Set Up A Flag Trade With Minimal Risk

Here is a very simple example on how to set up a Flag Trade with minimal risk.

1. Find a flag - Subject of future blogs - ;)

2. Place a stoplimit order 10 cents above the top of the Flag pole. with the limit 20 cents above the Flag pole.
This means you only buy when the stock breaks out but you dont buy if the stock gaps up.

3. Place a sell order 2% (or whatever you want to risk) below the buy point.

Now this next bit is very important and works very well. It will protect you in these whipsaw market conditions:

4. Place a sell order to sell 50% of your position at 2% above the buy point. This means that if the stock breaks out and manages to climb 2%, then you cannot lose unless it then gaps down. You have sold 50% of your position. Now if the remaining 50% falls 2% below your buy point you will sell the other 50% of your position and you will make no net loss (apart from trading charges).

You can now relax and hopefully watch the other 50% of your position climb upwards. This is likely to happen if you have found a good Flag

5. Place an automatic sell order at some higher point - say 10%, or just manage your trade by watching it.

The biggest complaint we hear is that people get 'Stopped out' to the downside. With this approach you can get stopped out to the upside!

This procedure works very well try it and see.

Advantages:

a) You only buy into the trade when the stock starts to break out.

b) You are only at risk until the stock hits your upper 2% sell point.

c) If the trade trigggers but doesn't hit the upper 2% sell point and subsequently falls, then you only lose 2%

See Figure below where I have shown a trade on ticker 'ULTA', buying 500 shares.