Invest and Trade Profitably with Jon Johnson

I am a new member of the Daily. I am trying to determine when to buy (get in) on recomended stocks. On 11/9 part 3 of the daily recomended stocks biib, bj, cost, and dri. The buy point for the stocks were 63.02, 43.03, 64.22 and 47.56. The next day all four stocks moved above the buy point levels and you didn’t buy them. Why? please explain and give me a workable formula to determine when I should trigger my buys.

August 30, 2000

Appreciate you becoming a member of the Daily. Below are explanations of why and when we entered or did not enter the specific plays in your email and then a more general explanation of entering the plays on the report. Please keep in mind that whether we enter or not is based upon our traders in the office and the designations of entered, not entered, etc. are designed for Alert Notice subscribers. Thus we may have a reason for not entering a play or not as we are watching the action all day, taking into account market conditions near term and longer term, specific news that comes out about a stock, etc. that cannot be covered in a daily write up. It is more difficult in this market to set a buy point at one price and leave it; we constantly adjust the buy points based upon the day to day action in order to give our members the best entry price and even then as in the case of BJ, it can get blown out of the water and we have to pass on it and wait for the next setup to play. Even so, however, as a general rule our buy points are where we want to enter the stock, and unless there are big upheavals such as BJ and its big upside gap, you can buy on the designated buy point and be in great shape on any play.

BIIB: This one was entered on 11/10.

BJ: A big opening gap pushed BJ well past our buy point. It never tested that gap intraday so we let it go. We look at each play and the aggregate of all our plays from a probability and risk/reward standpoint. In other words we look at our probabilities of winning a trade based upon all of the factors we see in the market and the stock as well as how it fits in with the other plays we have. We want the odds in our favor on all fronts but understand that until a stock makes the move a pattern or other setup is unproven. Very importantly, the risk/reward ratio has to be acceptable for the specific play. If we are right we want to make a lot of money; if we are wrong and it doesn’t work we want to lose little money. On a gap such as BJ that takes it well past our buy point, the risk/reward ratio for the play is ruined and we have to let it set up and see if a new play will develop.

COST: Entered on 11/11. It could have very well been entered on 11/10 as per the play setup in the report as it closed over the buy point though volume was light on the session. We decided to wait on this one versus others we entered that day (BIIB, CAT, NKE, RIG) as their action on the day was better in our estimation. The next session COST gapped lower and tested the 18 day EMA again and reversed with some rising volume; better action and we issued the alert. Either way you could have entered on 11/10.

DRI: As with COST you would have been fine entering DRI on 11/10. Sometimes we miss our entry points and try to cut it too fine, get it too perfect when issuing alerts, and as a consequence we sometimes miss a play we should have been in. DRI is one where that happened. If we miss it we cannot chase it; we have to let it go and come back to it.

These plays outline the general idea for entry and for exit points. Again, we adjust the buy points nightly based upon the day’s action, trying to get the best price we can to enter and thus obtain the maximum probability of winning and optimal risk/reward. If you enter on the buy point then in the vast majority of the cases you are going to be just fine on a play as long as you stick with the parameters. Note that we also adjust the stop points nightly as well, and they are points we look to exit if the play cannot hold above/below that level on the close.

On entering, we typically do it at two different times for two different reasons. If a play was moving at the end of the prior session and we did not have it on the report and put it on the report that night, we can enter the next day at the open. If it opens a bit lower on a common gap or early fade that is minor and then starts to bounce (on an upside play) then we can enter before the designated buy point. If it continues higher we can go right ahead and enter early in the session. The second type of entry is one at the close. This is when a stock is not making the move we want yet but is ready to do so (as are most of the trades on the report). On these we wait until it hits the buy point and then can hold it into the close. These are typically rebound plays or pattern breakouts that we want to see hold. On some types of these plays we will enter when it breaks the buy point. We designate in each play what kind of entry we are looking at, i.e. on the open on a continued move or early test of the prior day’s move, or heading into the close.

These entry rules can get blown out of the water on any given day. BJ gaps to the upside and opens a couple of points above our buy point; that renders the play dead for the day. If there is a big gap then the play is immediately suspect; if it tests and holds and then bounces, we can enter, but that requires watching the action. If a stock you want is going to gap significantly higher, best to remove all buy orders and see how it plays out or forget it for that day. Another issue is that early run higher in the session that cannot hold. This market is quite volatile even with the uptrend to this point and that is why we often want to see a stock hold a move toward the close to enter versus jumping in early and then seeing the buying dry up on that day. Doesn’t mean you still won’t win on the play, just we like to have as many of the odds in our favor on each play.

Trading is all about getting the probabilities in your favor and risk/reward is key to that. Then comes play management. We take partial profits when our initial targets are hit, then let the rest of the play run (some take half, we usually take a third if the stock is running well and according to plan) in order to maximize gains. Stocks often run much farther than our rational minds would suggest, and if we let them run until they show they are breaking down we increase our risk/reward dramatically. It is nice to capture that first move and put some money in your pocket. If you take it all off the table, however, after the test a stock, if it is going to run, really makes the big move. That is the move you want to catch but you have to be in at the right time to do it. Thus we enter on the initial move or on the test; often on both.

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