Archive for February, 2008
Formulating Your Market Opinion
February 27, 2008 at 2:38 pm
The Market Wizards books by Jack Schwager are in my opinion among the best trading books out there, as the interviews with top traders simply offer so much insight. I make it a habit to re-read these books semi-regularly because of the insights they offer, and it seems every time I read them I either pick up something new or am reminded of an important lesson.
One interview with Tom Baldwin contained a comment which I found interesting, especially given the clear lack of enthusiasm in Baldwin’s answers. Although Baldwin seemed to come across as stiff, arrogant, and basically anything but friendly to Schwager, he still offered some food for thought.
When asked how he learned to trade, Baldwin replied with this answer:
…All day long I stood there and developed an opinion. As I came to see that my opinion was right, I was reinforced, even if I didn’t make the trade. Then when I traded, I knew from standing there six hours a day, every day, that most of the time I was right. I would see scenarios develop over and over again.”
Baldwin’s comment is probably an oft-overlooked statement, and yet it carries some real value. “All day long I stood there and developed an opinion.” That answer isn’t anything flashy, but yet it’s so accurate. Your market opinion, your feel for the tape, your instinct….it all comes from those countless hours in front of the screens. Whether you’ve got 0 or 10 positions on at any given time, you are still soaking in the data and gathering important info which you’ll call upon sometime later.
Trading the market can be very exciting, don’t get me wrong. Pulling some fast money out of a stock and nailing a trade is a real thrill, and those of us who get to trade daily know that. However, newbie traders are often surprised at how boring the market can be at times and how much waiting is involved. Trading doesn’t mean constant motion and pure adrenaline from opening to closing bell. A lot of times it’s monotonous and dull, and yet it’s still wise to observe.
That trade you’ve been stalking might finally come around and trigger an entry, in which case you’re back on the wagon. And on the other hand, you might have days where you sit for hours on end without ever pressing a button. The best traders know this and are willing to wait when conditions warrant.
Observing the markets, watching stocks, gauging order flow and sticking close to the tape in general will help you tremendously. You’ll learn more about how particular stocks move. You’ll see where mistakes are made by others who bought or sold at the wrong times, and of course you’ll learn a lot about the role which volume plays in the action.
If you want to be a good trader, commit to putting in your hours each and every day. If you get tempted to overtrade and push buttons when you know you shouldn’t, then step away from the screen. Otherwise, formulate your market opinion by constantly staying close to the action. You won’t regret having a free ticket to the show.
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]
What If…
February 20, 2008 at 6:50 am
Do you ever find yourself asking, “what if..?”
Maybe you’ve done it in traffic when the lane you had been in is now moving faster than the one you’re currently in. (I hate when that happens.) What if you had stayed in that lane? What if you had taken an alternative route? Would you get to where you’re going any faster?
Well, trading offers unlimited opportunities to ask yourself exactly these kinds of questions, but are those thoughts worth exploring? It’s easy to beat yourself up over moves you did or did not make, so only look in that rear view mirror if there’s something you stand to gain. Let’s unpack this idea a little further.
The Plan
Over at TheStockBandit.com, I put out a nightly newsletter discussing the market averages and the individual trades I’m making. Some are swing trades with a multi-day timeframe, and some are purely day trades where I’m looking to rent a stock for up to a few hours to catch a smaller move. Regardless, every play has a designated trigger price which the stock needs to trade through before I’ll enter the trade, because I want to buy stocks on the way up and short stocks on the way down.
That concept is nice until we get a price gap. We all know that stocks don’t have to open tomorrow at the same level they close at today, so that can sometimes throw a kink into my plans. Sometimes a day trade candidate I’ve listed the previous night gaps through the trigger level. When that’s the case, I don’t chase them, at least not on the open. For day trades, my risk is kept tight and a gap represents a change in the risk/reward profile of that trade.
Every now and then, a day trade candidate will gap through my trigger price and never even look back. They just cruise higher while I sit there and watch, not participating. When that happens, my initial response is inevitably to kick myself, but that doesn’t serve a purpose. Instead, I need to review the stock and see if missing a great move is cause for concern.
Let’s look at an example and I’ll show you what I mean.
Monday night, I listed CLF as a day trade candidate for Tuesday if it could trade up through $118.30. On Tuesday morning though, CLF gapped through that price by nearly $2, so I skipped the trade not wanting to chase the upside gap. I’ve seen a ton of them fill, especially on the first trading session of the week. Nonetheless, CLF proceeded to run another $6 rather quickly after gapping up $2, and it wasn’t easy to watch! Here’s a look at the move it made after gapping above the trend line:
(Click for full-size image, courtesy of TeleChart)
The Evaluation
After passing on a trade and seeing a move like that, it’s time to evaluate what happened. Sometimes a distraction can be the cause for missing a move. Other times perhaps it’s diminished confidence after sub-par trading, or maybe it’s even due to a stock moving so fast that we simply choose to cancel an order.
What we’re wanting to determine is whether what happened was the exception or the rule. If it’s the rule, then there had better be a good reason for skipping the trade! However, if it’s the exception, then there’s no need to beat ourselves up over not catching it.
In this case, there were a couple of logical reasons why I chose not to take the trade. First was the frequency with which gaps have been getting filled lately. I don’t want to buy into what is typically a great opportunity for selling. Second is the shift in the risk profile of the trade. With a closer target on my day trades, I absolutely have to keep my risk in check, and that means a tight leash on such trades. I can’t make a habit of paying up by $2 above a trend line when my timeframe for the trade is minutes or hours, as that’s rarely acceptable when my timeframe is weeks. With CLF set to report earnings this week, I had to have an abbreviated holding timeframe for the trade (as per my trading rule of avoiding earnings).
So upon further review, this time I get a pass. It can be a helpful habit to run through this thought process after the fact in stocks which are in your trading plan, whether you took the trades or not. But when you do so, limit the time you spend looking backward. Take what you can from each experience, and if you find something useful, apply it going forward. Stick with your plan and take the trades which you feel have the highest probability of working for you. All else can be ignored.
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
[tags]Stock Market, Day Trading, Stock Trading, Swing Trading, Investing[/tags]
Stocks & Commodities Magazine Interview
February 15, 2008 at 6:15 am
I’m honored to be appearing in the March ’08 issue of Stocks & Commodities Magazine as the feature interview, as it’s a great publication that I’ve read for years. They have interviewed some great traders over the years whom I’ve learned a great deal from, so when asked about my interest in being included I didn’t even hesitate. Here’s a snippet of the interview on the S&C website, but you can buy the full issue at any major bookstore.
To those of you S&C readers who arrived here as a result of that interview, let me welcome you to the blog! For a quick tour of the blog, this post is a good place to begin as it hits some of the highlights and favorite posts.
Thanks for stopping by to visit, and I hope you’ll return often. Enjoy the long holiday weekend!
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
[tags]Stock Market, Day Trading, Stock Trading, Swing Trading, Trader Interviews, Stocks & Commodities Magazine[/tags]
Jack of All Trades, Master of 1 or 2
February 13, 2008 at 6:15 am
Most of us have heard the phrase, “jack of all trades, master of none.” What’s funny is that I don’t think that phrase was actually created to describe a trader, even though there are quite a few who certainly fit that description. For whatever reason, beginning traders especially seem to want to try a little bit of everything, kind of like a trading sampler platter.
What is it about us that makes us want to learn every way to skin the cat? Curiosity, perhaps. Drive, determination, ambition? Yes, probably. I’d say a lack of patience when chasing success also plays a part. But what so many of us tend to forget is that good trading doesn’t have to be complicated trading.
Even the most basic of technical analysis books will point out a number of different chart patterns worth studying, but the reality is that not all of them have to be traded. You can actually do quite well just sticking with a couple of favorite setups, provided of course that you stay consistent in how you enter and exit. You don’t have to master every trading style out there in order to be profitable – just getting good with 1 or 2 that you’re comfortable with is enough.
Trying to learn every trading style and expecting to apply them correctly in order to extract profits from the market is simply unnecessary. That’s not the objective of a successful trader. The experienced trader probably has a few tactics in his arsenal, but he knows he doesn’t have to use them all in order to do well. He can be profitable just by exploiting one or two good strategies, so long as he patiently waits for the proper times to apply them.
Does that mean you never try to grow or learn? Absolutely not! Successful traders will slowly add new strategies to their trading repertoire as time goes by, so strive to do the same. Finding new and different ways to profit is part of the fun of trading, and the market will at times reward your ability to adapt. So make an effort to become a well-rounded trader, but remember your bread-and-butter setups!
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]
Step up the Risk Ladder
February 5, 2008 at 11:49 am
Improving as a trader will include many things for you. Sure, you’ll learn to evaluate market conditions better as time goes by, and you’ll find better ways to respond to trading situations which in the past may have caused you to panic. As you improve, even your repertoire of trade types will increase as you add more advanced approaches like gap-fill plays and reversals. However, possibly the most important aspect of becoming a bigger and better trader is learning to increase your trade size effectively.
I’m a big believer in the notion that if you aren’t making money trading small that you won’t make money trading big. That concept sets the precedent here, so if you’re struggling to produce profits trading 100-lots, don’t even think about getting to 1000-lots. If you’re in that boat, keep refining your approach and set aside the notion that you should be trading bigger. You’ll know when the time is right.
Ready For More
When you’re consistently getting your P&L in the green, it’s probably time to start trading a little bigger. And while it’s easy to see on paper that simply quadrupling your position size may mean 4 times the profits, in reality it doesn’t usually work that way. After all, there are those pesky nerves to deal with!
The idea of multiplying the size of your profits is indeed an exciting one, but remember to approach everything first by way of risk management. Just as there are losing trades on smaller-sized positions, there will of course be losses on larger ones as well. Making certain that you can not only withstand larger hits to your account, but also the potential loss of confidence which could come as a result of larger-sized losses is imperative. Being “ready” to trade larger doesn’t simply boil down to having a bigger account which allows more buying power – it really comes down to your ability to accept increased levels of risk.
Baby Steps
Most experienced traders would agree that it’s not usually a great idea to find success at 100-share level or $100 risk-per-trade level and then jump straight to 500. The best approach is to incrementally add risk as you get more comfortable with the bigger numbers you’ll see on that P&L screen. Those good intentions of becoming a more profitable trader can get you into trouble if you jump too quickly into the deep end of the pool before you know how to swim well. A big increase in trade size puts your confidence to the test, and you want to be ready for that. Confidence is tricky in trading, as you have to have it to operate, but too much of it can cost you your objectivity. Protect it at all costs, and you’ll be glad you did.
If you’re considering bumping up your trade size, think of it as a ladder. Climb each step one at a time, and only move up to the next one when you’re ready. That approach will serve you well, letting you slowly add risk as you are comfortable so that you can keep making good trading decisions. Those good decisions don’t come from impulsive reactions to your P&L – they come from following your game plan for each trade. Patiently growing your trade size will help you stay focused on your trading plan, which is where profitability is rooted.
Remember, trading is a marathon, not a sprint, so be sure to sep up the risk ladder at a pace you can maintain.
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
[tags]Stock Market, Day Trading, Stock Trading, Risk, Investing, Swing Trading[/tags]
