Frequently Asked Questions
Q: What I find difficult to understand is how often you actually hold for a violation of the 50 day. Many instances the 50 day would cost an investor 50 % to 60% of their profit, yet I am tempted to try to hold for larger gains. Do you have any other specific rules based on the percentage gain you have in a stock?
A: In practice, if the stock is a leading stock, it will be in an uptrend of sorts. Look at BIDU, AAPL, RIMM, and so forth over the last few years as a few examples. They have their ebbs and flows where they may often violate their 10dma but not their 50dma. That enables one to stay in their position and add to it as the stock moves higher via pocket pivots. If a stock is well above its 50dma, it probably obeyed its 10dma for at least 7 weeks, thus I created the 7 week rule which enables one to take profits once their stock violates its 10dma after 7 weeks. Note, if your stock starts to sell off hard, such as a mini-gap down or a high volume reversal day off a peak, one could certainly reduce their position by 50% or more. Also, if general market conditions deteriorate, one could also decide to tighten their stops.
That said, using a violation of the 50dma for leading stocks regardless of general market conditions is often an excellent way to stay in the stock for the long haul as the strongest stocks will not violate their 50dma. Also note that when a stock pauses after an uptrend, it allows its 50dma to catch up to its price, so even though a stock may seem well above its 50dma at certain times, ebbs and flows in the stock will allow the 50dma to keep up with its price. Should the stock stage a climax run, however, take note and be ready to sell. Climax runs generally occur after a stock has been moving higher for a number of months.
Keep in mind some investors have shorter time horizons or are more conservative thus prefer to use the 10 or 20dma instead of the 50dma.