if position traders want to manage their risk at proper entry points and have a clearly defined
level at which to sell the 10-week moving average can be a great tool for your portfolio management
toolbox whenever you're assessing stocks to buy you should always have your exit strategy in
place at the time that you're making that initial purchase as a general rule you want to make sure
you're limiting your losses so you don't sink your entire portfolio on one trade holding and
hoping for the best and freezing up if the trade starts to head south is not a sound strategy now
pullbacks to the 10-week line early in a leading stocks run can be logical areas to not only add
to an existing position but to initiate a new one that's because many top stocks will find support
at this level and stay above it as they make their big moves making it a compelling entry point and a
great guide for when to get out of the trade when the stock eventually breaks support at that level
so when using the 10 week line to calculate the size of a position first seek out stocks that
meet IBD's fundamental and technical screening criteria and are within 10 percent above the
10-week line and the closer to that level it is as the stock is moving higher the better
now you also need to have a set amount you're willing to risk for each trade you make
let's say that's one percent of your portfolio per trade sounds pretty reasonable right so
for a 100 000 portfolio that works out to one thousand dollars of portfolio risk for each trade
okay so let's say you've identified a strong stock that typically gets supported it's ten
week moving average and the proper entry point is ten percent above the ten-week line in this case
risking that one thousand dollars would lead to a position size of ten thousand dollars or
ten percent of your portfolio we get that ten thousand number by dividing the one thousand
dollars you wanna risk by 0.1 or the 10 decline you'd be willing to hold the stock through
for it to come down to its 10-week line in that case risking 10 on the trade rather than 7-8
that stop-loss that ibd typically recommends might be beneficial that's because if you sell
when you're down eight percent and the stock goes down another two percent but find support at its
ten week line you would have been shaken out of the trade while the stock moves higher without you
and now this is exactly what happened with taiwan semiconductor back in september 2020.
the stock broke out of a flat base and was within 10 percent of the 10-week line as it was clearing
the buy point and you could have even used an earlier entry here to get a better price
while the breakout was bullish and accompanied by heavy volume the stock quickly pulled back it fell
seven percent below the traditional buy point and closed slightly below its 50-day line and
that's the 10-week line's cousin but by the end of the week the stock was able to find support
at the 10-week line and bounce higher preventing those who were using the 10-week rule from getting
shaken out as the stock was just trying to rev up now let's talk about using the 10-week line
as a signal to get out of a stock after it makes a big move ibd's research shows that
once a leading stock has a decisive break of the 10 week line that means the stock's move may be
over or at the very least it may be entering a base building period which means you're probably
better off putting your money to work elsewhere while the stock consolidates at the time of the
decisive break of the 10 week line you don't know how much more the stock will fall or
how long it will take for it to get back above the 10-week line and start to trend higher
now we consider a decisive break of the 10-week line to be a close below that level of 2
or more on a weekly basis so if your stock edges below the 10-week line early in the week
you can wait until close to friday's close to see if the stock managed to find support there
by the end of the week or if need be to make your final sell if the stock does have a decisive break
so let's take a look at this concept in action using taiwan semiconductor once again now those
who purchased taiwan semi at that september breakout could have used this 10-week line to
keep them in the stock for a gain as big as 70 by february 2021 but then in early march as many tech
stocks took big hits taiwan semi closed 3.6 below the 10-week line and it has yet to move higher
another example tesla the electric car maker was no doubt one of the hottest stocks in 2020 but in
late february of 2021 tesla had a sharp break of its 10-week line that was a clear sell signal for
many long-term shareholders that it was time for tesla to take a break after its huge run
so there you have it the 10 week line great for position sizing to manage risk
and a support level that can act as a key sell signal for a winning stock after a big run
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