All Entries in the "Trading Tips" Category
Beware of Traps!
September 9, 2008 at 6:45 am
A relative of mine runs a ranch and occasionally has to capture animals which don’t belong there. So in order to rid the place of persistent pests, he sets out traps with intriguing lures. Most of the time, the offending critter simply can’t resist what appears to be a risk-free, tasty meal, and they fall for it – to their demise.
Some things just look too good to be true, and at times in the market that’s certainly the case.
Watch Where You Step
Take Monday’s huge gap higher, for example. Overnight news related to one of the biggest problems this market has faced (housing and foreclosures) produced some early fireworks as shorts ran for cover and many traders on the sidelines reacted to hopes that a significant turning point had finally arrived. However, the session highs were set in the opening minutes and before the morning was over, the bulk of those gains had been erased – trapping all who bought into the hype as prices rapidly returned to much lower levels.
Few stop to consider the psychology at work in the market, on both sides, leaving them vulnerable to become victims of such traps. The news isn’t everything, so the failure to recognize that it’s how the market responds and adjusts to that news can invite some significant pain. After all, even good news which isn’t good enough can bring about selling.
An overnight gift in the form of a gap like we saw Monday can also invite heavy selling, as can a timid breakout. Also, if you determine that the easy money has been made in the short-term, then you’re staring right in the face of a possible reversal situation.
Look At Every Angle
Remember, the market is a forward-looking mechanism, so whenever the majority has already benefited from a move, there’s not enough power to push stocks much further. As a result, stocks can easily head the other direction…usually quite fast!
Bulls and bears alike get trapped on occasion in the market, and every time it happens emotions are sure to run high. It’s obvious that pain is in store for one camp while profits are banked for the other, so in order to place yourself in the right camp you must learn to recognize situations which have potential for big short-term reversals. Developing that skill will help you avoid falling victim to these traps.
So whether you’re eyeing new entries or evaluating current positions after some big overnight news, always consider the flip side of the trade and what your opponents are thinking. If you sense their case is better than the arguments you might pose, then there’s no reason to put yourself in harm’s way for getting trapped. Back down or pass up the trade completely – that way you can still roam freely. 😉
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]
Hit Singles for Satisfaction
September 4, 2008 at 7:10 am
The allure of swinging for the fence is common in the trading world, and it appeals to each of us from time to time. However, that sure doesn’t mean it’s the thing to aim for in our trading from week to week or month to month.
Rather than gunning for home runs at every at-bat, I’m content to hit singles, knowing that getting on base is the biggest key in this game. There are a few advantages and motivating factors to this mentality, so let’s take a quick look at them.
- I do my best to avoid the “I don’t want to miss anything” mindset of a longer-term position trader by placing zero pressure on myself to participate in every move that comes along. For me, good trading doesn’t require that I catch the entire trend.
- I don’t enjoy letting good profits evaporate, so I’d rather Take the Money & Run and ring the register in most cases. I might miss out on the occasional double or triple, but I’ve found that when strong trends are present, multiple entries will set up along the way. That enables me to trade the same stock a few times profitably even if I don’t sit in for the entire move.
- I feel no obligation to stay with a position for the long haul. Ideally, I’m participating in the best portions of the move while having either zero risk (cash) or limited risk (tight stop) during those times when a rest phase or pullback comes along.
- For most of my swing trades, I tend to set an entry, stop, and usually 2 profit targets. That lets me book some gains along the way to ring the register while staying on for a continued move should it come. It also helps me offset the urge to take a good trade off the table, so partial sales are definitely helpful for leaving on less and less exposure particularly when a move begins to get a bit extended.
You don’t have to be a hero every day with your trading, so take some heat off yourself and do what you can to get on base. There are a lot of Hall-of-Fame members who weren’t big-time sluggers.
Aim for consistent success in your trading – you don’t have to trade big to find it. Patient progress goes a long way not only for your account, but also for your emotional stability along the way.
Plus, those base hits add up quite nicely.
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]
Quick-Hit Trading
September 2, 2008 at 7:18 am
Say a friend offered to give you a penny today and then double the money every day for a month. “Gee, thanks” you might say, expecting that to add up to maybe $25 or so.
But that response would make you rather ungrateful considering that you’re looking at more than $10,737,418 by the end of that month. You have a better friend than you thought! As Gary B. Smith once noted, constantly compounding money can bring truly amazing results.
I’m a short-term trader, and I don’t at all mind getting into and out of most positions over the course of just a few days. As a result, it’s only natural that Bandit is the word I use to describe my style. Rather than let long-term themes try to develop, I’m far more interested in compounding my money at a faster rate, making sure it’s doing its job whenever I put it to work. I love to catch the quick-hit moves.
Short or Long (Term)?
My swing trading approach necessitates that I use pretty tight stops to keep my risk in check at all times, so it’s typical that I’m shooting for moves more like 10% than 50 in my trades. I also scale the risk side properly as well, limiting losses on average to 3-4%, as opposed to the 15-25% a longer-term trader might allow.
A true hands-off trend follower might be looking to call the top or the bottom in the overall market or a given sector, but they’re also going to have to endure some difficult times along the way. Whenever their trades go stagnant, they stay with them in hopes they’ll get back on the move. Painful pullbacks and drawdowns must all be endured for the purpose of letting a larger move unfold, and those can often be of the gut-wrenching variety!
Some very successful traders have been longer-term trend followers, and I won’t argue with some of the advantages of that approach. It just isn’t best for me.
Get In, Get Out, Getaway
I don’t mind booking smaller but more frequent gains over the course of a few days. Quick money is fine with me – it adds up more rapidly and I rarely have the patience of a Turtle to stay long or short a stock for more than about 2-3 weeks. I want my money turning over more rapidly, so the tighter stops and narrower targets I tend to use help me to accomplish that.
As traders, every one of us must determine what we want out of the market, and then employ the best approach to get there. Take a closer look at your trading and consider what you want out of it. Consider the holding periods which suit you best – that’s how you’ll know the kind of trading style you ought to have.
From there, continually look to improve your approach over time, getting more and more efficient with your timing, entries and exits. Evaluating your trading for the sake of growth will pay off big, because even the occasional minor change can make a big difference. Review your results regularly, and you’ll start to make out 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]
Don’t Push When You Can Pull!
August 27, 2008 at 10:32 am
It would be nice if the market would post a sign and tell us where it’s headed, but if that were the case then trading wouldn’t be so lucrative when we’re right. Good trading doesn’t have to be about nailing every move, contrary to what many believe.
Rather, letting the market pick a direction and then jumping on for a ride can be a very effective approach simply by limiting our mistakes.
Often times we find the market to be range-bound or lacking momentum (such as right now ahead of the Labor Day holiday). During such times, it’s extremely important not to force trades in an effort to anticipate the start of a meaningful move. The drifty price action found within those trading ranges makes it extra difficult to gauge momentum, so making shorter-term trades with tighter stops and narrower objectives for targets is a necessary approach during such times.
Heads Up
Have you ever pushed on a door expecting it to open, failing to notice the “Pull” sign posted right in front of you? Had you only been paying attention, it could have been so much easier. 😀
Similarly, trading requires the same awareness on our part. Keeping our heads up and taking notice of any changes in the landscape which may serve as clues goes a long way toward avoiding blunders. If we don’t stay sharp and pay close enough attention to formulate an opinion, we’ll never catch those clues.
If you’re pushing when you should be pulling, recognize the difficulty you’re facing with your trading and change your approach. There’s a reason why that trade you’re fighting right now isn’t cooperating with you – and it isn’t that you’re unlucky or hard to get along with!
You’re trading against a headwind of some sort, and the sooner you recognize it, the sooner you can move on to a trade that offers you some real potential.
Even if you’re a contrarian, wait for those signals and confirmation that it’s time to act. Trading is easiest with the wind at your back, so don’t fight it!
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]
Identify Failing Bounces for Short Selling
August 20, 2008 at 7:45 am
Traditional Wall Street tells you that the market goes up over time, which has proven to be true. That’s nice if you’re a “long-term investor” who socks money away in mutual funds and doesn’t care about working your capital a little harder.
But for the self-directed trader, it’s important to remember a couple of things. First, the market (and stocks and sectors) will undergo corrections from time to time. Even if a longer-term trend persists, short-term hiccups and even the occasional gasp for air will occur. Second, those corrective phases (or downtrends) offer the best opportunities for short selling if you know what you’re doing.
Flip the Chart if You’re a Bull
You might be predisposed to trading the long side, in which case you’ll certainly relate to this analogy. Within uptrends, buying dips can be an excellent strategy to participate in the move. Doing so allows you to effectively buy on a short-term discount a stock which is in the midst of a longer-term advance. On the flip side, one of the best ways to participate in a profitable way within downtrends is to correctly identify failing bounces.
It’s the mirror-image of buying dips.
Shorting failing bounces can be a great way to trade the dark side, but it does require some finesse and an added dose of patience. These aren’t like breakout plays where you should expect an almost immediate pop and follow through. Rather, they are sometimes more like watching a cruise ship turn around… it might take a couple of days before the direction really changes! With that being the case, these kinds of plays are usually best for swing trading.
The Look
So with the concept laid out before you, let’s talk about what to look for and then I’ll show you an example. What we want to find is a stock which is in fact trending lower. That means lower highs and lower lows are in place, so that support levels have been broken in recent weeks or days with some high-volume selling. Since then, the stock has attempted to bounce back up but has been unable to attain previous relative highs on the chart.
Furthermore, as price goes up in the near term, volume is going down. That creates a negative divergence which shows us that the move is more of a dead-cat bounce as opposed to true accumulation taking place. Often times this establishes a bear flag or rising wedge pattern. As these patterns are confirmed, you’ve got a trade candidate on your hands.
Here’s what good shortable failed bounces look like on the chart, and be sure to notice the lack of solid volume on each bounce attempt:
Chart Courtesy of Blocks
As you find these types of setups, be sure to take notice of the duration of each bounce since stocks will often stick with a certain rhythm in how they move. Also seek to find some sympathy weakness occurring either in the same sector or in the overall market. That way when the time is right, you’ll be putting the odds of success in your favor as you profit from the next decline rather than just endure it.
Trade well out there!
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
Broken Trades
August 18, 2008 at 7:15 am
A memorable Far Side cartoon is called Horse Hospitals. In the picture, a pair of racehorses lie flat on gurneys with broken legs hoisted. A veterinarian rounds the corner staring at a clipboard in one arm while holding a rifle in the other. The adjacent room shows another gun-wielding vet with a large caption reading “BLAM” while eyes widen on the injured racehorses, suspecting their time is drawing near.
Those poor racehorses! If they only knew that a broken limb would seal their fate, they’d undoubtedly run with much more caution!
Now I’m no advocate of cruelty to animals, but my stocks are a completely different story. I have no love for them if they do not work, and I certainly know when something is broken (remember, my P&L tells me!).
If you think of your trades as horses in the race and one of them pulls up lame, it’s time to turn out the lights for that trade. If that trade was your employee and not doing its job, wouldn’t that be grounds for dismissal?
Let it go if it isn’t going to work for you. Staying in beyond your planned stop level exposes you to unnecessary risk with far-diminished odds of a reward, leaving your capital tied up in an underperforming trade.
Good trading requires a cold approach. Building and implementing a game plan is followed by reviewing results so that any adjustments can be made. If you want to trade successfully, make a commitment to operate in such a manner. It might not be an overnight process, but it’s one which will be well worth it to you in the long haul.
Btw, even the vet in the cartoon doesn’t bring his feelings into play…he’s staring at his ‘chart‘ before making a decision. 😉
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
Has the Easy Money Been Made?
August 14, 2008 at 1:51 pm
It’s a question all good traders find themselves asking on a regular basis…
“Has the easy money been made?”
Sometimes it’s in regards to an open position which has stalled out or losing momentum. Other times it’s tied to a look at the overall market, trying to determine whether or not the current move still has some fuel in the tank.
Indeed, few questions in trading are as important as this one.
As you evaluate your own trades, this is the question which will most often be your deciding factor in what to do. Perhaps you’re eyeing a nice setup for an entry… is the risk/reward structure as it should be? Or maybe you’ve been in a position which is warranting a second look right now… do you stay in, jump ship, or tighten stops due to a lack of trust?
How Do You Know?
Watching the rhythm of a stock’s (or market index’s) movement over time, and particularly the recent action, can provide you with some excellent clues as to what’s really taking place. Every stock has a personality, and your ability to decipher it will ultimately prove whether it’s trade-worthy.
Suppose we’re eyeing a rally which is underway and we’re trying to decide if it’s likely to continue. Gauging the upside volume compared to the downside volume can offer us some important clues. We can also glean a lot of useful info with a close look at the pace of the advance – is it sustainable? Measuring the depth of the dips, the quality of the rest phases, and of course the upside acceleration as strength resumes is going to complete the picture and leave us with some crucial elements to consider. Weighing each of these is what will ultimately bring us to action (or inaction).
A Fork in the Road
Whether it’s the current market move off the July lows, or any single position you are evaluating, always seek to determine if the easy money has been made.
If your conclusion is yes and you’re concerned the current wave might be closer to the end than the beginning, then be extremely cautious and keep any new trades on a very short leash. You might just be in the midst of one of those times when discipline and patience is needed while some new bases form in the charts.
However if your conclusion is no, then keep working your watch list in search of swing trading candidates which can leave you properly positioned should the move continue.
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
