Bulkowski's Alpharma Trading Quiz

Price moved from a low of 13.35 to a high of 26.22 in less than a month. Where's the flag in the high and tight flag? If the region circled in red were higher, that would qualify even though it doesn't look like a flag (appearing like a flag is not a requirement for a high and tight flag). What interested me was the rising price trend.

Answer 1 (Do you buy?): Since price has continued to move up, buy.

Answer 2 (Target?): The rise from the trend start to the top of the flag is about 100%, take half of this and that's what you can expect (more of a dream, really. High and tight flags don't perform as well as they used to).

Answer 3 (Stop price?): In this high and tight flag, a stop is difficult. Placing it below the red-circled area (about 19, shown in the prior chart) would be great but it's too far away. A volatility stop would place it at 22.92, or about 12% away, base on 2x volatility. The above chart shows where I placed it.

Here's my notebook entry for the trade.

30 August 2005. Volatility is $1.71, so the stop should be no closer than today's low of 25.19 - 1.71 or 23.48. That's about 10%."

The volatility measure I used then was 1.5x the volatility reading instead of the 2x multiplier I use now. The above chart is a day later than the previous one.

"1 September 2005. Stop raised to 25.09, or 1.44 (volatility stop) below today's low of 26.53. I think we dropped off a large up move a month ago. That's why the big change in volatility."

I raised the stop again, as the above notebook entry says.

How about now? Time to sell? This shows price as of 9 September 2005, eight days later than the last chart.

"Date: 14 September 2005. Filled at: 25.06 to 25.08. Sell reason: Hit stop."

The stop took me out for a 3.8% loss. Price eased down to a low of 23.37 before making at a recent (as of the chart date) high of 32.74. The decline to 23.37, meant a potential loss of 10%.

Did I make a mistake selling too soon or should I have weathered the drawdown? That's a question only you can answer because one day, you will be confronted with a similar situation, too.