All Entries in the "Trade Management" Category
Trading vs Investing
October 7, 2010 at 11:42 am
A recent email exchange with a new subscriber brought forth some important concepts I want to share here on the blog. Among this guy’s comments were the following:
“I’ve decided to take more control of my money and future after investing for several years with a financial advisor. I’m sitting on a lot of cash..in setting up my portfolio should I scale in and out of some core positions in a separate account? Currently I feel as though I’m under invested, and it sucks to watch undisciplined investors make so much money. I guess the real question is, should I trade my entire account or should I trade some and invest some?”
During any nonstop rally like we’ve seen from the August lows, this is a natural reaction from a trader who has exercised good discipline. Sometimes it seems like it would pay better to just be ignorant and chase extended market moves like this one! Unfortunately though, that’s not an option for anyone who understands the two-sided coin known as risk.
Taking the ‘ignorance is bliss’ mentality may be great on the way up, as every gap higher and afternoon recovery adds to the bottom line. However, when the tide shifts and the tape gets painted red, it’s a recipe for feeling helpless and stupid for not exiting when the opportunity was there.
The Best of Both Worlds
I’m all for people taking control, because many financial advisors simply want to ‘outperform’ the market rather than make money – the only reason to have money in the market to begin with.
Here’s what I personally do with my money in order to benefit from both the short-term fluctuations and the longer-term trends which occasionally emerge…
I like to diversify my timeframes. I don’t trade Bandit setups with all my money, but I do direct all my money. By that I mean nobody else manages it for me. What I do is devote a chunk of it to my short-term trading. I want enough of it available there that no buying power issues arise, and so that I’ll have plenty of cash available to put on any trades I like.
I also take a chunk of money to devote to intermediate-term ideas, so these are plays which I like for the next few months but not short-term or long-term. I’m riding these out with smaller positions, wider stops, and I’ll often exit by way of shorting options against my common.
Finally, I leave money in long-term accounts (retirement accounts) where all I do is trade ETF’s for durations of 6-18 months. Those long-term plays are simply to have market exposure when I feel a big-picture trend is present which I want to be on board for, but do not want to react to every tick. For example, earlier this summer I was buying ETF’s for a bounce, and more recently I’ve been reducing exposure there (by selling to raise cash) and getting called out of those trades after selling calls against those positions.
So for me, dividing funds into different timeframes is really helpful. Also, I maintain separate accounts for these differing timeframes. That means I don’t login to my day trading account and each time see a 6-18month ETF play I’ve been in for 9 months and get tempted to exit after a 30-minute selloff. It is a little more to keep up with, but helps me avoid feeling like I have a lot of cash going unused.
Think of day trading with a stopwatch, swing trading with a clock, and position trading with a calendar. Each can be an effective way to watch the time, and they can all be used simultaneously.
If lately you’re feeling underinvested after this market run, you certainly aren’t alone. It’s a frustrating feeling, but there will be other trends to participate in, and one of these days you’ll be very glad to have cash on hand to put to work.
Any other thoughts?
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Are you following me on Twitter yet?
One Intraday Setup That’s Working
September 28, 2010 at 9:38 am
In a world dominated by algo’s and machines, the astute trader can still turn a profit. It’s true, despite what many losing traders might tell you.
It takes adaptation, some ingenuity, imagination, and of course, thinking outside the box. For the creative trader though, new patterns will emerge from which profitable trades can be made.
So today, I wanted to point out to you one such example. I won’t name the stock, because it doesn’t matter, but here’s the chart from the opening 50 minutes or so:
As you can see, this stock gapped higher, ran a little more initially, and then began to roll over. The selling intensified as new lows were made on the session, and the gap began to fill before a brief period of rest set in. But that wasn’t the end of the story. Conventional day trading wisdom says this gap keeps getting filled, but only if another new low is made with a break of that intraday support.
Lately I’ve noticed this kind of setup – and you can reverse it with a downside gap if you’d like – offering some good plays. I had one finger on the trigger to short sell this one upon a break of that support, but it held just above the whole number. As the stock started to catch a bid, I went long with a very tight stop – only $0.06 from my long entry. And only 10 minutes later I was flipping out my shares for a quick $0.50 winner.
** For those wondering, that’s a reward-to-risk ratio of better than 8:1.
This setup offers two things I really like…
First, it offers very minimal, defined risk. If support (or resistance in the case of a morning gap down) gives way, I’m out quick for a small loss.
Second, it offers a great pivot area where emotion is building. The battle that took place at support was really something, and once one side began to win out (in this case the buyers), it sparked a quick move away from that level.
So, keep an eye out for this setup – it’s been a great one to trade. Gaps which only partially fill before hesitating at a level just might offer you a quick, profitable reversal play like this one.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Are you following me on Twitter yet?
Three Pillars of Risk Management
July 14, 2010 at 6:41 am
As a Seinfeld fan, I really enjoyed The Fatigues episode where Jerry dates a woman with a mentor. George needs to give a report on Risk Management, and passes off the task to Jerry’s girlfriend so she can read all about it and save George time.
But Costanza isn’t the only one who doesn’t fully understand Risk Management. In fact, far too many traders struggle with this very topic, and it keeps them from surviving and from succeeding.
So, let’s look at 3 pillars of risk management as a way to keep it simple. If you can nail these down, you should be alright.
Protect Capital
This is a biggie, no doubt about it. Simple on the surface, but not easy to put into practice.
As traders, our capital is what keeps us in business. Ignoring the consequences of mismanagement is a major mistake that’s not easily recovered from. Those who fail to understand the importance of first preserving what they have tend to place profits ahead of protection. That leads to the age-old error of eyeing new trades with only potential gains in mind, rather than placing equal importance on potential losses if the trade fails.
Capital comes in two forms…psychological capital and trading capital. Both must be protected with vigilance.
Psychological capital is the amount of inner strength, confidence, and willingness to take risks that a trader possesses. It can be eroded through many mistakes, and it’s not easy to replace. Protecting one’s confidence as a trader is paramount to staying in this game, because the trader who’s unwilling to pull the trigger when good opportunities come along won’t ever win.
Trading capital is what’s available in your account, and it’s of course the type of capital most are familiar with. Money can be more easier to replace than confidence, but it’s still critical to manage risk in such a way that your account stays intact. Traders who disregard the importance of keeping an adequate capital base find out quickly they’re unable to profit big enough to matter, even when they’re right. So, try to maintain account highs as often as possible, and you’ll find your account is growing on a regular basis.
Trade YOUR Proper Size
This one will vary for everyone, so the secret is to make sure you’re trading position sizes which allow you to be at your best. That means avoiding trades which mean too much, both psychologically and financially. Let’s look at those one at a time.
Psychologically, the ability to recover from a loss is something we all must ensure. Taking a big hit from a trade which didn’t work out leaves us vulnerable to anger or despair, and neither are beneficial to our trading. Anger promotes revenge trades, and that typically leads to digging a deeper hole than that which we may find ourselves in. Despair leaves us so focused on our emotions that we fail to recognize good opportunities when they come along.
Financially, we never want to be trading so large that we can’t recover from a loss. Taking a fairly large position when you’re confident is one thing, but dumping your entire account into a single idea is another. Consider the math behind poor trades, for example. A 20% loss in your account will require a 25% gain to get back to flat. And the deeper that loss gets, the more that’s required to make it up. Taking several smaller trades instead of one big one might require more management, but it can also greatly help to avoid one major disaster.
Exit When You Know You Should
This sounds really simple, and it is, but it’s the follow through which makes this one difficult for some. Making a trading plan is one thing, but sticking with it can be another issue entirely.
It’s all about discipline, and that isn’t going to change. You know at which point you’ve stayed too long in a position and the time has come to kick it to the curb. All of us know what it means to blow stops, and most likely, it doesn’t pay off when we do. That’s a self-inflicted mistake that can be avoided, provided some measures are taken to help automate the process.
Here’s the thing…defined risks are the best kind. Pick your exit at the same time you select your entry, and commit to it. If you struggle with that, set a stop order the moment you’re filled on your entry, and then you won’t have to make a decision under the gun. If you get stopped, you most likely just saved yourself some additional pain. But you’ll be managing your risk effectively and reinforcing discipline even when you’re wrong.
If you’ll protect your capital, trade your proper size, and get out when you know it’s time, you’ll be doing 3 of the things the most successful traders focus on. How can there be any downside to that?
Trade Like a Bandit!
Jeff White
Swing Trading & Day Trading Service
www.TheStockBandit.com
Are you following me on Twitter yet?
Be Patient Buying Dips
June 23, 2010 at 6:56 am
Novice traders are equipped with very little useful information, as even your grandmother knows to “buy low and sell high.”
With the recent correction, many stocks now are starting to appear ‘low’ on the scale, and that’s enticing – but dangerous – to those who have been waiting for a shot at getting in. The trouble is, that age-old “wisdom” doesn’t tell the whole story.
Cause for Caution
Merely buying a stock on the basis that it’s cheaper now than it used to be is no formula for success. The goal is to be buying when there’s an expectation of higher prices. When prices are declining, the trend is of course down, which means it’s best to wait for some technical proof that the correction has ended before aggressively buying.
Think of it this way. At the department store, escalators come in pairs. There’s an up escalator, and a down escalator. Buying stocks on the slide in expectation that they’re going to go right back up is like getting on the down escalator in hopes of it rising. It makes no sense. Eventually, the down escalator will end at a level floor, which in the world of technical analysis will be support. Only once that’s found can you step onto the up escalator with a realistic expectation of a ride back up. Wait for stocks to do the same thing.
Proof of Change is Needed
After a long-lasting bull market like we saw from March 2009 to April 2010, there’s going to be new money attracted to the game. So we know right now there are some new traders in the mix who are aiming to buy low, and it’s no surprise many are getting hurt with the recent ‘discounts’ we’ve seen in prices. The market has been in a correction phase for several weeks now, and it hasn’t been pretty. More importantly, it might not be done yet.
The real key here is to wait for the technicals to shift, and that will come in the form of a higher low on the daily chart. We’ve already seen higher highs get established in the NAZ, S&P 500, and DJIA, but they have yet to create higher lows. That may happen soon, or it might be a while, but that’s the next element to watch for before committing to the long side for anything but quick trades. On the premium site, that’s the stance I’m taking for now, and June’s been good so far because of it.
Trade Like a Bandit!
Jeff White
Swing Trading & Day Trading Service
www.TheStockBandit.com
Are you following me on Twitter yet?
Prepare for Anything
January 21, 2010 at 7:00 am
On several occasions in recent years, I’ve taken a spring trip with my dad and some friends to Arizona to play golf for a few days. I love the desert, and it’s fun to spend some time with the guys and make a few birdies (let’s not talk about the bogeys!).
Around Scottsdale, and particularly to the north of town, it’s quite common to see single-engine planes buzzing around the skies. Maybe it’s the great weather and silence of being on the golf course that made me notice them, but they seem to be everywhere. They’re pilots in training, and they’re starting small before they work their way up to something larger (like perhaps, something with more than 1 engine!). I respect that approach, and we’ll touch on that shortly.
But one thing that really caught my attention is that they actually shut off their engines – on purpose – over and over. What? It’s one thing to hop in that little thing with what sounds like a lawnmower motor on it, but hey, it’s no glider. Why would they do this intentionally?
They’re creating stall conditions and learning to recover. Learning to purposely manage a malfunction in a controlled environment (well, partially) helps them avoid panic should it ever happen unannounced. Eventually, they’ll become the kind of pilot I wouldn’t mind flying with.
From One Cockpit to Another
As a trader, sometimes that malfunction happens without warning. Sometimes right after an entry is made, the position rips right against you, perhaps even before you’ve had time to place a stop. Sometimes it’s an overnight trade which has unexpected or unscheduled news hit which causes the stock to gap against you, perhaps even beyond where you had intended to exit in the event of a failed trade. It’s painful and shocking, and more often than not, it results in panic for the untrained trader.
So how do you deal?
It’s almost impossible to mimic the emotions that go along with such a situation, but here are a few simple things you and I can do in order to avoid panic.
1. Expect it to happen. That doesn’t make us negative thinkers, mind you, but rather traders who are mentally prepared for anything – including the worst-case scenario. After all, if we’re prepared to face the worst, what could possibly cause us to panic? The point here is that through logical thinking as well as visualization, unexpected events and adverse moves can be mentally rehearsed to the point that when it does happen, we’re focused on the solution rather than the problem.
2. Keep a level head. By doing #1, we’re freed up to maintain our wits. Throwing a temper tantrum or freezing up entirely is only going to make it worse. The deer in the headlights stands motionless (at least here in south Texas), which means it’s up to the car to change course if something awful is to be avoided. Don’t be the deer – you can’t base your protection on hope that the stock will change course for you. Cooler heads will always prevail, so exercise self-control when you find yourself in a sticky situation and your mind will be available to strategize.
3. Expect to survive. Trusting that you’ll be alright in the long haul will help keep things in perspective, just as they should be. What might feel like a catastrophe to the inexperienced trader might be a little unsettling to you, which is something you can absolutely recover from. At the worst, it’s one bad trade out of your next 1000 trades, so consider it a spot on the windshield to look beyond rather than something worthy of doing more damage to you than it already has.
4. Never allow one trade to be too important. This of course takes into account position sizing and position risk, because the financial hit is the one that comes first. Putting on trades which are larger than they should be is nice when they work, but when they don’t, look out. Staring at a loss which is bigger than you’ve faced before will bring instant regret. Similarly, trading within one’s limits also means that no trade is ever emotionally too important. The aftermath which follows a big loss can be more emotional than financial, so walk the line carefully when choosing position size, and you’ll avoid a tailspin.
The market will dish out surprises from time to time, no doubt about it. Train yourself to expect it, and mentally rehearse some ways you’ll respond when it happens. You’ll ultimately feel as though you’ve been there, and your second reaction (following ‘oops’) will be a remedy rather than crippling anxiety and fear.
Trade Like a Bandit!
Jeff White
Are you following me on Twitter yet?
Keys From a 6-Month Streak
January 13, 2010 at 3:18 pm
Anytime you find yourself in the midst of a streak in your trading, it’s worth paying attention to. When you’re winning, you need to find out why.
A few years ago, I was fortunate to put together a 13-month streak of consecutive net profits (profits every month for 13 months). The longer the streak continued, the more I thought about it, and the better it made me to sort of ‘observe myself’ during that run. I made note of not only my routine and the kinds of plays which were working, but I also included my thought process and the mentality I was bringing to the table. I still occasionally reflect on those notes to stay sharp.
For the past 6 consecutive months, we’ve put together net profits in each month over at TheStockBandit.com (July, August, September, October, November, December). Results can be found here.
Although I am trading confidently, I’m not telling you this in order to boast. I’ve been at this long enough to know the market will serve up a healthy dose of humility when it’s needed!
Rather, I want to share with you some of the things I’ve been focused on in recent months that have brought consistent success, hoping it can improve your own process.
Here are 5 Keys I’ve taken from the past 6 months:
* Be Patient. I have not forced trades. When setups were plentiful, I would get more aggressive. Hence the reason some months had more trades than others. When the setups were harder to come by, I was willing to wait. The year is long, and there will be an abundance of opportunities, so there’s no need to try to make something happen. Watching and waiting for the must-take setups to come along pays off.
* Picky is Good. Before committing capital, I have been requiring high-quality chart patterns and situations which carry a nice potential payout. Lowering your standards to second-rate setups will result in overtrading and a higher barrier to success, and trading is already hard enough without that. You deserve the best, so require it if you’re putting money into it.
* Take the Conservative Route. The occasional home run is nice, but they don’t always happen on purpose. In fact, swinging for the fences will send you right back to the dugout more often than it’s likely to put you on base. My approach has been to hit singles and ring the register more often, paying myself when I catch a nice move, but now wearing out my welcome. The conservative route brings with it consistency and confidence, two things I strive for.
* Have Directional Flexibility. A willingness to trade both the long and short sides has led to my booking winning trades on the short side in every month during this run, despite the fact that the market has pushed relentlessly higher. This was extremely helpful during July, September and October when we saw some brief market pullbacks as well. Looking for outlier stocks can pay off, both in terms of winning trades and the occasional hedge to long positions.
* Monitor the Behavior of Positions. Never trust a skinny chef, or any stock you hold a position in. I don’t mind giving trades some wiggle room, but I do keep a close eye on the price action and how volume corresponds with it. During this run, whenever I started to notice a discrepancy between what I expected to happen and what was actually happening, it was a clue that an adjustment may be necessary. Every stock has some personality associated with it, so if that begins to change, give it your attention and be willing to modify your trade parameters.
The next time you find yourself in the midst of a nice run, take a little time to see what you can learn from it. Take note of what’s working and what isn’t, do more of that which is working, and keep plugging along. It will help you not only perpetuate the process you’re already in, but it’ll help you return to the same mode later on.
Trade Like a Bandit!
Jeff White
Are you following me on Twitter yet?
Always Something to Worry About
November 11, 2009 at 12:12 pm
Ever get spooked out of good trades? It’s one of the worst feelings in trading, knowing you were right and just couldn’t stick with the play long enough to get paid a fair amount.
The back-and-forth nature of the market makes it easy to jump to conclusions that a turn may be right around the corner, perhaps even a painful one. As a result, it can be really difficult to stay in good trades, or to continue riding a trend which has gotten a little bit long in the tooth. The flight to safety plagues us all from time to time – often prematurely.
An example is the current environment. The indexes have made a tremendous move up from the March lows, making it hard for those with inventory to stay long or for those with cash on hand to put it to work after such a surge. What if the trend changes?
Or take that trade you were in last week. You nailed it – well, the entry at least. Sure would be nice if you were still in there, huh?
Well, I’ve been there. I’m familiar with that frustrating feeling. And you know what I’ve come to realize?
There’s always something to worry about in the stock market.
Earnings, upgrades/downgrades, the Fed, interest rates and inflation, terrorism, nukes, the economy, elections, geopolitical events, strained relations with other countries, etc. It’s virtually an endless list. Looking back over my past 11 years in the market, I can recall “major” concerns for every calendar year. And yet for every single year, there were some phenomenal stretches of trading.
There’s literally always something going on. That something may be a driver of prices, or it may simply be a sideshow – a distraction, if you will.
But here’s the thing… for traders like you and me, what matters is how we respond to the conditions – not what the actual conditions are or our ability to determine what’s going to happen next. We have to walk that fine line between making wise decisions to protect our capital and allowing some fluctuations to occur so we remain on the right side of the tape and fatten our accounts.
Profits come from putting money at risk when there’s some potential payoff. For individual traders like you & me, it means we need to be agile enough to hop on board with whatever it is the big money is doing. Doesn’t matter why they’re doing it. It only matters that we pay close enough attention to determine the trend and find appropriate spots to take action. We get paid for taking risks – especially the right kind.
Silence is Golden
Don’t be surprised if you can at any point in time find arguments for why the next bear market is about to begin, or why prices will never decline again. Not only is there a constant difference of opinion, but there often is some decent logic behind those arguments, whether bullish or bearish. That’s what makes a market – thank goodness!
But those opinions will be shrugged off many times, so our flexibility is critical.
Bears and bulls alike will constantly beat their drums as to why they’re positioned the way they are. Don’t let that be the reason you put cash to work or pull cash out of good trades. Get long during uptrends, and get short during downtrends and you’ll come out just fine. It isn’t necessarily ‘easy’ but it is simple.
Stick to the charts and keep ‘reasoning’ in check, because the market can defy logic for extended periods of time. Is it doing that right now? Who cares! Prices will do what they do, and it’s our job as traders not to predict anything – but to react accordingly. Trade what you see – not what you think – and you’ll usually be far better off.
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?
