The Essential Guide to Hop&Pop
and Flop&Drop Trading
The Hop&Pop is a "long only" portfolio that holds a
maximum of 20 positions. In February of 2004 I realized I was going to need a
complement to the Hop&Pop group for trading on the short side. At the time
I was expecting a correction and we had only four or five longs in the
Hop&Pop portfolio. I knew if a correction did begin, the Hop&Pop
portfolio might end up empty for a while. So I added the Flop&Drop
portfolio for shorts. It too can hold up to a maximum of 20 short positions,
but I don't think it will ever get to that point. Between the two portfolios we
will never hold more than 20 positions, with this in mind you can decide on how
much money, or what percentage of your trading resources, to allocate to any
trade.
Before getting into the details I want to start with my philosophy
of trading in general. Stocks move by themselves and as a result of all stock
movement the market moves. We can also say that the market moves which result
in the market's individual components moving. The point is that while a stock
can move by itself independent of the market, when the market makes a real
directional move many stocks will move in that same direction. So getting the
general direction of the market right is important.
It is also important to understand that the market is not
always making a strong directional move. In any given year the market will make
two to four significant moves and it is during these periods that it will be
easiest to make money. The rest of the time it is possible to make money but
not as easy. For this reason, I prefer to pursue trades with the wind at my
back. This gives us a better chance for success, but it also means that at
times we will have a lot of "long" Hop&Pop positions and at other times we
will have a lot of "short" Flop&Drop positions. Understanding that there is
a time to be aggressively long and a time to be aggressively short and a time to
sit back and take it easy. Keeping this in mind will help you get through the
inevitable ups and downs of the market with your profits intact.
The idea behind Hop&Pop
The idea behind the Hop&Pop portfolio is to find stocks
that have traced out a solid base formation. When stocks are about to make a
strong directional move higher either the price will pop higher or volume will
expand rapidly and folks start hopping into the stock. I have several variations
on this theme, the price pops higher and the trading action is hopping. Don't
get hung up on the exact way it is supposed to work. What is important is that
we are looking for high-volume price moves higher from a base formation.
Ideally the base formation will be a cup with handle
formation. I will not limit our long trades to that single formation, but that
is a focus. The cup with handle formation is a base formation made popular by
William O'Neil and Investors Daily. It has proven to be a very reliable pattern
and often stocks will make substantial moves higher from this pattern.
One key for a stock to make a substantial move is having the
market on your side. I don't know if they still do this, but I used to get
weekly chart books from the publishers of Investors Daily. In the front of the
book they would always have an example of a great cup with handle success story.
The caption would read, "This stock rose 356% in 17 months from this point." At
the time that always amazed me and I have been looking at the examples for the
pattern ever since.
But after a while I noticed something very interesting about
all of these great examples. They broke out within very specific time frames. Many
time frames were between June 1982 and October 1982. The market bottomed in
August 1982 and aside from a few rough spots continued higher until the 2000
peak. There are other clusters of dates but all of the clusters revolved around
an important low or an important breakout period for the market. We recently
saw such a period from March through April 2003. I wanted to launch the
Hop&Pop portfolio in 2002 but we waited until the right time for it. The
first Hop&Pop recommendations were made the first week of April 2003.
This goes back to the point I was making earlier. There are
times when the market really goes and it is relatively easy to rack up strong
gains. Of course after each of these periods there will be a time when the
action leaves a lot to be desired. My goal with Hop&Pop and Flop&Drop trading
is to be there with the right exposure when the market is making that big move.
The rest of the time I prefer to be less aggressive, but not over cautious.
Bottom line, if you pick the right stocks and the market is
moving against you it will be difficult to make a lot of money. If you get the
stocks all wrong, but the market is moving strongly in your favor you actually
have a good chance of making some money. If you get the right stocks, which are
usually the ones breaking out on strong volume and the market is moving in your
favor, this is when you really make a killing in no time flat. Ideally, we want
to pursue this latter course.
In a perfect world we would not hold any positions until the
patterns were right and the market was set up for a powerful move higher. Then
once a major market breakout begins we would go 100% long and stay there until it
looks like the move is stalling out at which time we would start taking
positions off the table until only the strongest ones remained. Then the whole
process would start over again. The problem is a large number of recommendations
would come at one time, but these recommendations would be few and far between.
I know you would prefer a steady flow of new ideas. I do work to keep a steady
flow of ideas, but it is important to understand that at times the best thing
to do is nothing at all.
The idea behind Flop&Drop
The Flop&Drop was added out of necessity. I am a trader
and the name of the service is Tactical TRADING Outlook. In early 2004 it
became apparent the market was reaching at least an intermediate-term peak and
it was going to be difficult to make money on the long side for a period of
time. I wanted to keep trading and with the long side of the market looking
weak the obvious choice was to turn to the short side.
If you don't know or understand the process and risks
associated with selling short I recommend reading up on the process. There are
many sources on the Internet, just type selling short into your favorite search
engine and you will be on your way.
The basis for Flop&Drop (name suggested by a subscriber),
aside from the fact it rhymes with Hop&Pop, it is the pattern I prefer for
short trades. I like to find stocks that made a nice run higher, corrected and
then failed to reach a new high on the next attempt. That part is the Flop because
the rally effort flopped. The next part is the Drop. In this situation the
stock will either find a support level to hold in admirable fashion or it will break
support and drop to a lower support level. When the market drops, stocks break
key support levels, so again it helps tremendously to have the market moving in
your favor.
How to handle the trading alerts
When there is an addition or deletion to either of the
Hop&Pop or Flop&Drop portfolios I will send an alert. These alerts go
out just like the regular Daily Outlook reports, but I send them during the
day. Entry prices and or entry instructions are pretty straight forward. If you
ever have a question just ask. Each stock has an entry price and while you
should always strive to get in at that price, it is not some magical price
point which must be obtained. Getting in a little above or a little below may
make a difference for that trade but it has been my experience that getting in a
little above or a little below price tends to balance out over time.
Each active position has a set stop price. These are adhered
to on a very strict basis. The only thing to prevent a real disaster is the
stop price. From time to time we will get whipsawed and that is always
frustrating. But that is part of the process and understanding it is part of
trading, and knowing that it happens from time to time might make dealing with whipsaws
a little easier. Some people actually enter stop prices with their brokers.
Others prefer to use a mental stop price, which allows a little more wiggle
room. Which method is better? There is no easy answer. In some situations a set
stop price may save you a bundle, but on those whipsaws occasions a mental stop
is better. What is important is to understand that when we have been stopped
out of a position it is because the stock is moving against us and I am much
more interested in protecting your trading resources (your money) then I am in
trying to finagle a pleasant exit out of an already bad situation.
If you start using stop orders on all of your positions from
now on you will end up better off in the long run. Once a stop order is reached
you are out-- period. You don't have to wrestle with a losing position, "should
I give it more slack? ...no wait, it is about to move in my favor..." Using stops
is part of the discipline and it enables you to quickly move on to the next
potentially huge winner.
It is not hard, but you do have to pay attention. If you
don't have time to keep up with everything you may consider opening an "auto trading"
account with Robbins Securities. They get all the information at the same time
as everyone else, and if they have questions they will call me to make sure
they do exactly what they are supposed to do. With auto trading you open a
regular account. It is your money in your account and you have control over
your account just like at any other online account. But, you tell Robbins
Securities that you want them to execute Tactical Trading Outlook stocks
recommendations for you when they come out. You can specify how much of your
money or what percentage of your assets to allocate to each trade. You have
control over everything and you can make any change whenever you want. It is a
great alternative for those of you who are too busy to manage your trading. If
you have interest in this please contact them at: www.robbinstrading.com/moreinfotto.htm
and this will get you started.
It seems easy to me, but I have been doing this for 15
years. If you have any questions just e-mail them to editorial@tacticaltradingoutlook.com
and if I don't respond some one will. I want to make sure you to have a clear
understanding of how we are trying to achieve our common goal of making money
in the stock market. If you have questions let me help clear up the issue.
Thank you for you support. My best wishes...
Jim Patterson
Editor
Tactical Trading Outlook
Copyright ©2007 Tactical Trading Outlook, LLC. All rights reserved.
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