All Entries in the "Trading Tips" Category
World Series Series, Part 3 – Sacrifice Bunt
October 25, 2008 at 8:26 pm
This is Part 3 of a series, be sure to check out Part 1 and Part 2 as well. New posts will be made during game days of the World Series.
Lose Small
With a base runner on and a batter at the plate, one thing we’ve come to expect in baseball is the sacrifice bunt. Rather than risk hitting into a potential double-play situation, a definite option is to force a fielder’s choice with a bunt. Doing this isn’t likely to result in more than one out, and it just might advance a runner and put him into scoring position.
In the trading realm, we’re often faced with the decision of choosing between multiple trades, some of which just aren’t cutting it for us. And it doesn’t have to be multiple trades, it might be multiple trading strategies which need to be reduced. In order to make net progress, we might give up a little bit of potential with one of them in order to focus more on the one which has higher odds of growing our accounts. Eating a small loss in one trade (or strategy) for the sake of managing a better-performing trade (or strategy) is never a bad choice. We’re putting our attention on something that’s actually producing, and that’s the key.
Take One For the Team
Not every at-bat is going to be a glamorous one for the baseball players on TV, so when it’s time for the sacrifice play, it’s important to note that there’s actually some honor for the guy willing to lay one down for the better good of the team. Accepting a short-term setback in return for the longer-term health of the team (or your trading account) is wise. It keeps the ego out of the equation, which is great because we want to be in the habit of making good decisions.
So the next time you’re faced with a choice between a trade you’re hoping will work vs. a trade you already have working, be willing to cut the unproven trade first, and trust that losing small now will mean winning big later. Your career just might depend on your adopting that mentality.
Trade well out there!
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]
World Series Series, Part 2 – Have a Backup
October 23, 2008 at 8:45 pm
This is Part 2 of a series and a follow-up post to Part 1. New posts will be made during game days of the World Series.
When Plan A Requires a Plan B
Every game in the World Series is headlined by the starting pitchers as they come up in the rotation. Even throughout the season, when you get tickets to a game, one of the first things to ask is “who’s on the mound?”
Whether you’re a fan or a manager, your hope is that the starter is going to have his best stuff on game night. That’s the first line of defense needed to win games, but just in case, there’s always a backup. A reliever. Someone waiting in the wings who is the Plan B just in case the starter isn’t at his best.
In trading, we always want to have a stop loss in place for our trades. That’s the defense required to limit losses so that we can profit in the long haul with the winning trades we’ll have.
What If…
There’s nothing like being able to limit your losses, so make every effort to do so. Determine where you need to be out of a position, and stick with it. But don’t be afraid to have a disaster plan in place just in case. If your position gaps through your stop, what will you do?
Determining a ‘what if’ scenario at any given time in your trading is a good practice to be in. It’s also a great reminder to size your trades accordingly, because you don’t want everything riding on any one trade – ever. The idea of doing that might be exciting if you were to be right, but that’s a 2-way street and you absolutely must limit your downside if you’re going to stay in this game and survive.
Trade well out there!
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]
World Series Series, Part 1 – Think Like A Batter
October 22, 2008 at 9:01 pm
Trading has so many similarities to sports that I can’t help but occasionally mention it. A few years ago I did a series on Trading and Golf, which drew a number of parallels between the two endeavors. It was well-received by you as readers, so to mix things up a little for a few days I’m going to do a mini-series here on baseball and trading analogies to overlap with the World Series, which of course starts tonight.
I don’t know how many games we’ll see this Series go, but I’ll have new posts on game days right here so check back often. Now let’s get right to it with Part 1…
Think Like A Batter
Every batter in the World Series has a skill which has been acquired over time – he anticipates what pitch is coming. He’s played the game long enough, studied each pitcher extensively, and has been coached on the habits of the guy on the mound. So he knows to watch for that slider or change-up.
Now, it’s important to note that there’s a big difference between anticipating and predicting, because remember, predictions don’t do anything for us. However, anticipating makes us sharper. It forces us to watch for some specific clues, which can in turn accelerate the speed at which we’re processing information.
Wait For Your Pitch
As traders, whether we’re monitoring the overall market or a specific stock, it benefits us to anticipate what we might see next. That doesn’t mean we take action before it’s time, because like the batter, he’ll still wait for the pitch before he decides whether or not to act. What it does mean is that we are always attentive to the conditions and on the lookout for certain reactions in the market. That way, when we see them, we’re more prepared to act quickly – and speed is everything in trading (just as it is when swinging at a 90mph fastball).
So think like a batter and start to anticipate what may happen next. Then wait for your pitch before you take action. It will speed up your response when your anticipations are confirmed, but at the very least it will sharpen your attention.
Trade well out there!
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]
First Can Hurt!
October 6, 2008 at 10:43 am
Sometimes you just know someone’s gonna get it. Between now and Halloween, it’s the last person of the group walking through a haunted house. During a scary movie, it’s usually the first one to go looking for trouble in an effort to prove their bravery, and it just doesn’t ever seem to end well for them.
In the market, it’s not much different – especially right now. The indexes have been correcting sharply, and there’s certainly some fear and panic in the air. Traders attempting to call the lows are becoming casualties on a regular basis, and it’s just too bad they lack the self control which could help them avoid that suffering.
When conditions get extremely volatile like they are at the moment, attempting to be first in line (buying in hopes of a turn) can be a very costly endeavor. Consider the perpetual bottom-callers within downtrends such as this. Or those who continually try to short sell the highs within uptrends, just dying to be a hero (yes, pun intended).
And it isn’t much different for those who simply allow themselves to get caught in the fray, unwilling to exit and take their medicine from a broken trade. The hope which initially grips them quickly turns to fear, paralyzing their decision-making as they watch their P&L get worse and worse.
Ouch!
Trying to call market turns can leave you strung up by your ankles like a jungle-walker caught in a booby trap. Keep your feet planted so you can keep moving, because if you get caught in a trap you can’t navigate the terrain… and that’ll mean some very bad news for your trading.
Most traders will agree that waiting for confirmation of a trend shift offers a higher-odds directional play, but there are still so many who want to time that turn and be the first one to place a trade in the new direction. Perhaps they want recognition or to feed their pride. Either way, it’s clear that profits aren’t what is driving their decision-making. And isn’t that why we trade?
So the next time you’re tempted to call a top or bottom, remember just how easy it is to encounter serious pain if your timing is off. Avoid getting strung up by an ankle! Have the maturity and the patience to wait for some confirmation of a higher low or a follow-through rally after a relief bounce. Doing so will allow you to continue walking through this jungle called the market in search of profits. Because truthfully, first in line just isn’t all it’s cracked up to be.
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]
Prevent Poundings, Part 2
October 2, 2008 at 9:45 am
Previously in Part 1, we took a look at some of the suffering caused by market meltdowns and the general idea that steps need to be taken to avoid getting flattened when you find yourself caught on the wrong side of such moves. In this post, we’ll take a look at some specific measures to take in order to not only recognize those moves as they begin, but also to avoid having a major setback to your trading account.
I’ve taken plenty of hits as a result of bad or mistimed trades, and I’ve also found myself poorly-positioned for some big moves over the years. However, I’ve yet to blow out a trading account after having been in the market for a decade. I’ve avoided really bad luck, yes, but I’ve also made a habit of doing several things which helped to ensure my survival as a trader. Here are 4 of them:
Monitor Key Levels
Whether you more closely watch the futures (NQ & ES) or the averages themselves, there is no substitute for keeping an eye on important support and resistance levels. Few things have the ability to influence individual stocks the way the overall market does, which is why it’s not something to be ignored. Keep in front of you levels like 52-week highs/lows, the high/low of the prior week and month, and of course those zones which keep being tested on both the upside and downside. As you see them get broken, it’s an excellent signal that the stocks you’re watching may soon follow.
Watch Chart Patterns
Gaining an understanding of even basic chart patterns will be of tremendous benefit to your trading. They will not always work without fail, but they can give you a very meaningful heads-up to what is taking place out there. Even respecting the price action itself, such as light-volume bounces after heavy distribution, will give you an edge which can be exploited to your benefit. Monitor not only the patterns found in your stocks, but also the major averages too. Patterns provide reliable signals across markets and timeframes, so they’re certainly worth watching.
Pay Attention to Psychology & Be Sensitive to Sentiment
Many people will tell you to always be fading the prevailing sentiment, but that’s not sound advice. After all, within a trend the crowd will be correct – for a while. It’s better stated that when sentiment reaches extremes, it might then be time to start considering a reversal (such as Monday’s highest close in the VIX – a measure of fear – since August 2002). Until then, recognizing frequent hints such as repeated failed bounces will afford you an added degree of awareness, helping to provide you with a useful directional bias (even if it’s a flexible one).
Take Clues From Trades
Although it has been said that nothing is new on Wall Street but the faces and pockets, the fact of the matter is that cycles do emerge and disappear periodically. Certain trade types will work great for a while, but then another method becomes more reliable. Taking notice of trade types and/or the patterns which are working best for plays will pay big dividends for the astute trader. Those who are continually on the lookout for which kinds of plays are ceasing to work will be miles ahead when it comes to knowing what setups to avoid, thereby helping to keep your account intact. If and when you begin to notice failed breakouts or breakdowns, it’s your clue to proceed with added caution.
Look Beyond the Spots on the Windshield
It’s inevitable that there will be losing trades, good trades which go bad, and there will be times when each of us will be caught on the wrong side of a trade or the market in general. During those times it’s easy for frustration to swell quickly, causing you to press harder until confusion reigns supreme. In the end, all you really want to do sometimes is throw up your hands and step away for a little while – and that can at times be the best solution.
I’ve witnessed traders who refused to move out of the way when they knew they should take cover, and it wasn’t pretty. The refusal to accept a small loss left them ever more committed to the trades which were costing them increasing amounts of money. The result was an added psychological attachment which did anything but help them.
The ‘storms’ which impact your trading in a negative way might be massive selloffs like we witnessed on Monday, or they might simply be those stretches of trading when you’re not at your best.
Either way, the idea is to avoid letting occasional bumps and bruises turn into irreversible harm. Taking those hits is never fun, but in order to be successful over the long haul you must learn to minimize the damage. Small mistakes are the key, so keep that in mind the next time a big move begins which you’re caught on the wrong side of.
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]
Prevent Poundings
September 30, 2008 at 10:22 am
Yesterday we saw a historic decline in the market as the major averages posted some of their worst performances ever. The selloff was harsh, unrelenting, and decisive (to say the least). The damage to many stocks will not be repaired for quite a long time, and it’s safe to say that just as many trading accounts suffered significant losses.
In fact, I know that’s true from my recent correspondence with many other traders. Just yesterday I heard from one I’ve known for a couple of years, finding out he’s leaving the game after having blown out his account after adding to a bad position. In his words, he failed to preserve capital and instead broke a fundamental rule by leveraging and averaging down when underwater. It’s a disappointing thing to hear of, and I’m sure it’s a common story this week. About the only positive thing about the situation is that those 5 Expensive Words aren’t likely to be used by him again.
To see the market come under heavy distribution is certainly not a new thing, because we all know that the market does much more than simply climb higher. Over time there are impressive rallies, there are dull trading ranges, and yes – absolutely – there are mind-blowing bloodbaths which can rock your confidence to the core if you find yourself caught on the wrong side of it.
Learning from Gustav, Ike, and Kyle
We’re at the tail end of hurricane season, and there are some realistic parallels we can draw here. Those who live in the projected path of these powerful storms whenever they come along realize that certain precautions must be taken in order to avoid physical harm. (See where I’m going here?) While a few of their belongings might sustain some damage, their willingness to pack up and get out of town when authorities say it’s time can save their lives – allowing them to return and rebuild, and once again thrive.
Similarly, as a trader you must be willing to seek shelter when storms come along, whether it’s a slow grind downward or a massive selloff like we witnessed on Monday. During these times, your account might take a hit, but any effort to preserve capital during such times will enable you to at some point resume your activities as a trader. (And that’s not something to be taken lightly, because I know of numerous others who wish they were able to do just that). Once the clouds begin to break up, then you can seek out those profits once again and begin to rebuild your confidence.
Safety First, Profits Second
Knowing that the market corrects is one thing, but making provision for your own safety in the event of such a move is entirely different. In my next post, we’ll look closer at a few specifics on how to put this idea into practice, but I wanted to set the table for it today and post a reminder that goal #1 is based on staying in the game. Without a sound understanding of that basic principle, making money over time becomes far more difficult.
It’s been a nasty market out there, so keep your head on straight and don’t let an adverse move take you completely out – whether you’re short or long. This too shall pass, so tread with caution and trust that better times will arrive when being bolder is far more prudent than it is now.
Trade well today, and I’ll see you back here soon with Part 2!
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]
Reckless Testing
September 24, 2008 at 11:34 am
Some traders are just reckless when it comes to trying out a new strategy.
From time to time, every one of us will see the need to modify our style in order to keep improving, and truthfully that’s a willingness each of us must have if we want long term success as traders. There is no shortage of tools or trading styles that might have the ability to improve your trading, so there’s certainly nothing wrong with trying them out when you recognize it’s time to change. In fact, some of the best traders I’ve ever known are willing to try new methods when they realize it could be better than their current approach. However, the key is how you test out those methods.
Reckless traders aren’t reckless because they are experimenters. Rather, they’re reckless in the way they fail to protect themselves while experimenting.
Just Enough to Feel It
Now, I’m not a fan of paper trading because no emotion is involved. Red and green numbers in a demo account somehow just don’t have the same impact on one’s psyche the way real dollars do, so naturally I don’t find it beneficial to “pretend trade.” Instead, having some real money on the line is the fastest way for the market to not only get your attention but also for you to learn quickly.
But hold your horses, because I’m definitely not advocating bold trading during a test phase. Yes, trading the actual shares with real dollars (as opposed to claiming a would-be entry on paper) gives you the best sense of how a new style really works, but go small. I cannot stress that enough.
The idea is to learn something new with minimal pain. Of course, stock market 101 requires that we pay the occasional tuition, but why tinker with different methods and invite more pain than is necessary before getting a feel for the new ways?
Just in case that tuition bill comes due, you want the price tag to resemble something from the local junior college – not an ivy-league school!
How to Test Best
So when the time comes that you find it necessary to do a little experimenting with a style that’s new to you, go slowly. You want to trade new methods so small that if you take several hits in a row you’ll still be fine. A couple of minor bruises still send the same message to your brain (‘that didn’t work‘) without requiring a broken leg to get the point across!
Don’t be reckless with new trading styles – be smart and find the best ways to get results with the least amount of risk. After all, you can always step up the risk ladder later on.
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]
