A Short Cheat Sheet on Going Long

Learn Gary's three Fs and four caveats -- in less than 700 words.
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Boy, the positive response to my recent

shorting column was simply overwhelming. One reader even wrote in that I was at my "lucid best." Hmmm, odd though that it was also my shortest column of the year.

But, heck, if it's brevity you want, then it's brevity you'll get. Therefore, a 672-word cheat sheet on going long! Of course, bear that I am, this probably marks the top. But nevertheless: onward!

Okay, so it's easy to remember, my long strategy has a code name: the Three Fs. (The Three Tenors was already taken, unfortunately.) Those Fs are: fat, flat and full. Of course, if you aren't able to say those three quickly, then please, read no further.

But, if you were able to rattle off fatflatfull, here's what they mean:

"Fat" refers to a period of congestion. And by congestion, I mean a period of time -- normally four weeks or longer -- in which prices are confined to a fairly narrow range. Of course, "narrow" is entirely dependent on the volatility of the stock, but like the

Supreme Court

and pornography, you generally know it when you see it.

"Flat" refers to the line, in this case a resistance line, that is drawn across the top of the congestion. Ideally, I'd love for every point in the congested area to just touch this resistance line, but that rarely happens. However, the best types of breakouts generally do come from a resistance line that has at least two or more touches. In short, the flatter the better.

Finally, "full" refers to a volume spike on the day of the breakout. There are many traders who trade just on chart patterns alone, but I think by ignoring volume, you're including many low-quality candidates. In fact, I've found that the best, highest-odds breakouts occur on extreme volume days. My scans generally set the minimum volume surge for 150% of the 50-day moving average, but, again, the more the better.

Enough blubbering (329 words so far, so I have to scoot)! Here are some recent examples taken, of course, from my top-secret files. Included are two winners, two trades still open and two losers. (Wesson picked the losers; without that lightweight I'd have a 100% hit rate!)

Can you see the similarity in each chart? The volume surge is always the first priority for me, and I place equal but secondary emphasis on the fatness and flatness.

All right, you have the three Fs down? Good, now just add these four caveats and you'll be set:

(1) I always go long the morning after the breakout. Preferably at the open. Like the short side, you sometimes get gaps up, but if you choose to avoid those gaps with limit orders, you sometimes miss those 15-minute winners.

(2) My profit target is always 5%. I could take less or more, of course, but in my testing that seems to work the best for giving me the highest amount of profit per day.

(3) My stop is always 6%. I've found that volume breakouts often retrace, and the 6% is just wide enough to capture a fair number of winners without getting stopped out too often. The totals vary as the market dips and turns. But overall, I average about 65% to 70% winners.

(4) Finally, I never trade a stock that is more than 6% above the resistance line. If I do, then there is a good chance the stock will retrace more than 6%, but still not broach the former resistance (now support) line. Then I'd be in the situation of having been stopped out on a chart that was still valid. Therefore, I just don't trade those supernovas. Yes, I miss some great trades, but I've found there are always plenty of safe breakouts throughout the year to cobble together a strong showing on the long side.

And that's it: three Fs, four caveats and no wordy endings. Now if that wasn't lucid, then nothing is!

Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. At time of publication he had no positions in the stocks mentioned, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. This column, Technician's Take, appears every Monday. Smith also writes Charted Territory, which appears every Wednesday, and TSC Technical Forum, which runs Saturdays and Sundays. While he cannot provide investment advice or recommendations, he welcomes your feedback at

gbsmith@ibm.net.