All Entries in the "Trading Tips" Category
Take Cues From Failed Patterns
December 18, 2007 at 6:35 am
Chart patterns are great for selecting trade entries, but rarely do I see them being discussed from the perspective of risk management. One of the best things about them in my opinion is that they show me clearly when I should be in or out of a trade. When they fail, the signals are clear and I can limit my loss. What else could I possibly want when I’m wrong??
Take SOLF for example. This stock recently tripled in just a few short weeks, putting it on the radar of every momentum trader around. With ample liquidity and lots of strength, it’s no wonder it hit my watch list. I particularly liked the symmetrical triangle pattern it formed as it consolidated recent gains, creating a nice pivot point for an entry on the long side.
I bought it on Friday morning for a trade as it cleared $27.25 at the upper trend line of the triangle, but the stock couldn’t hold the breakout and failed soon afterward. I took a loss of 2% on the failed trade (I’ve certainly had worse). Although a losing trade isn’t any fun, I definitely felt the setup deserved a chance, and if faced with the same opportunity again I’d take it. However, I limited my loss because the pattern failed.
The stock is now 10% below my exit price just one session later. Taking my cue from a failed pattern really prevented additional pain, allowing me to move on to the next trade and protect my capital rather than babysit a stock which had reversed and hope for a comeback.
Here’s a look at SOLF and the failed symmetrical triangle pattern:
(Click for full-size image, courtesy of TeleChart)
Trade great setups which offer big potential rewards when you see them, but be sure to let the patterns you’re trading guide your exits as well.
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]
Consider Risk First, Then Reward
November 29, 2007 at 8:31 am
Anytime I am eyeing a trade to make, the first thing I consider is what is my risk in case I’m stopped out. Theoretically I might not be able to foresee all that could happen to a stock, but barring a major news event or gap in the stock, I want to first determine at which point I’ll need to exit the position. Only after this step do I take a look at the positive potential for the trade and then move towards a decision for an entry.
A major difference between amateur traders and professionals is the fact that amateurs consider the potential reward first and then may look at their risk, while professionals consider their risk first and then look at the potential reward. This is a big deal!
Keep Your Head On Straight
The market carries a lot of allure and it can entice you into making larger or bolder trades when all you look at is the reward side if it pans out. However, surviving the trading game and sticking around long enough to make a living at it will require that your risk be quantified before anything else. Even with those home-run types of plays you might feel very strongly about, you still need to determine at which point you’ll bail out of the trade and cut your loss in the event that you’re wrong.
Consider the earnings play by the amateur trader trying to make a quick, easy buck on a favorable gap from the announcement. This play is attempted all the time, but the truth of the matter is that while the odds are high that a gap will come, the direction and size of it simply cannot be determined. This leaves the trader hoping to hit it big but very uncertain as to their exit plan if the stock moves against them.
Trading Like A Pro
Professional traders operate in a completely different manner. What appears to be a good trading opportunity is examined before the entry is made. This closer look may not take a long time, but it will reveal to the professional key information that will make up his mind on whether or not to take the trade. Determining an adverse exit level will allow him to define his risk, size his position accordingly, and then decide if a favorable move will pay him a multiple amount of what he’s putting at risk.
This principle is at the heart of profitable trading, because we are going to have our losing trades, sometimes frequently. Ensuring that those losses are contained will make them very easy to overcome with winners that we will find, but a methodical approach which begins with a look at the risk is where it all begins.
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]
What It Means To Wait On The Market
November 21, 2007 at 10:54 am
One comment I make frequently over on the main site is to “wait for the market” to produce good trading setups. Those of you who read me over there understand what I mean, but the rest of you have no doubt heard the phrase. I thought it might be helpful to explain just what it means and give some examples of how it’s done, particularly because it is so important in this wild market environment.
A good trade is usually a planned trade. For me, that means scouring the charts in search of patterns which I’ve found to be repeated over time. They also give me a black & white entry and exit as they confirm or fail their patterns. My style is such that I won’t trade unless and until I see these patterns emerge. Oh sure, I’ve forced plenty of trades from the usual boredom trade to the revenge trade, but those kind rarely pay me. The ones which pay the bills are the ones which come along and really stand out from the charts, the ones which I can’t pass up.
Waiting on the market means that you don’t go hunting excessively to find a good trade. It means you do your homework and take what the market gives. I’ve found that when I have to dig and dig to find a trade that it’s usually not worth taking. The best trading periods offer up plenty of opportunities for entries and new trading ideas, so when you’re not seeing what you like don’t force it.
The current trading environment is a sloppy one, so I’m having to put this theory into practice daily right now. After a prolonged uptrend, the market entered a corrective phase a few weeks ago and volatility is running extremely high all of a sudden. Emotions are swinging back and forth as traders take profits and fund managers worry about getting left behind every time a bounce begins. This means that the daily charts which typically offer a steady flow of multi-day trade candidates are now just not offering much without drastically increased risk.
As a result, I’ve been doing more day trading than swing trading, reducing my trading timeframe so that I can keep my risk in check. Even planned trades which have abbreviated timeframes (like day trades) are requiring extra patience right now, because the frequent reversals and morning price gaps which have been so common in recent weeks are preventing many of them from triggering entries. So rather than lower my standards purely for the sake of activity and put on lower-quality trades, I wait!
If you’re new to the game, be aware that trading shouldn’t be full of excitement and thrills every moment of the day. It’s easy to want to be actively trading at all times, but sacrificing your objectivity for the sake of entertainment will mean a quick exit from the game. There are times which will be downright boring as you wait for your pitch to come along before you swing the bat. Your ability to accept this fact will put you miles ahead on the learning curve, and you’ll pay far less tuition while learning the ropes.
Patience is probably the most underrated attribute of the successful trader, but it’s the one most-often exercised by those of us who make our living in the market. So whether you’re letting a good trade develop or simply looking for your next play, wait on the market to provide the conditions you’re seeking and you’ll eventually be glad you did.
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]
Modern Day Darvas Methods
November 6, 2007 at 6:50 am
One of my favorite trading books is the all-time classic, “How I made 2MM in the Stock Market” by Nicolas Darvas. The book outlines how Darvas became a successful trader by overcoming his own mistakes through his ‘box theory’. Having gone through several different methods without finding any consistency in profitability, he ultimately became a chartist and a millionaire – imagine that! 😉
I’ve read this book probably 10 times over the years. One thing which stands out to me is that he found success by avoiding getting spooked out of good trades, which would have happened to him had he watched the tape too closely. Darvas’ inability to keep close tabs on the market at all times allowed him to let his trades fully develop, preventing him from micromanaging his positions. If you’re like me, you might stand to benefit from such an approach.
While traveling the world by way of his profession as a dancer, he received his weekly copy of Barron’s, and reviewed his stocks of interest through these quotes which were delayed by days. After reviewing the prices and locating his favorite chart pattern, he would wire detailed trade instructions to his broker. Although today’s markets move faster than they did back then, at the end of the day he was simply focused on the price action and how his stocks were moving – just as we all should be. This means he was not being distracted by the extra “noise” of every tick, geopolitical news, rumors or sentiment.
A member at TheStockBandit.com brought this up in the discussion forums not long ago, stating that since he works all day and can’t micromanage his trades, he has let them develop more fully without overreacting to every little blip that comes along. Many of us fight the urge to react to every tick, and with dirt-cheap commissions and sophisticated trading platforms, we can micromanage trades quite regularly if we allow ourselves to! I found myself in a doctor’s waiting room the other day checking quotes on my PDA, even though I knew my safety nets (stop loss orders) were in place. I think it’s a good idea to stay connected to the market (even Darvas did that via his Barrons), so long as we just don’t succumb to the urge of taking action when no action is really needed.
Here are a few ways a modern-day Darvas might prevent micromanaging trades:
* Use Your Platform Tools. Set it and forget it. Whether you have sophisticated tools like bracket orders or just the basics, use the tools your broker has provided to help you structure your trades in such a way that they have the ability to play out without needing your constant supervision. This will help you to trade without emotion and allow you to fully implement your strategy for the trade from start to finish.
* Hide The Number. I’ve written about hiding the number before, and I think it can be quite beneficial, whether it’s your account balance or even just your P&L on trades. A trader friend of mine claims that hiding his P&L has made the biggest positive impact in his trading – more than any tools or indicators. It’s an interesting concept, particularly if you find yourself overreacting to every little pullback or advance. By giving his broker trade instructions ahead of time, Darvas didn’t watch his P&L or spook himself out of trades.
* Turn off the news flow. Darvas found that his absence from the Street allowed him to stay in trades longer so that he could let his original game plan play out. That means he was not surrounding himself with rumors or opinions or the news flow. He didn’t make bets based on gut feel – he stuck to the charts, trading from the price action when opportunies arose. If for you that means turning off CNBC, avoiding comparing opinions with your trading buddies by staying off of instant messenger or Skype, then so be it. Whatever helps you make your money is what you need to focus on. Remember, Silence is Golden!
Every one of us has some things to practice and refine in our trading. If you find yourself letting every tick influence your trading decisions too much, then take more of a Darvas approach and see what happens. You just might realize that your original game plan will serve you far better than shifting gears on the fly in an effort to control every move of your stock.
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, Darvas[/tags]
Deciding if a Stock is Trade-Worthy
October 31, 2007 at 9:58 am
I’ve noted before that I review many charts every night in my preparation for the following trading day, and I will probably always do so. I think there are numerous benefits to it, including keeping a streamlined watch list of trading ideas at your disposal, which greatly aid in my trading.
Since I’ve already reviewed my charting routine, I’m hoping it will help you out to explain a bit just how to go about deciding if a stock is actually “trade-worthy.” There are several things I check for as I flip through the charts, so let’s go through 5 of them and see if there’s some particular aspect of my process which can help you in yours!
Does the stock have a pattern?
I trade from the chart patterns, and the main reason why is that I know where to get into and out of trades. Every trader needs to have some kind of method for determining entries and exits, and for me this comes from the charts. Chart patterns can assist all sorts of trading methods, from short selling to playing uptrends or looking for reversals from support and resistance levels. Regardless of your method, watching the charts closely and having some familiarity with the patterns will help you often in knowing whether a particular stock should be on your trading list.
Does the stock meet your price & volume requirements?
Asking yourself these things when you run across an interesting chart will help you to quickly determine whether you’ll be able to get into or out of the stock smoothly, as well as whether there’s some potential for movement once you’re in. Illiquid stocks won’t have sufficient trading volume, showing an absence of buyers and sellers. That’s never a good thing, because your buy and sell orders need to be fulfilled by other sellers and buyers. The stock’s price can also have an impact on whether you’ll want to trade it, as some expensive stocks can carry a wide spread and move too far for your comfort. At the same time, a cheap stock may not offer up enough opportunity for price fluctuations if you take the trade.
Does the stock have earnings on the near horizon?
This is a big one every 3 months, as a slew of earnings reports begin to roll in about 2 weeks after the end of the quarter. These scheduled news releases are company-specific, and trying to trade them is a complete gamble. A good plan is to simply do your charting homework and then check the earnings calendar from a site like Yahoo Finance to be sure an entry in a stock won’t coincide with the news, particularly since they usually mean significant price gaps.
Does the stock have a history of making tradable moves?
A stock’s character, particularly in recent weeks and months, will play a major role in how (or even if) it should be traded. Watching at recent history to see if a stock tends to make good multi-day moves in a trending fashion, or if instead it typically makes quick one-day splashes followed by indecision will go a long way in helping you determine your strategy in trading it. Some stocks make habits of trending smoothly, while others gap frequently or may simply ignore indicators you rely on in your trading method, and each of these factors should be weighed before an entry is considered. Every stock has a personality, and the key to good trading lies in finding stocks whose personalities match your trading style.
Is the stock approaching key resistance or support?
Some stocks will have every important variable in place, but the only potential impediment to a lasting move could be major resistance or support (for a short sale). These levels will appear as congestion areas on the chart, and will often slow down a stock on its way higher (or lower). Anytime I see these virtual speed bumps on the horizon, I will not consider swing trading the stock but will instead just take it for a day trade to grab a quick move.
No matter which trading method you prefer or timeframe you trade on, make it a point to add some consistency to your preparation process. Having some well-defined qualifications for stocks you’re considering placing trades in will keep you disciplined and will no doubt add a layer of confidence to your approach, which will help you get back on track when you need it and stay there.
Trade well today!
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]
When Character Changes
October 23, 2007 at 7:34 am
Anytime we see a big contra-trend move like we got last Friday, the discussions begin….
Was it the end of the trend? Is this just another dip to be bought? Is the world ending?
Those questions arise for the overall market, but also for individual stocks. In reference to the stocks, the answer to all 3 questions is yes, depending of course on the stock in question.
Whenever I am considering whether a dip is buyable, the most important aspect of the stock to evaluate is whether the character has completely changed or not. Some stocks go through a minor character change when they see a minor dip in the midst of a strong uptrend, but others will reverse course sharply and never look back. The latter kind is what I want to avoid like the plague!
As you begin to work your watch list and seek out potential long-sided plays in the days ahead, take careful note of just how intense the dips are. Doing so will greatly assist you in deciding whether a buy is warranted, or if instead you need to keep waiting for a better opportunity.
Let’s look at a couple of examples.
MMM was trending nicely higher recently, climbing and basing on the way up in a healthy fashion. This stock’s ability to put in rest helped it keep climbing without getting too extended. A couple of weeks ago, MMM began to pull back gradually, but the uptrend was still intact. This stock actually had found support just above an old base, but then came Friday’s sharp move lower on heavy volume. The big spike down was followed by more weakness on Monday, and needless to say this chart no longer resembles an uptrend. As a result, I’ll avoid buying anything that looks like this.
(Click for full-size image, courtesy of TeleChart)
NUAN has been trending higher the past few months, and this stock also recently began a pullback. It also took a dip on Friday (and Monday temporarily), but the character of the stock was not affected. The pace of the pullback has remained constant, as is evident by the trend line just overhead. This is the kind of setup which I would consider putting on watch for a potential long-sided play once things shape up (and if it could clear the trend line). Stocks which may be impacted by widespread selling pressure but which still hold up relatively well are the only stocks worth looking at once the storm passes.
(Click for full-size image, courtesy of TeleChart)
Be careful out there with new buys, and pay close attention to the character of your stocks! If the intensity of their pullbacks worsen considerably, cross them off your list of buy candidates and move on to the next good setup.
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]
Earnings Are Tricky
October 18, 2007 at 11:10 am
The mother of momentum stocks is set to report earnings tonight, and I have no doubt that GOOG will shake and bake one way or another after the news is out. With the odds of a large gap tomorrow morning in the stock, the allure is there for some fast profits on either the long or short side.
On that note, I know that some of you feel compelled to satisfy your craving for risk. If that’s the case with GOOG, then let me encourage you to define your risk and limit your downside exposure through a call or put purchase. If you absolutely can’t stand to pass up the gamble opportunity, then at least you’ll know what the worst-case scenario will be in case you’re wrong.
Personally, I like to save money and confusion by avoiding earnings plays. That might not sound very exciting, but I’m not a trader for the excitement. I like making steady profits with consistency, not roller-coaster emotional swings betting on coin-toss earnings reports and hoping to be right.
They’re just too tricky to play! Not only do you have the reaction to the top-line number, but soon after there is a reaction to the conference call & any guidance that may be offered. Don’t forget that expectations going into the report play a huge part in how the news is accepted, and someone’s sure to be disappointed or surprised. In addition, there are far fewer traders in the after-hours trading session, which means less liquidity. That’s a really bad thing when you discover you’re wrong and need out of a trade!
Best bet: stay away from earnings and let the amateurs duke it out. Instead, find the chart patterns you like and trade them. Exploit your edge over time for profits, and don’t worry about the gambles for the sake of excitement.
Trade with discipline!
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]
