All Entries in the "Trade Management" Category

Stop Loss Placement, Part 3

August 5, 2009 at 8:44 pm

To continue the series on stop loss placement, it’s time that we build on both Part 1 and Part 2 by taking things a step further.

In this segment, I specifically want to clarify a major advantage of basing our stops on the chart. Of course we’ll know where to get out if the pattern happens to fail, but there’s one thing many traders fail to focus on in relation to that. It’s an equation, and a simple one, but it gives us our position size.

Dollar Risk Per Trade

If every stock were the same price and carried with it the same volatility, and if every pattern we traded happened to carry the same exact chart scenarios, Part 3 of this discussion wouldn’t exist.

But each stock is a little different than the next. Each setup will vary from the previous one we entered. And of course, the distance from our entry to stop isn’t going to be the exact same from one trade to the next.

So what we need to do if we want to maintain a consistent dollar risk per trade is to determine an amount we’re willing to lose on each trade in case we are wrong. Let’s face it, some trades aren’t gonna work, and we’re going to get stopped out.

Once we know how much we’ll be willing to risk (in terms of a set $ amount, or a set % of our account value), then we can combine that into a simple equation to give us our position size.

$ Risk Per Trade / Distance from Entry to Stop = Position Size

Watch this clip and let me explain more thoroughly with some specific examples. It was also posted over at the Trading Videos site, but I’ve embedded it here for your convenience.

And if you have questions pertaining to stops, add them to the comments section or contact me directly and I’ll try to work those into the next few segments.

Let me highly suggest clicking the “HD” on the video player and then going full-screen for best quality.

Update:  Check out Part 1, Part 2 and Part 4 of this series!

Thanks for stopping by and I’ll see you here soon with more. Until then…

Trade Like a Bandit!

Jeff White

Are you following me on Twitter yet?

Scale Out of Winning Trades with Partial Exits

August 4, 2009 at 12:55 pm

It’s common among traders to think that you either have to be all-in with a stock or all-out of a stock, but that sure isn’t the case.

Many of us do our buying in one piece, entering a full position at one time as an important level gets crossed. This is my personal preference, as I continually seek out trading opportunities where a ceiling is shattered or a floor implodes, enabling price to make a nice move through it.

And when I am wrong (yes, when, not if ), I’ll exit in one piece.  As events occur or conditions emerge to show me that the stock is clearly moving in the opposite direction of what I had expected, I’m going to bail out of the trade and protect capital.

So, I’m getting into trades in one piece, and I’ll stop out of trades in one piece.  But rarely will I exit a winning trade in just one piece.  Instead, I’ll scale out.

Advantages of Incremental Profit-Taking

Over the years in dealing with traders from literally around the globe, I’ve found that very few of them will get out of favorable trades in pieces.  Adopting this method of booking profits can be an excellent way to trade, and particularly in a momentum-based market like the one we currently find ourselves in.

Taking partial profits and peeling off a portion of your position on the way up carries with it several advantages.  Let’s look at a few…

1.  You can lighten your exposure into favorable moves. As your trade makes its move, it’s a great idea to start reducing your position size.  The idea is that as a move progresses, it naturally becomes more difficult to capture similar returns to the initial move.  Typically stocks surge early, so this is a way to take advantage of that early momentum.

2.  Make room for new opportunities. This isn’t just for those who may be trading with a smaller account and need to raise cash to put toward a new play.  In fact, even traders with larger accounts may find it difficult to manage a lot of positions in terms of the attention they can devote to each trade.  Catching the move you initially were seeking can remind you that it may be time to shed some shares and seek out another stock to put your money and/or attention into.

3.  Let slippage work in your favor. Posting offers on the way up means you’re capturing the bid/ask spread – not paying it.  I use market orders for entries and for stopping out, because when I need to be in or out of a trade I don’t want to haggle over a few cents.  But when it comes to booking profits, limit orders resting at higher levels mean you’re out there offering out some inventory, letting someone else pay up for it.

4.  Satisfy the urge to take cash off the table, yet still stand to gain from a continued move. This is a big confidence booster as well as a way to manage money wisely.  Turning some of those paper gains into real profits not only pads your account, but it also reinforces that you’re on the right track.  Gaining some momentum in your trading is a great thing, both for your account and for your psyche.  And by adjusting the stop for remaining shares, keeping even a portion or a core position allows you to benefit from a major move, should it occur.

Trade Like a Surfer

Just as a surfer catches one wave after another, a good trader maintains the same mentality.  Ride the best moves you can find, but don’t be shy about easing out of a trade once you’ve caught a nice move.  Paddling back out to locate the next one will require your availability, so when you start smiling about a trade, it’s probably time to start scaling out.

The fear of missing out on a giant run keeps many traders from selling at all, but scaling out carries with it the best of both worlds.

Consider making partial sales in your next winning trade, and see what it does for your bottom line.  It just might be the best adjustment you make this year.

Thanks for stopping by and I’ll see you here soon with more. Until then…

Trade Like a Bandit!

Jeff White

Are you following me on Twitter yet?

Stop Loss Placement, Part 2

July 31, 2009 at 7:52 am

As we dive deeper into this series on stop loss placement, I want to be sure you caught Part 1 because it helps lay the groundwork for this ongoing discussion.

I’ll be posting segments of this series one segment at a time, both for convenience and better consumption on your part.  I want you to have a thorough grasp of how this can all work.  After all, it’s a topic every trader faces, regardless of risk tolerance or timeframe or style or the market we’re trading.

Let’s keep it moving…

The Importance of the Chart

Just as we discussed the value of timeframe & personality in Part 1, here in Part 2 we’re going to talk about the importance of the chart.

Given that my entries are determined by the chart, it’s logical and consistent to allow the chart to offer an exit.  That might be based on an important reversal, or simply a failure of the pattern being traded if I need to stop out of the trade.

In each case, I’ll show you in the clip below exactly what I’m talking about, along with an explanation of why this works for me.

The beauty of basing entries and exits on the chart is that it’s consistent across multiple timeframes. The same principles will apply on an intraday 3-minute chart as they will on a daily chart.  That means once you gain an understanding of it, you can use it for both day trades & swing trades.

Watch this clip and let me explain more thoroughly. It was also posted over at the Trading Videos site, but I’ve embedded it here for your convenience.

And if you have questions pertaining to stops, add them to the comments section or contact me directly and I’ll try to work those into the next few segments.

Let me highly suggest clicking the “HD” on the video player and then going full-screen for best quality.

Update:  Check out Part 1, Part 3 and Part 4 of this series!

Thanks for stopping by and I’ll see you here soon with more. Until then…

Trade Like a Bandit!

Jeff White

Are you following me on Twitter yet?

Stop Loss Placement, Part 1

July 30, 2009 at 7:27 am

It is the most common question I’m asked:  “How do you determine where to place a stop loss order?”

And it’s a great question.  Newer traders need to know it.  Experienced traders will often study it and refine it.  It’s arguably as important as any other aspect of a trade.

So here I am setting out to create this mini-series as a resource.  There will be several parts, so check back often for the segments to come.

There are several aspects to stops which I feel should be addressed, so I’m going to cover them in pieces.  Small, bite-sized, easy-to-digest pieces.

Hopefully they’ll be helpful to your trading approach and enable you to specify some ways to protect the downside.  After all, a stop loss can be your safety net.

Timeframes & Personalities

Deciding on the placement of an initial stop loss will boil down to a few things, not the least of which are (1) your trading timeframe, and (2) the personality of the stock being traded.

I’ll elaborate on each of these in the video, but essentially they’re my starting point:

Longer timeframes necessitate wider stops, and shortened trading timeframes warrant tighter stops.

Similarly, a lively stock deserves a wider stop, while a stock which tends to move very methodically will justify a tighter stop.

Watch this clip and let me explain more thoroughly, along with some examples.  It is also posted over at the Trading Videos site, but I’ve embedded it here for your convenience.  And if you have questions pertaining to stops, add them to the comments section or contact me directly and I’ll try to work those into the next few segments.

Let me highly suggest clicking the “HD” on the video player and then going full-screen for best quality.

Update:  Check out Part 2, Part 3 and Part 4 of this series!

Thanks for stopping by and I’ll see you here soon with more. Until then…

Trade Like a Bandit!

Jeff White

Are you following me on Twitter yet?

Managing Gap Risk

July 15, 2009 at 8:25 am

It’s a simple fact that stocks gap.  The indexes gap.  The news flow causes it, upgrades and downgrades cause it, and even just excitement or fear at times will cause stock gaps.

There are common gaps, which tend to be small, and then there are of course bigger, harsher gaps like breakaway gaps or runaway gaps.

Alot of these actually do end up getting filled, whether quickly or eventually, but let’s talk about one major cause of sizeable gaps:  earnings season.

Right now we’re getting into the thick of earnings season, which is a few weeks long after the end of the quarter.  Companies need to report their results for Q2 and let shareholders know how business is going.

Business, schmizness…I’m a trader.

The Importance of the Clock

So while I don’t really care much about the business environment for XYZ Corp., I have to recognize that holding a position into that earnings report means one thing – the inability to manage my risk.

With company-specific news set to be released imminently, I know that the stock is likely to bolt one direction or the other.  That’s not such a big deal in itself, but the problem is that earnings reports primarily occur outside of market hours.

That means by holding a stock overnight when they’re set to report earnings (whether after the closing bell or before the next day’s opening bell), I’m inviting a big gap to come along.  Even worse, I can’t do anything about it.

Maybe it results in “free” money for me if the stock goes my way, but it could just as easily result in a black eye – or the loss of a limb!  Have you seen some of these earnings gaps?

So what I do to manage the gap risk associated with earnings is simple:  I do not hold a stock going into earnings.

Not a dramatic enough answer for you?  Well, what are you in the market for…money or excitement?

Why Do You Trade?

If it’s profits you want, then you care about preserving capital and managing your risk whenever that capital of yours is on the line.

But of course if it’s excitement you’re after, then you just want a story to tell – and you’ll get it when you hold positions into earnings reports.  Only problem is, nobody really wants to hear about it.

The Visual Version

Last night over on the trading videos site, I posted the following video.  In it, I discuss this topic and offer a practical way to manage gap risk during earnings season.

Let me highly suggest clicking the “HD” on the video player and then going full-screen for best quality.

And here are 3 earnings calendars I reference in the video, they’re certainly worth bookmarking:

EarningsWhispers.com
Yahoo Finance
Earnings.com

Thanks for stopping by and I’ll see you here soon with more. Until then…

Trade Like a Bandit!

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]

Lessons from My Biggest Trading Loss

May 28, 2009 at 9:58 am

The trading has been really, really good lately.  I’ve been fortunate to nail some nice moves for both day trading and swing trading timeframes, which of course is always fun.

But in order to recognize and appreciate the good times, one must also go through some periods of poor performance.  You have to struggle, and fight through the pain.  Expensive lessons get learned, and thank goodness, they can stay with you for a while.

That’s what I’m here to tell you about in this post.

I want to show you some lessons I learned from the biggest trading loss I ever took, and hopefully you’ll benefit from my mistakes.  After all, standing on someone else’s shoulders is the best way to look forward.

Setting the Scene

With summertime having arrived in 2004, the usual conditions were present.  That means lighter trading volume – and whenever that’s the case, I tend to prefer short selling over buying.  (I view volume as the fuel needed to propel a stock higher, so when it’s present, I realize bidders can simply disappear and the stock can slide without needing high activity.)

Having noticed a deep correction in NVTL which shaved off about 1/2 its value in just a few weeks, I had the stock on the radar and was waiting for a good setup.  No harm so far.

It had begun a lazy, light-volume bounce off its correction low, which of course left me skeptical.  I watched for the pace of the bounce to slow, and once it did, I started a position.  That was on June 1 as it attemped to roll over slightly, but it was merely an attempt.

The following day, NVTL made a new recovery high, but I stayed in the position.  Mistake #1. As soon as the bounce resumed, that was grounds for dismissal, but I stuck around in a stubborn fashion.  A week later, NVTL was again on the move, and I found my P&L turning deeper red by the day.

I was wrong, and it hurt.  So I did what any trader in the midst of breaking trading rules would do – I added to my position.  Mistake #2. Now I’m in a bad trade and I have too much of it.  Why?  Because I needed to be right.  Mistake #3.

StockFinder Chart courtesy of Worden

Long story short, after adding a couple of times on the way up to improve my basis, I ultimately drew a line in the sand which was crossed 3 weeks after my entry.  I blew out of the trade… stunned, bruised, and yet relieved.

Ultimately NVTL corrected, but I would have had to hold the position for another month and endure another 10% against me before that happened.  Even then, I only would have been able to exit at breakeven.

It was a nasty loss, and it angered me to have allowed it.  Now 5 years later, I still shake my head at the series of mistakes I made, but it’s a great reminder to me of what can happen when I allow myself to break my rules.

Reminders & Takeaways

• “Paper” losses are very real. Many try to fool themselves into thinking that because a gain or loss hasn’t been realized, that it should be viewed differently.  Wrong.  If you’re underwater in a position, you’re losing whether it’s a closed or open position.
• Adding to losing trades is a recipe for pain. If you’re already in the hole and you’re already in the size of position you originally intended to be in, you stand to dig a deeper hole and cloud your judgment even more.  Don’t add to a losing position when it’s a hail-mary effort at escaping a bad trade.
• Accepting a big loss can bring about some needed relief. For one, you’re ending the loss – it can get no worse.  That’s a big reduction of stress and distractions from your other trading efforts, which is a huge benefit.  You’re also accepting that you were wrong, and creating some closure which mentally helps you move on.  There’s no substitute for a clear head when trading, so take it.  Further, there are few things worse than logging into your trading platform and staring at a giant loser day after day.
• Being early = being wrong. This trade ultimately moved back in the direction I thought it would, but not until it had far exceeded my “uncle” point.  Just goes to show that the market can continue moving against you for longer than you can handle it sometimes, so it’s never worth arguing with.

If I could get away with only talking about my great trades here, it might be more enjoyable for me, but you’d take less away from it as a reader.

And the reality is that I lose on plenty of trades.  But there is much to be gleaned from glancing in that rearview mirror, both for me and for you.  That’s how we get better!

Sometimes it comes with a grin and sometimes with a grimace, but it always offers valuable lessons to gain from.  I hope you’re willing to do the same with your own trades.

Are you watching the Trading Videos over at TheStockBandit.TV?

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]

Excuses are a Waste

May 5, 2009 at 11:04 am

As the producer of a stock newsletter for the past 5 years (wow, time is flying), I get a lot of email.

Some of it is from subscribers, and some of it is from people who are ‘tire kickers’ and haven’t decided yet to take control of their trading. They want to know if what we offer can get them to the next level.

A response is always provided to them of course, but it’s not always what they want to hear.  The deciding factor is their attitude.

You see, in their emails they often times want to air out some garbage and tell me a story.  It goes along the lines of “I used to be good at this, then I hit a rough patch and now I’m lousy.  Can you fix me?”

And although their ‘story’ might be factual, that rough patch probably isn’t what’s holding them back.  It’s their reliance on it.  They lean on it like a crutch, because it gives them an identity, a safety net to fail into – for now.  They have to stop relying on that and get back on track.

There will always be people like that, and neither I nor anyone else can bring about a change in them – they have to do it for themselves.  They have to move beyond that mindset and toward something they really want.

The “I’m losing and it isn’t my fault” attitude is an excuse, and it’s not going to get you anywhere.  A lack of success can’t be blamed on circumstances.

I know because I’ve had that attitude.

A few months ago, I was putting together an educational course for people who want to learn trading.  It was a big project and it brought about some demands on my time which previously weren’t there.  What used to be free time was replaced for a little while with work on that project, and so my situation was temporarily different.

Out of my routine, I fell into a trading funk for a few weeks.  I was wrong a lot and irritated regularly with my trading.  And I told myself it was because of that project.  When asked by friends how my trading was going, I’d say “it’s been better, but I’ve been really busy with the educational course” – as if anyone cared.  As if that project were the reason why I was struggling with my trading.

Nonsense.

Once I stopped relying on that excuse and decided to get a grip – and it is a decision – I was finally free to get back to the winning ways I had been missing.  I wasn’t being driven by every little tick which might have gone against me, and I wasn’t as afraid that open profits might quickly disappear.  As a result, my trading improved rapidly.

But it all began with my attitude.

So here’s the thing… If you’ve got loser’s limp and you find you’re frequently making excuses for your trading results, consider this a wake-up call.

That attitude is leaving you stationary like a turtle in mud (no, not that kind of Turtle), and you’re going nowhere fast.  Get back on track mentally and move toward the attitude you know you should have.

The past is there to serve you, not hinder you, so take what you can from it and move forward.  Once you’re thinking better, I’ll bet you start trading better too.

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]