Discussed in this article: Electronics for Imaging Inc. ( $EFII )

I want to look at Electronics For Imaging ( NASDAQ:EFII ). The first thing I’ve got to point out is this, 209.1K, what does that mean? It means a stock traded 209,000 shares today; I’ll let you do the rounding. So this is what I would call a very illiquid stock. I don’t want to focus on that, we need to be aware of it, but I want you to look at this volatility squeeze.

The stock has been trading sideways for quite a while; the thing about these volatility squeezes is, once the stock starts to move higher, and I think it is here, you don’t have to keep a really tight stop if you’re going to trade this stock. If you’re trading this stock because it’s in a volatility squeeze and you’re expecting an upside breakout, you’re expecting the stock to continue to run here, well then, do you need to put your stop down here? How about right here, should you put your stop there? No, because your expectation, your reason for being in the trade is that you think this stock has been like a tight spring here, and the stock is going to move higher.

So sure you’ll be wrong if you’ve got your stop here, you’re stopped out. Well your reason for being in the trade was wrong, “Oops I lost money.” You give it a little more room, “Oops I lost money,” I lost a lot of money percentage-wise. But that’s not the way I think you trade these things. The idea is, if the stock is going to continue to run, which is what you think is going to happen, put your stop right underneath $30.00; you don’t have to put it down here, because you don’t have to give the stock this much room in order to conclude that you’re wrong on the trade.

Instead you say, “Okay, I think the stock’s going to move higher, I’ve got my stop right in the middle of this congestion area. Maybe the stock can pull back a little bit, test the breakout, and then move higher.” That’s fine; I don’t want to keep it too tight. But if the stock falls back to the middle of congestion, and then falls a little bit more, well then I know that my underlying reason for being in this stock is wrong and so I want to get out. Now, you can then buy it back if you want or put your money to work somewhere else.

But the bottom line is, you had an opinion about this stock. Your opinion was, this squeeze, this pop, was going to lead to more upside, that’s the opinion that you’re using to base your trade on. So you place your stop as high as possible, at the highest level that you can put it, to where if the stop is hit then your conclusion is that you were wrong in your theory. That’s different than just keeping a really tight stop.

No, you have to have a logical reason, have a reason for putting your stop where it is. If you don’t you’re going to wind up ultimately keeping your stops way too tight, you’re going to get stopped out a lot, ultimately concluding that stops don’t work, you will stop using them. Then one of these days, when you most need a stop, and you don’t have it, you’re going to lose all your money. So let’s not do that. Instead know how to apply a stop here to Electronics For Imaging ( NASDAQ:EFII ). Know that if this stock comes under any kind of buying pressure because it trades so thin, if there’s any big buy orders that come in, this stock could really start to move.

You can chase volatility pops. By definition, if you want to trade, you’ve got to chase. Let’s..

This off-the-radar printing company is about to break out.