The following describes how to buy extended stocks while staying within most of the key risk parameters set out by WON and CAN SLIM. I’m not recommending this, especially at this time, but I want share how to do it properly if a person cannot resist chasing a stock they missed.
An 8% stop-loss is a very unique tool that only applies at one specific place, a valid buy-point. Applying an 8% stop-loss any other time is overly restrictive and will inevitably lead to getting shaken out during normal and healthy stock movements. So if we must buy an extended stock, we need to adjust the 8% rule to accommodate the level we bought at to prevent an unnecessary shakeout. But at the same time, we also need to manage our risk and not expose ourselves to more losses than we would have had if we bought at the proper buy point.
The reason the 8% stop-loss works is because most successful breakouts will not retreat more than 4% below their proper buy-point. So with a hypothetical $100 pivot, almost all leading stocks will not dip below $96 dollars. And if you bought within the 5% buy region, or up to $105, you will be able to withstand a pullback to 4% under the pivot.
But if you instead buy 10% past the pivot, the 8% stop-loss is far more likely to get you shaken out during an ordinary pullback and you would be forced to sell at $102, far above the $96 level identified by WON and CAN SLIM as the intended shakeout protection and stop-loss level.
So if we want to use the same $96 level for a stop-loss on our $110 purchase, we now need to use a 14% stop-loss to have the same level of shakeout protection.
Since our adjusted stop-loss is nearly 2x as large as the standard stop-loss, we will then adjust our exposure by cutting our position size in half. Of course our upside is not nearly as great with half a position, but it does let us get in a stock we missed without affecting the risk of getting shaken out or increasing the potential loss to our portfolio.
If things work well in the stock, then you increase to a full position at a more traditional add-on point.
Always try to buy at traditional buy-points, but if you must chase, make sure to adjust your stop-loss and position size in order to maintain the same risk profile as laid out in CAN SLIM.
I hope this helps.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.