you can keep a trailing stop just below that level. So you buy it here at 55.50, you’re risking a couple bucks; it’s an acceptable risk. Or, frankly in my view, if you’re buying it because it’s breaking out and you think it’s going to hold it, then you keep a stop just below the last day, maybe the last two days of trading. Because if this is a bona fide breakout it is not going to pull back into congestion. If it does pull back into congestion then it’s a fakeout, the trade didn’t work. So get the heck out. Don’t just sit there and try to figure out another reason for staying in the trade. That’s what losers do and I don’t want you to lose.
So if you’ve got that as your trade setup then look what happens: This day FBR, I don’t know this research firm, couldn’t care less, but a lot of people did because the stock traded big that day, it went up basically about 5 percent. So they upgrade the stock and it moves. YOU were in here, 55.00 even call it 55.50. Have your stop in place and so even if you had bought this at 55.50ish, right now you’re up 4 percent on just a couple days in a well defined trade. The stock keeps moving up and now you’re up even more. Again, 55.50, you’re up almost 7 percent in just a week, week and a half or so of trading. So I want you to be using this technique, which is, it’s all about risk management. I’ve said it before, I’ll say it now, and I’m sure I will say it again: You can buy any stock at any time and have it be a low risk trade, as long as you use stops that are tight. That’s a low risk trade.
Now here’s the problem with that though: there’s low risk and there’s low probability, and there’s high probability. If you’re buying a stock that’s super extended and then you’re putting in a tight stop, “Oh, because I want it to be a low risk trade”, well it’s also a low probability trade because you know the stock is going to whipsaw, you’re going to get stopped out and then you’re going to be angry. I’ve seen this happen to members. I’ve seen members, they email me, I see them post in the forum, “Hey, stops don’t work. I keep getting stopped out. Blah, blah, blah.” I ask them for details on their trades and they’ll show me where, “Oh I bought on such and such a day and I just put in a 3 percent stop like you suggest.” Well then I look at the stock and it’s the exact wrong time to be doing that. You’ve got to know your chart work. In this case you want to be buying this stock on the initial breakout. But because it’s not really coming out of a volatility squeeze you need to have a stop that’s back in congestion and then you can raise it as the stock works in your direction.
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