Leave Tips on the Table

In response to my recent pieces on trading well vs. focusing on a specific profit amount, a longtime reader wrote in about two lessons he has learned involving interacting with other traders: Don't give (or listen to) stock tips, and don't try to impress friends with your trading prowess by talking about your profits.

These are lessons many traders learn the hard way. Tips are easily dispatched. They usually concern very illiquid stocks where news and research is scarce.

If you're holding a gob of shares in some worthless company that isn't even on a major exchange, it's a lot easier to unload them at a high price if you start a rumor that the company is being acquired at a premium. As the lemmings seize on the tip, those who fabricated it are happy to sell into the urgent demand of those who are unable to think for themselves.

You know how the story usually ends -- there is no acquisition and no demand for the stock. What if the company is acquired and you make out like a bandit? Well, you are a bandit -- actually, you're a thief. You had inside information and illegally bought the stock from someone who wouldn't have sold it to you if he knew of the pending acquisition. If you want to make money on tips, get a job as a waiter.

Unless you're a money manager, don't disclose your profits. It creates bad karma. People never talk about how much money they're losing. They only discuss excessive profits. Revealing your profitability to others with no skin in the game serves no purpose. First, it's none of their business. None! More importantly, you have now imposed artificial pressure on yourself to continue to match your stated profitability.

Trading is tough enough under the best circumstances. Who needs the pressure of living up to the expectations of others that is based on your silly, short-sighted bragging? Instead, quietly trade your way to consistent profits. If you want to brag, tell everyone about the big fish you almost caught last weekend.

Let's check out some charts.

Brocade Communications (BRCD - commentary - Cramer's Take) is up more than 50% in 2006. The stock has been moving higher as it churns between the middle and upper Bollinger bands. That's what strong stocks do, and Brocade is a strong stock!

Monday's advance fell short of Friday's high, but volume was heavy, though not as heavy as Friday's options-related volume. As the stock moves higher, new entries become problematic -- how do you treat a subsequent pullback? Are you allowing the early buyers to sell you their marked-up stock, or are you simply participating in an ongoing uptrend? I'd put Brocade on my watch list before buying at this elevated level. That way I'll see the next pullback and be there for a safer entry.

The Chicago Mercantile Exchange (CME - commentary - Cramer's Take) has rewarded patient bulls. There is little indication that the uptrend is in trouble. Yes, I see the slope of resistance rolling over, but you've got to turn your monitor on its side to believe this stock is done moving up.

My stop would be a bit lower than the middle Bollinger band (the 20-week moving average). That's around $390. Now, if a $40 difference between the current price and your stop seems a bit much, then divide all the numbers by 10. A $42.90 stock with a stop at $39 seems about right to me.

I received email from a reader who believes in the fundamentals of ViroPharma (VPHM - commentary - Cramer's Take) and feels that the market overreacted to bad news. He could be right ... to a point.

This stock is so badly damaged that any wall of worry suitable for climbing has crumbled. ViroPharma could see a snapback rally on pure short-covering, but a haircut of 50% in less than two weeks takes a while to recover from. If you love this company, you are likely to have many chances to buy at current levels while those bulls who refuse to suffer any longer slowly give up their shares to those who like the stock at $10. That type of stock-for-cash exchange usually occurs over time.

I last wrote about Joy Global (JOYG - commentary - Cramer's Take) in November, before it split 3-for-2. While Joy has advanced quite a bit since then, I don't believe it's done going up. The stock has advanced about 20% over the past week or so. That's a recipe for a pullback if I've ever seen one. And if the bulls continue taking it higher, I'd consider a scaled entry as a balance between risk and reward.

Isle of Capri Casinos (ISLE - commentary - Cramer's Take) broke out of a tight sideways range Monday. On the surface, this looks like a textbook squeeze breakout. The daily close was near the intraday high -- a sign of persistent buying pressure. But while buying pressure outweighed selling pressure, overall trading volume was light. This light volume makes me cautious. If you're long, consider protecting your profits with a stop back in congestion. After all, Isle of Capri is up more than 20% since mid-January.

Be careful out there.

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Dan Fitzpatrick is a freelance writer and trading consultant who trades for his own account. His columns focus on quantitative strategies for trading and investing. Fitzpatrick has lectured throughout the U.S. on the proper use of technical analysis and options trading. At the time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.