Advanced Concepts
The Philosophy of Channeling Stocks
Prior to purchasing a stock, you should know at what price you plan on selling that stock. Upon receiving confirmation that you have purchased a stock, it is then a good idea to place a Good ‘Til Canceled (GTC) order in at the price you wish to sell, and the sale will be made for you when the stock reaches that price.
This helps eliminate the “day-trader” mentality where you constantly monitor the activity of the stock price. Prior to buying the stock, you knew how much you wanted to sell it for, so place the GTC order. Without the GTC, the stock could have hit your target price and never triggered a sale leaving you with a stock that could have sold.
We recommend you employ a stop loss order after purchasing your stock. A stop loss order is put in place to sell your stock if it begins to decline in price.
There are many theories on where a person should set their stop loss level. A common approach is to set your stop loss at somewhere between 15% and 20% below the price you paid for your stock. If you purchased a stock at $5 per share, the stop loss in place at 15% would sell that stock if the price dropped to $4.25 a share. This reduces your downside risk and prevents the possibility of major losses.
Not all brokers will allow you to put a GTC and stop loss order in at the same time so you should check with your broker first. Let the stop loss order be your friend.
Find out which stocks are trading in the Channel!
In addition to placing stop loss orders to cut your losses, you can also set a Trailing Stop order (Profit Protection Stop). As the stock price increases, this is a means of protecting your profits. For example, say you bought shares of XYZ company stock at $2.00 and you then set your GTC at $3.00 and a stop loss at $1.25 because it has been Channeling between $1.75 and $3.25. The XYZ stock then begins to rise and reaches a price of $2.75. It is at this time that you may decide to change your stop loss to $2.50 as a way of protecting your 50 cent per share profit.
If the stock continues to go up, you gain even more and also, if the stock goes up to $3.00 a share, you could change your stop loss to $2.75 to then protect what would be a 75 cent per share profit. You can continue to “Trail Stop” up as the price rises and this can go on until the stock begins to go down and triggers the sale of your Trailing Stop order price. This is just another way to protect your downside and lock in your profits.
What about the Channeling Stocks that are in the higher price range? How does one invest in stocks that trade for $10, $20, $50, $80, $100 or $200 per share? We also invest in these stocks as well, only using options. Options allow you to control 100 share “blocks” of a given stock at a fraction of the cost of purchasing them outright.
Channeling Stocks that are optionable can be great tools to invest in with the purchase of Put or Call options. Our weekly updates will notify you which of the selected stocks of the week are optionable. Using the effect of a Channeling Stock and utilizing the time factor can be a profitable venture. Based on historical evidence, is it time for the stock to Channel up? You might want to consider buying a call option. Time to Channel down? You might want to consider buying a put option. If you have never invested in options before, you must understand options are risky. They can expire without any value.
Before investing in options, you should be very comfortable with how they work. For more information on options, you may want to explore the Chicago Board of Options Exchange website. It is filled with free information.