MSFT Long Entry off of “Near Dummy Spot” (25 Aug 2006)

August 25, 2006 at 9:38 am by Will

What is it with these huge, boring stocks? ;-) First Cisco, now Microsoft. When’s the last time two of these behemoths broke out, then gave us a nice little pullback? Should be interesting trades if the overall market holds. I jumped at this one this morning:

MSFT

I call yesterday’s bar a “near Dummy Spot” because it doesn’t strictly meet my requirement of a DS being an inside bar. Its bottom was 2 cents lower than the prior day’s. Pity. Doesn’t stop me from taking this trade, though.

Note that this is just an intraday picture thru about 1000 EST. We don’t know yet how this bar is going to look for the entire day. However, we must have an initial stop in place to take the trade.

If you don’t know where you’re gonna get out, you can’t get in. You must be able to clearly state your maximum potential loss in order to take a trade. You must know how much you stand to lose if you’re wrong, and be comfortable losing that amount. If you aren’t, reduce your position size. Don’t get caught up in the dreamy “how much I’ll make if I’m right” and let that entice you to commit too much.

The most logical place to set an initial stop for this trade is at the bottom of yesterday’s bar, since the trade is taken off the top of that bar. That would give a stop of 25.50 and an entry of 25.87, which results in a total initial risk (tah-dah! “R“) of 37 cents.

I’m not always logical. All the youngsters may be wearing low-riders, but I pull my stops right up to my waist. I’ll drop back out of this trade if MSFT reverses and falls through its open of 25.71 (corrected[ed]). In my book, a pretty white (blue) candle breaking a pullback and resuming the prevailing (up) trend should not reverse on itself if there are sufficient buyers and they are sufficiently commited.

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