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12:
Closing The Trade
Page 1
THE student of Tape Reading, especially he who puts his
knowledge into actual practice, is constantly evolving new
ideas and making discoveries which modify his former
methods. From each new elevation he enjoys a broader view;
what were obstacles disappear; his problems gradually
simplify.
We have previously defined Tape Reading as the art of
determining the immediate trend of prices. If one can do
this successfully in the majority of his trades, his profits
should roll up. But recognizing the trend and getting in at
the right moment is only one-half of the business. Knowing
when to close a trade is just as important if not the most
important part of a complete transaction. At a certain point
in my trading, I became aware that a large percentage of my
losing trades resulted from failure to close at the
culmination of what I have termed the immediate trend.
(Continued after the box of related
articles.)
An example will make this clear: New York Central was on a
certain day the strongest stock in a bull market that showed
a tendency to react. The pressure was on Reading and Steel.
My indications were all bullish, so I couldn't consistently
sell either of the latter short. I was looking for an
opportunity to buy. The market began to slide off, Reading
and Steel being the principal clubs with which the pounding
was done. I watched them closely and the moment I saw that
the selling of these two stocks had ceased, gave my order to
buy New York Central, getting it at 137 1/4. It never
touched there again, and in ten minutes was 139 bid for
5,000 shares. Here I should have sold, as my buying
indication was for that particular advance. Especially
should I have sold when I saw the rise culminate in a
spectacular bid which looked like bait for outside buyers.
Of course the stock might have gone higher The main trend
for the day was upward. But for the time being 139 was the
high point. I knew the stock was due to react from this
figure, and it did, but at the bottom of the normal reaction
selling broke out in fresh quarters and the whole market
came down heavily. The result was that my profit was only a
fraction of what it ought to have been. This is the way the
trade might have been made: I should have sold when 139 was
noisily bid, and when the reaction had run its course,
picked it up again, provided indications were still bullish.
If they were not I would have been in the position of
looking to get short instead of waiting for a chance to get
out of my long.
Having reserved in the early part of this book the right to
revise my views, I will here record the claim that the best
results in active Tape Reading lie in recognizing the moves
as they occur, getting in when they start and out when they
culminate. This will in most cases cause failure to get all
of the moves in the one most active stock for the day, but
should result in many small profits, and I believe the final
results will exceed those realized by sitting through
reactions with any one stock. There is a very wide
difference in mental thought processes between the man who
feels compelled to get out of something and one who has
money to invest and is looking for a chance to make a fresh
trade. The start and finish of a small move is best
illustrated by a triangle - the narrow end representing the
beginning, and the wide end the termination of the move. The
width in an upward move would appear like this:
and a downward move like this:
These figures denote the widening character of a move as it
progresses and are intended to show how volume, activity and
number of transactions expand until, at the end,
comparatively active conditions prevail. The principle works
the same in the larger market moves; witness the spectacular
rise in Union Pacific within a few sessions marking the end
of the August1 1909, boom.
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