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Stock Downside Trade and Breakdown
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Disclaimer: This is NOT investment advice, just general help and opinions. Please check with a registered investment advisor before making any investment decisions. This document may contain errors. Chapman Advisory Group LLC employees are not investment advisors. Please review:
Downside Trade Indicators
  • Provide downside trade information to gauge the quality and profit for short term short trades(3 days to 6 weeks).
    Downside IndicatorInformation
    Trade Quality
    • An indicator that analyzes Target 1 profit, potential and profit/loss ratio.
    • Good Trade Quality means there is good target 1 profit and potential along with a high profit/loss ratio (a tight cover limit is available).
    Target 1
    • Target 1 is a stock price that a typical short term pullback may achieve.
    • These typical pullbacks can last anywhere from 3 days to 6 weeks in duration and occur approximately 6 to 12 times a year.
    • The Target 1 percent profit is also listed.
    Cover Limit
    • The cover limit price is provided along with the percent loss from the current stock price.
    • A cover limit is either a mental or automatic (placed with a broker) sell order placed above the current stock price to limit loss.
    • Cover limits are only adjusted in one direction (down) and trails above the current stock price.
    Profit/Loss Ratio
    • The Profit/loss Ratio indicator is the ratio of Target 1 profit divided by the cover limit loss.
    • Higher profit/loss ratios above 2.5:1 signify higher quality trades.
    Target 1 Potential
    • Analyzes support areas that block the pullback to Target 1 and helps the investor gauge if Target 1 is possible.
    • It may be unreasonable to expect a stock to reach the Target price (low potential) if blocked by one or more strong double or triple support areas.
    Target 1 Support
    • Lists the support areas between the current stock price and Target 1.
    Target 2
    • Target 2 is a stock price which may reached on an extreme pullback which occurs only 5% of the time or approximately 1-2 times every 6 months.
    • A stock rarely remains at Target 2, some investors may want to cover at Target 2 to lock in good short term profits.
Breakdown Trade
  • Breakdowns are quick pullbacks that occur when a stock breaks through a support area. Typically the next support will be a good distance away (or a new low area) giving the stock room to pullback.
  • A stock usually starts to pullback and breakdown once it moves below a trigger price. This trigger price is typically close to the lower edge of the current support area.
  • Upon breakdown stock can be expected to reach the breakdown target price. Also listed is the cover limit and profit/loss ratio for the breakdown.
  • Breakdowns vary in how quickly they pullback and reach the breakdown target.
    • True Breakdowns are the strongest breakdowns made from type double or higher support areas and their pullbacks typically last only 3 to 5 days.
    • Continuation Breakdowns are made from type single support areas and their pullbacks typically last longer at 1 to 3 weeks.
  • Breakdowns fall into three categories depending on their state:
    • WATCH: A watch breakdown is currently stuck at support and may breakdown.
    • CONFIRMED: A confirmed breakdown is a stock that has started to breakdown and is below it's trigger price and support area.
    • POSSIBLE: A possible breakdown is a stock which has started to breakdown(below it's trigger price and support area) but has a mixed possibility of continuing lower(no bearish backing).
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