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Consolidate Stock Gains

Consolidating stock gains typically refers to a stock market advance after which stock prices continue at the new level, thus “consolidating” gains. However, the dictionary definition of consolidation is to strengthen gains or make them secure. An investor whose stock picks have paid off during a market rally will also want to consolidate stock gains as the market is consolidating its gains. To consolidate stock gains an investor can sell stock and take profits, use options trading and buying puts on the stock to protect gains, or a combination of the two. To consolidate stock gains an investor should remember the old adage that you don’t have a stock profit until you take a profit. The guaranteed way to profit from a stock, to consolidate stock gains, is to sell your stock. The problem with that approach is that the investor then loses out on subsequent stock price advances. For example, after Microsoft went public in 1986 there were any number of times in the first decade or so when an investor could have taken profits by selling the stock and then would have missed out on further advances. Thus trading options can be an attractive approach to consolidate stock gains in short or long term investing.

How can an investor use the purchase of stock options to consolidate stock gains? The strategy is to hold on to the stock after a rapid advance with the hope that the stock itself will consolidate its gains and not be subject to a correction due to its own factors or general market volatility. Then the investor buys “insurance” in the form of option contracts. The investor buys puts on the stock. Each put contract gives the investor the right but not the obligation to sell 100 shares of his stock at the contact price. This price, also known as the strike price, is set in the contract. If the stock in question drops in price for whatever reason the investor can execute the contract and sell his stock without losing out on his stock gains. His expenses for this “protection” will be the premiums paid for put contracts and, if he executes the contracts, the fees and commissions involved in the sale as well as capital gains taxes on his profits. At that point, if stock fundamental analysis dictates, he will repurchase the stock at the much lower “spot price” with the expectation of another stock price advance. This strategy is, in fact, a way to consolidate stock gains and retain the stock with the expectation of further gains.

In order to consolidate stock gains the investor will commonly borrow technical analysis tools from traders. By doing technical analysis of stocks using time honored tools such as Candlestick analysis the investor can be able to anticipate market trends or market reversal and buy calls or buy puts accordingly. The combination of fundamental and technical analysis will allow an investor to consolidate stock gains while leaving the door open to further advances in already successful stock picks.

Market Direction: The T-line is a very valuable indicator for identifying the direction of a trend. It makes trend analysis very simple. After a candlestick buy signal, the true trend reversal will be confirmed with a close above the T-line. A candlestick sell signal needs to be followed by a close below the T-line. Maintaining these simple rules allows an investor to key positions in place even when a trend appears to be questionable. For example, there have been numerous days in this rally that might have instigated closing positions other than for one simple observation. Prices could not close below the T-line. As a slow uptrend continues, one assumption can be made. As long as there is not a candlestick sell signal and a close below the T-line, the uptrend is still in progress.


The T-line, working in conjunction with the candlestick signals, also makes for very simple closing strategies. As seen in the MIPS chart, a Doji had formed right on the T-line. The stochastics were heading lower. Although the price opened higher, when it came back down through the Doji and the T-line, that illustrated the Bulls were not able to maintain control. It was time to close out the position. Having knowledge of what should occur after a candlestick signal, especially when it forms on a technical trading level such as the T-line, helps investors maintain positions or immediately close them out. A Doji forming right on the T-line required a positive open with continued positive trading. Witnessing the selling back through the support level was an immediate alert that upside buying had disappeared.


Candlestick analysis is predicated upon simple common sense investment practices. Unfortunately, most investors are not initially educated on the correct investment practices. They learn their investing through hit or miss. By the time they realize they need to learn how to invest correctly, they have already let emotional thought processes dictate their investment strategies. This incorrect thought process has already been ingrained into their psyche. Learning how to trade/invest correctly now requires implementing the proper investment strategies while having to overcome the incorrect investment strategies that have become mentally comfortable. Take time to learn how to use candlestick analysis correctly.

Chat session tonight at 8 PM ET .

Good Investing,

The Candlestick Forum Team


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