In my system, it doesn't take much to justify a long position. Probably why I have about 10 too many. Let's talk about systems for a moment. Mine is one that has stops. When a stock closes below it's stop, I exit the next day.
How does one come up with a stop? The wisdom is to pick a point where if it goes below that, you will believe (usually stayed 'know') that you were wrong, and obey your own system by exiting. The question is, wrong about what? Wrong about what the price will do. You predict it won't go below a certain point, or will go up rather than down.
Another piece of wisdom is to accept that you cannot predict market moves. However, by choosing a point where you will be wrong, is to practice predicting the future. There's an inherent conflict of interests here. It can't be swept under the rug or explained away. Both pieces of wisdom are necessary for proper risk management. Of course, you could set a stop based solely on true range.
My stops are based on the SMA of recent lows in stocks that have made higher lows in what is usually a 3-6 month period. Sometimes it seems like the price is being pushed around by these averages, sometimes it just makes a good stop. I try to truly accept that I cannot predict, and that the math of winning over the long term is about risk management. By taking positions on pullbacks during a trend, the math says I should come out ahead and have low draw down.
So far it means exiting a lot. Today I'm entering $GOOGL and $RSG with low risk on aggressive stops.
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