All Entries in the "Trade Management" Category
Managing Day Trades Effectively
November 9, 2009 at 11:14 am
Would you rather make money by the minute, or by the day?
I’m open to either, so why not both! I like swing trading for the set-it-and-forget-it benefits it offers, as I can structure my trade and manage it with little effort on a multi-day timeframe. The time requirements are minimal, and the payoffs can be great. But I also like day trading and the flexibility it offers. I can enter the day with zero directional bias, and still find some opportunities to capitalize on from the intraday chart patterns.
Trading multiple timeframes is one of the best ways to diversify as a trader, there’s no getting around it. But let’s explore this idea a little further of managing day trades, because that’s one subject so many seem to struggle with.
R & R
It’s no secret that the key to good trading – for most of us anyway – isn’t how frequently we’re correct, but rather how big we’re correct. After all, we’re going to be right sometimes and wrong sometimes, so the net difference is where the rubber meets the road. For me, that comes directly from the size of my winners as compared to the size of my losing trades, or my risk-reward ratios. Let me repeat: it’s not really the frequency of wins that matters… it’s the size of them.
So if that holds true, then it’s true across all timeframes. From the position trades you might hold for a few months, to the swing trades of a couple weeks, to the day trades which might last a couple of hours, the key is risk vs. reward.
Deciding on Day Trades
In the Bandit Hideout, there’s a nightly video newsletter called the Bandit Broadcast. It contains setups for plays across multiple timeframes, from the swing trades I’m considering over the coming days, to the day trades I’ll be making tomorrow. The day trades are for brief, short-term moves of up to a few hours. They look like on the daily charts that they could make a quick move but not necessarily a lasting one, so instead of holding them overnight I simply look to grab them for the initial move and then ring the register and set them free.
For these plays, I’m not trying to endure pullbacks or wait around to see if it’ll keep running for several days. So once I’ve determined if a stock is trade-worthy, I tend to watch 3-minute bars and simply look for the same kinds of chart patterns I seek on the daily charts….channels, flags, wedges, triangles, etc. The same patterns will still play out across timeframes, which I’ve long said is the beauty of chart patterns and technical trading.
The Other ‘E’
When I find a setup that looks suitable for a quick play, my attention isn’t solely based on where my entry will be. Too many traders focus on that alone, and in return, fail to recognize the other half of the equation – the exit.
For stops, I usually set about 1% from entry as a stop (as outlined in the day trading strategy). The previous day’s low is often much farther from there, so I really just focus on today’s chart and try to first and foremost limit risk.
After that, it is a matter of gauging momentum by monitoring the volume, strength, and pace of the advance so that I don’t overstay my welcome. I’ll gladly offer out shares in chunks on the way up, scaling out and using the strength to my advantage. Once the momentum fades, I’m outta there.
I really like the advantages that swing trading offers me when it comes to setting up plays and letting them work, but I simply can’t deny some of the aspects of day trading which offer flexibility and potential for grabbing short-term moves.
So as you construct your day trading strategy, be sure that it’s suitable to your unique needs as a trader. You might be willing to withstand more risk than the next trader – or less. You might prefer to exit in pieces, or you might like jumping out all at once when your stop or target levels are hit. Whatever your style may be, just be sure to stick to it for maximum consistency. It’s how you’ll manage your day trades most effectively.
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?
Implementing the Time Stop
September 15, 2009 at 10:03 am
Staying patient with a position can sometimes pay off nicely. After all, not every trade works out exactly when we want it to. It might require a little more time than we originally expected before we see that P&L turn the shade of green we were looking for, and it’s sure nice when that happens.
But there is a flip side to the coin.
Sometimes you can be overly patient with a trade, giving it more and more time (dare I say too much?), just waiting for it to make its move. And I’m not referring to letting it move farther and farther against you – you know better than that!
I’m talking about the trade that simply goes nowhere.
Fortunately, there is a solution to the flatlining trade, which is to implement a time-based stop. This is essentially a countdown placed on the trade, that if nothing happens by a certain time, then either an adjustment is made to stop & target levels, or the trade is simply closed out. You know – so you can move on with your life!
After all, why tie up capital in a position which isn’t performing as expected? Kicking a stagnant trade to the curb can translate into more money to be put toward another opportunity, plus it enables us as traders to put our attention toward something more worthwhile.
Show Me the Money!
Just this week I faced this dilemma. I was swing trading SHLD on the short side due to the breakdown from a bear pennant pattern (see chart 1 below), but aside from the initial weakness, there was no follow through (see chart 2 below).
I had designated 2 targets for my exit, and of course 1 stop loss in case the stock reversed and went back above resistance, but none of those levels were reached. The stock refused to go down far enough for me to start booking profits (according to my trading plan), and yet it wasn’t bouncing enough to stop me out either.
Chart 1:
StockFinder Chart courtesy of Worden
Chart 2:
StockFinder Chart courtesy of Worden
Although SHLD was certainly underperforming the market, and I felt confident if market weakness ever arrived that SHLD would crack pretty good, that never happened. The stock simply formed a trading range, and I began to realize it was essentially a stagnant trade.
Time to Move On
Over the weekend, I decided I’d give the stock through Monday before making any moves, and so when it remained in its range, I tightened my stop heading into Tuesday, and today as the stock reached my adjusted stop I closed the position for a minor loss.
I know what some of you are thinking… Why give up on what might eventually develop into a good trade?
Don’t think of this as surrendering or giving up on a trade, because I know that can be difficult for traders who don’t mind being patient. Rather, consider it your responsibility as a trader to keep your capital working for you in the best manner possible.
That means putting it at risk when there’s a good possibility of profiting, and it means protecting it from risk when that potential isn’t present.
The longer we’re in a position as traders, the more we become exposed to company-specific, unplanned news…a surprise, if you will. Leaving a position at risk indefinitely raises the likelihood that news will eventually push the trade one way or the other. The problem with that is that a trade initiated from a technical standpoint should not evolve into a trade which is hopeful for news to make it move. We want real selling or buying to be the deciding factor, and when that turns stagnant then the basis for the trade is negated.
So as you work through your position sheets this week, consider whether some of those stocks are merely resting or if instead they’ve completely lost momentum and are now simply range-bound.
Do your best to determine if a little more patience is needed, or if instead a little less patience is warranted. Time is money, especially for a trader. It might be time to put that trade on the clock and set a deadline. A far better trade just might be waiting for you.
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?
Stack the Odds for Daytrading Success
September 3, 2009 at 5:04 pm
Trading is all about stacking the odds for success. Risks must be taken in order to get paid, but the key is gauging under which circumstances the potential reward really outweighs that risk.
I discussed taking risks in a recent post, and I felt that a follow-up and an example of what I was referring to was in order. Here it is.
Many of my trades are continuation plays. They can be great for offering situations which warrant putting some money on the line once clues of a continued move are present.
However, there are many opportunities on the intraday timeframe which are exhaustion/reversal kinds of setups.
Buy or sell programs, news, and just plain old momentum drive stocks far beyond the pain thresholds of traders, carrying price a considerable distance in one direction or the other. That opens the door for some recoil, and catching the turning point can be quite lucrative.
Stacking The Odds
Here in a moment, I’m going to show you exactly what I mean in a video, but first let me outline a few keys which combined to produce a great trade in this situation.
- Corresponding market action. With the indexes having a distinct possibility of a short-term turnaround, conditions were ripe for similar price action in individual stocks. This is a point I make over and over in the weekly index videos.
- Prior key level on the daily chart of this stock was being tested. A huge intraday move which carries price right to a previously important level on the daily chart will increase the odds for a quick recoil move.
- Intraday price action suggested the move was becoming exhausted. That indicated that a reversal could quickly develop in the stock.
Here’s a video explaining it. Select the HD option and go full-screen for best quality:
Stack multiple factors in your favor for a great trading situation. They’re worth waiting for!
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Taking Risks
August 26, 2009 at 1:10 pm
It’s a known fact that in the market, you get paid to take risks. We all know that, right?
But are you getting the proper rewards for those risks? Are you taking the most appropriate kinds of risks? And perhaps most importantly, do you recognize the extent of the damage which can be done when you take on risks which are larger than you can handle?
I’m in the midst of re-reading a great book on risk right now (I’ll put up a post before too long about it, because it’s something you should read), and it’s got my wheels turning. I’m reconsidering exactly what is risk, how much I should be taking, and why I need to embrace it.
Before sharing too much about the book, let me share with you a couple things which are on my mind right now, and I’ll lay out the rest in a later post once I’ve finished the read.
Defined Risks are the Best Kind
Option traders often refer to their ‘max risk’ on a given trade, because on some strategies they are able to truly limit their downside risk to a set amount. If they’re long premium, the most they can lose is 100%, for example.
But an equities trader like me needs to think in terms of a different kind of risk factor. Yes, I could buy 1,000 shares of XYZ at $20 per share, and my max risk (in terms of capital outlay) would be $20,000. But that’s not realistic risk, because it’s so incredibly unlikely that stock is headed to $0 – especially over the course of a few days when I’d expect to be in the trade.
Instead, it’s important when trading stocks to think in terms of max $ risk if the trade fails (not if the underlying company fails). I touched on this concept of dollar risk per trade earlier this month, but let’s look a little closer at it. If I know my entry and I can designate a stop loss on the trade, then barring any drastic circumstances I’ll be able to exit at or very near that stop should an adverse move occur. That’s the risk I want to be familiar with. The kind of risk that says “if this trade doesn’t work out, what do I stand to lose?”
That’s very different from simply looking at every trade from a capital outlay perspective. It’s a major shift for some of you to start thinking this way, but it can also make a major impact on your trading to implement it.
Know Your Exit
Making what could turn out to be a difficult decision before getting in the heat of the moment can be the most important part of your trading plan. It’s one thing to hunt for entry after entry, locating breakout levels and spots where trend lines could get broken, but it’s an entirely different thing to know where you’ll look to exit that same trade, whether it moves in your favor or not.
I’ve said before that a good trade is usually a planned trade, and that definitely involves knowing your exit from the outset of the play. So before you place that order to enter your next trade, decide on where you’ll get out of it. Set a bracket order or jot it down, or at least verbalize it somehow! That’s still better than thinking you’ll get around to it later. Don’t procrastinate – decide on an exit.
Have a Goal
There is no reward without risk, and there should be no risk without reward. Knowing this, there’s absolutely no reason why each trade shouldn’t have some favorable objective associated with it, so set a goal for each trade. A realistic one that could quite feasibly be reached during the course of the trade.
Perhaps you’ll set a hard target and book profits once that level is reached regardless of how strong the momentum seems at the time. Or perhaps you’ll plan to book partial profits at intervals along the way.
At the very least, having some idea of a level where your stock could move to is still going to help you formulate a game plan, even if you don’t choose to leave a resting order in that zone to book profits.
If you know your stop and you have some kind of upside expectation, then you’ll have a far better grasp of just what your risk is on a given trade and whether or not it should be taken.
Thanks for stopping by and I’ll see you here soon with more. Until then…
Trade Like a Bandit!
Jeff White
Hard Stops vs. Mental Stops
August 20, 2009 at 10:15 am
When I’m swing trading, I prefer to place stop and target orders via bracket orders. That means I’ve got pending orders which will cancel out the other side based upon what gets executed first. I’ve got a hard stop in place just in case of an adverse move in price, and I’ve got a limit order in case of a favorable move.
This set-it-and-forget-it style of trading works well for me on the multi-day timeframe. First, I don’t need to watch every tick. I can trust that my orders are doing the job for me, because generally those stop and target levels are several percentage points away. Second, it helps to keep me from micro-managing trades. I don’t get so consumed with the intraday chart that I abort my original game plan. That’s good.
But when it comes to intraday plays, or day trades, I often times will take a slightly different approach by using a mental stop. There are a few reasons for this:
1. I’m watching the price action closely and developing a feel for the move that’s taking place. I will know the area where I’ll plan to exit the trade before getting in, but in the first few minutes I may not have a specific, hard number that I’m ready to commit to. That’s simply part of tape reading on a trade that may only last minutes.
2. Because I’m watching the price action, by default I’m at the PC. That means I’m able to blow out of the trade instantly when I realize the time has come that I’d rather have the cash than the shares.
3. Since my intraday timeframe is about minutes or hours, it’s often a bit tougher to continually place and cancel orders for the same trade as it progresses. Ideally, the stock is moving in the intended direction and I’m eyeballing areas on the chart where I’ll need to book some gains or begin to lighten up (or even exit entirely). Those levels change continually based upon the momentum of the stock, so I often times defer to sort of a “mental trailing stop” whenever that’s the case.
4. Fortunately, I’ve never struggled with blowing stops, so I can trust myself to bail on a trade when it’s time to. And again, I know going into the trade the general area where I’ll get out, so even if that’s crossed right away then my decision is made. My struggle generally lies with staying with big winners and allowing them to become huge winners, but that’s a topic for another discussion.
Which One is Right For You?
The answer to this depends on your personal style, and some real honesty is required on your part with this one. But it is rather simple.
If your tendency is to blow mental stops, then set hard stops in your trading platform and leave them alone. End of discussion. It’s for your own good.
If you prefer mental stops, insert support or resistance levels on your chart (literally draw them) so that you’ll at all times have a visual representation of where your trade stands and if the time to bail out is approaching. I often set red support levels and green resistance levels as sell and buy markers for trades. Whatever you do, be consistent and don’t hesitate to kick that trade out the door when it stops behaving.
Bottom line:Â if you know deep down inside that you lack the discipline to cut a losing trade when the time comes, put a hard stop in place. And if your problem is simply staying in a winning trade when you know you should, consider scaling out on the way up.
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?
More on Recovering from Trading Losses
August 17, 2009 at 6:44 am
Ever been downright frustrated with your trading?
If you’ve been a trader for any length of time, I’m sure you have. There can be stretches of disappointments during which it feels like getting on the right side of a move might not ever again happen. Your account shrinks and your confidence takes hit after hit, causing you to question your desire to continue playing the game.
If it sounds like I’ve been there, it’s because I have been. Multiple times. Every time I’ve hated it just as much as the first time, but every time I’ve emerged as a better trader. No pain, no gain!
Dealing With Drawdowns
I think it’s a good exercise for every trader to know their thresholds, and to determine just what you’re willing to lose during a poor trading stretch. That’s not to say you plan on it, but rather you designate some amounts, which if lost, will prompt you to make some immediate adjustments.
That might be a dollar amount subtracted from your account highs, or it might be how many consecutive losing trades you’ll endure when a drawdown occurs. Once those flags have been raised, it’s time to shift the routine.
It doesn’t mean you entirely abandon an approach which has proven to work for you over time, but rather that you install some safety rails for yourself before the damage becomes far more difficult to repair.
Short-Term Steps for Long-Term Survival
If you’ve suffered from a recent drawdown, it’s important that you take a few steps to get back on track – both in the near term and for the long haul.
In the near term, it’s crucial to preserve whatever confidence you have left. Remember, that’s your psychological capital, and it must be protected. Take a few days away from trading, maybe a week, and just clear your head. This may sound obvious, but stepping away is the best way to stop losing! Discouragement leads to some poor decisions in trading, so come back in a few days to resume trading after some of the irritation has subsided.
When you do begin again, cut your position size down to an amount which is insignificant, whether win or lose. You want to gain some confidence in trading well once again, making some good choices without the influence of recent losses. P&L becomes an afterthought at this stage.
Focus on the method, on making good trades which work, and then gradually increase your trade size so that the profits return. The first few trades might not grow your account, but they can greatly aid your thinking process by lifting the pressure of “making it back” and then you can get to that shortly thereafter.
Staying in the Game
A string of losing trades is no fun – downright frustrating, irritating, and bothersome. But the idea is to limit the losses when they do come (and we know they’ll come, that’s just part of trading) so that we are still trading when the best opportunities come along.
That’s how my method is. I equate it to a poker player who loses small, hand after hand, folding to surrender antes before finally sticking with his bet when a good hand comes along so that he can win a pot. Lose small, lose small, win big – that’s exactly how trading must be. How you choose to respond to losing will make or break you.
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 4
August 6, 2009 at 8:50 pm
As we complete this series on stop loss placement, we’re going to discuss trailing stops. But be sure to catch Part 1, Part 2 and Part 3 first!
In this segment, I specifically want to discuss the importance of managing our risk throughout a trade, not only to reduce losses but also to preserve profits. This is achieved by adjusting our stop, or through the use of a trailing stop.
When and Why to Adjust a Stop Loss
A rock climber knows the importance of anchoring himself to the wall along the way up, just in case he happens to slip. The anchor set early in the climb at a low altitude is every bit as important as the ones set at higher levels, but the more a climber ascends, the less useful a low anchor will become. As a result, it’s wise to keep raising it along the way.
Trading is similar in that the stop loss we initially set for a position may not be appropriate once that trade has progressed, so it’s likely to need adjusting along the way.
Setting some rules for ourselves, sticking with them consistently, and maintaining an adequate reward-to-risk structure throughout the trade can keep us in good shape.
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.
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 3 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?
