Super Micro Computer (SMCI) had a big breakout on Friday, January 19, 2024 – maybe too big. It went up about 30% in one day. While a breakout often serves as a good entry point for an A.M.P.D. trader, a break out of this magnitude risks being over-extended, and there is a real possibility that in near-term trading, the stock may give up some of those gains.

Investors who follow the A.M.P.D. trading strategy generally enter a new position with protective stops at 5-7% below their entry point to limit their losses if the stock goes down. After a one-day 30% gain, a small correction could easily trigger that stop. For this reason, Adam Sarhan says that most A.M.P.D. traders tend to be wary of breakouts when they go beyond 5% above the recent pivot point.

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A trader who wanted to buy SMCI could put the stock on their watch list, wait for a pullback, and buy the bounce after the dip – or they could wait for a new base to form and watch for another advanced entry point.

By comparison, Hilton (HLT) had a modest breakout last week after bouncing off the 21-day moving average. As of Monday morning January 22, 2024, it was trading at about 4% above the recent pivot point. A trader who bought at this point and put in a stop at 7% below entry would have protection below the pivot, below the 21-day moving average, and just above the 50-day moving average.

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One of the key ways the A.M.P.D. trading strategy manages risk is by using protective stops. To get into a position, an A.M.P.D trader needs to survive a pullback without triggering the sell stop. The more extended a stock is, the more likely it is to experience a sharp correction, and the more likely it is that the stop will be triggered.

PS: SMCI has been on Adam’s watch list for weeks. Subscribers who have been following the newsletter were in a position to see the SMCI breakout early. If you’re not already a subscriber, consider signing up for a free trial!

As always, the A.M.P.D. trading strategy is for self-guided, independent traders. There is risk in trading in the market, and as an independent trader, you should make risk-informed decisions, and you must take responsibility for all your decisions. The information in this article is not financial advice and is intended for educational purposes only.


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