All Entries in the "Trading Tips" Category
HOPE is Not a Trading Strategy
September 27, 2006 at 1:49 pm
He is the Wiz, and nobody beats him.
It’s true – I’m a huge Market Wizards fan. All 3 of these interview-style trading books by Jack Schwager are excellent, and they continue to teach and remind me of highly important lessons about trading. My copies are all marked up with underlines, highlights, and margin notes, and I seem to add more every time I open them up.
Recently, I ran across a great quote by Larry Hite in Market Wizards:
“First, if you never bet your lifestyle, from a trading standpoint, nothing bad will ever happen to you. Second, if you know what the worst possible outcome is, it gives you tremendous freedom. The truth is that, while you can’t quantify reward, you can quantify risk.”
What a nice, basic concept. Know your risk…..on every trade, at any given time.
I know a trader who’s struggling to follow this advice right now. After getting caught on the wrong side of the market a few times in recent weeks, he’s suffered a series of tremendous setbacks. He isn’t quantifying his risk – now he’s only thinking of the rewards….praying he can recover from it quickly. As a result, he is swinging for the fences and hoping for a miracle. I’m afraid it’s just a matter of time before he’s right back to square one and looking for another trading stake. I’ve expressed my concern to him, but it’s a decision he’s going to have to make for himself.
HOPE is not a trading strategy! The market doesn’t care what side you’re on, and it has far greater staying power than you do. Arguing with the market is a futile endeavor, so the best we can do is to quantify our risk before putting trades on, and once our stop loss levels are hit we’ve gotta exit. The hard part isn’t knowing when you’re wrong (your P&L will tell you at all times). The hard part is replacing that hope of a miracle with the resolve to take action and stop losing (they call them ‘stop loss’ orders for a reason!).
It is easier to put a giant dent in your trading account when you’re trading with leverage. Futures, options, and even just day trading margin in a stock account can greatly accelerate losses compared to just trading a handful of stocks well within your buying power. Be sure you understand the risks you’re taking, because trading with leverage will compound your errors and bring the pain even faster.
We can all heed Hite’s advice, whether trading well or poorly. It’s timeless and it’s dead on. How can you argue with the idea of knowing your downside? You might be a part-time trader looking to make some extra cash on the side and possibly become a full-time trader one day. Or, you might already be a full-time trader. Regardless, the idea is to keep yourself in the game. Don’t blow out your account. Quantify your risk on every trade, and survive whatever the market throws at you. We’re all going to be wrong at times…..just don’t stay wrong when you know it’s time to bail out.
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
Find out how I quantify my risk here.
[tags]Stocks, Investing, Stock Trading, Trading, Stop Loss, Market Wizards[/tags]
How to Get Short
September 19, 2006 at 10:41 am
On the heels of my order types post, I wanted to point out a useful tool to direct-access traders which only the more active day traders are likely to already know. Active traders who diversify are willing to trade both sides of the market, and aside from the uptick rule, getting filled on a short sale order is often the hardest part to catching the trade on the dark side.
Direct-access trading platforms offer hotkey choices to traders, allowing you to set up specific keys for sending out designated kinds of orders which are routed through your chosen venue. I have found that the ARCA market short/sell is probably my most valued hotkey for a couple of reasons. When I want out of a long position, I hit that key to send out a market sell order, regardless of whether I’m trading a listed stock or a Nasdaq stock. However, that same key is also the one I use when I am short selling a stock and need to enter the trade quickly. And fortunately for me, my trading platform automatically checks whether I’m already long, short, or flat so that I don’t need to set up different hotkeys for selling vs. short selling. For those of you hunting for the best direct-access broker, you might want to consider whether or not you’ll have to send out different order types for selling and shorting. Personally, I like to keep things simple!
The ARCA market short/sell is a proactive order, which means it will effectively ‘chase’ the market lower until either your order is filled or you cancel the order. On Nasdaq stocks, I find that using this key will get me into the trade almost instantly (it is scary fast), and on listed stocks (NYSE) it does a great job of helping me get filled when I want to get short.
Remember that short selling in a strong market can be tricky, but there’s still opportunities out there to catch pullbacks if you look for them in this environment. Once you find them, if you aren’t using the ARCA market short/sell order, you should be. It will make a world of difference to those of you who are willing to trade the short side.
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
[tags]Stocks, Investing, Stock Trading, Trading, Short Selling, Diversification[/tags]
Hidden Benefits of a Large Watch List
September 18, 2006 at 11:28 am
Bring wide eyes to your watch lists!
I’ve written before about my homework and the process I go through nightly to locate trading setups, but there’s a hidden benefit to my process that I feel greatly adds to my trading results.
Every afternoon after the market closes, I run my TeleChart scans and I end up with a ton of stocks in one big watch list. This big list is where I locate my trading candidates. Although I’ve seen software that offers to locate chart patterns and provide me with a potential shortcut, I feel strongly that a trained eye is better at picking up subtle nuances of a chart that may be extremely hard to mathematically define for a chart recognition software program. That is the primary reason why I flip through so many charts every night, but there is a huge added benefit I’ve noticed from taking the longer road – getting a feel for the overall market.
While I do take a close look at the market indexes every night in my newsletter (incidentally, every Sunday night you can get a look at my index charts on the free Market View page), there is an understated value in looking at a large watch list of individual stocks. Although it’s not too difficult to pick up on developing trends or trading ranges in the index charts, flipping through 2000 stocks manually tends to give me a much more complete view of how many stocks are setting up bullish patterns or if too many are getting extended. This in turn helps me to gauge how aggressive I should be the following day with adding new positions or paring back those which I am already in.
Flipping through such a long watch list takes me a little over an hour each afternoon, but I’ve found it’s time well spent for me. I started small with more like 50 stocks in my watch list, but as time has evolved, I’ve added more stocks to my tradable universe and my eyes have also become better trained to quickly locate the kinds of patterns I tend to trade. This has allowed me to look through many more charts in the same amount of time it used to require to examine those first 50. Making it a nightly habit will do the same for you!
By the way, subscribing to this RSS feed will mean you won’t ever miss a post!
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
[tags]Stocks, Investing, Stock Trading, Trading, Stock Watch List, Chart Patterns[/tags]
Keep it Orderly
September 12, 2006 at 1:43 pm
There are a lot of ways to buy and sell stocks these days, and virtually any kind of order you can think of is now available to traders. Because of my trading strategy, I’m often asked by subscribers of my swing trading service which order types I use to execute trades. The debate between Market & Limit Orders is an old one, but I’ve got pretty clear reasons for which type I prefer and when I use them. Let’s do a little Order Type 101 and look at some of the basics. Then I’ll wrap things up with a look at my personal preference.
Gotta Love Second Chances
August 7, 2006 at 4:42 pm
Second chances are so nice to get, even if we don’t deserve them! If you pay attention in this choppy market environment, you’ll often find that you get multiple chances to get into a trade (and profit).
This could be viewed as frustrating, as a stock breaks down or breaks out, only to quickly return to the support or resistance level. However, it can be great if you get caught snoozing on the first move!
Last night in my stock newsletter, I highlighted NTRI as a potential short. NTRI had broken down a couple of weeks ago and since then had formed a bear pennant pattern. A break below $51.00 at the lower trend line was the trigger for my short sale.
(Click image for full size) NTRI was primed and ready to break down from this bear pennant pattern, with the trigger being a break of the lower trend line at $51.00. NTRI triggered soon after the open today and I was able to short sell it as it broke through the $51.00 level (thank you ARCA market sell/short!). Had I missed the first entry, I would have had another shot at getting in the trade by offering into the first bounce which carried it right back up to the $51.00 level (funny how that works!).
(Click image for full size) NTRI broke the $51.00 level right off the open, but the bounce which followed provided another shot at entering this trade. Gotta love those second chances! Fortunately, NTRI drifted lower throughout the day, providing a nice trade whether you caught the first or second entry. In fact, if you don’t like to trade breakouts/breakdowns, you may actually prefer to bid into pullbacks or offer into bounces in order to establish a position – if so, this is an excellent market for you. Be on the lookout for second chance entries in these choppy conditions, and you’re sure to find some second chances to profit!
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
By the way, subscribing to this RSS feed will mean you won’t ever miss a post!
[tags]Stocks, Investing, Stock Trading, Short Sell, Trading[/tags]
One Method for Profiting in this Tricky Market
July 25, 2006 at 11:18 am
This market reminds me of a few years ago leading up to March 2003, where every bounce was an invitation to short sell (up until the final low was made). That market provided me with one of my better stretches of consistent profits, ironically with somewhat small position sizes.
Back then, the back-and-forth market action was producing sharp pullbacks and bounces much like what we’re seeing now, and I was trading a very effective method which was low-stress yet highly profitable. Call it the ‘Pick and Grin’ approach.
What I would do was establish small pilot positions (pick) in stocks on reaction bounces anticipating a move back down once the bounce was sold. This method of initiating smaller positions, booking some quick gains, and adding exposure when the stock returned to previous levels was very good to me. If my entry timing was poor, it didn’t matter a lot because I was only in a partial position. Depending on the stock, I’d either add the remaining shares up to my intended size (average down the good way), or cut the trade entirely and look for a better spot to re-enter.
Once the stock began to weaken, I’d place bids to cover at least half of my position, booking profits as the trade developed in my favor. If the move was sharp, I’d take most of it. If the move was slow and steady, I’d scale out on the way down. Then I’d patiently wait for the relief bounce or oversold bounce to arrive so that I could remount the shares that I had covered.
This went on for a few months, and I was amazed to see what my consistent gains were adding up to by the end of the month. Minor gains in a handful of stocks were booked with regularity, and the end result was a fatter trading account.
Right now, this market is making it very difficult to hold positions for very long. The sharp spikes upward we’re seeing are being followed by dizzying spirals right back down, making it much harder to not only locate good swing trading candidates, but also harder to hold them.
Consider the Pick and Grin approach until things smooth out. With the sharp market moves likely to continue for at least a little while, it won’t hurt to trade a little smaller. Plus, the add-and-subtract style of the Pick and Grin approach will let this back-and-forth market play to your advantage.
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
How to Grow Your Trading Account, Part 2
July 6, 2006 at 4:50 pm
In Part 1, we discussed some general ideas about how to grow your trading account. Here in Part 2, let’s check out the impact of this concept.
Jack and Jill are two hypothetical traders with different personal motives which lead to different plans for their trading profits. Keep in mind that both Jack and Jill have the same trading strategy.
Jack is a part-time trader looking to pull some money out of the market each year to supplement his income and help pay for his boat. Hypothetically, the same trading results will cap his earnings going forward, although it allows him some additional income each year. Every year, though, Jack’s account resembles these figures:
Jack: $100,000 trading account, withdrawing profits annually:
Beginning: $100,000.00
Profits: $20,000.00 (20% return)
Withdraw: $20,000.00
Ending: $100,000.00
Jill is a full-time trader who is performing the same as Jack each year, making 20%. Her husband works and they live off his income, which allows Jill to leave her trading account and subsequent profits intact. Jill begins to make more and more money every year with the same 20% performance. Look at the rapid growth Jill enjoys in her account:
Jill: $100,000 trading account, leaving profits intact:
Year 1 Beginning: $100,000.00
Profits: $20,000.00 (20% return)
Withdraw: $0.00
Ending: $120,000.00
Year 2 Beginning: $120,000.00
Profits: $24,000.00 (20% return)
Withdraw: $0.00
Ending: $144,000.00
Year 3 Beginning: $144,000.00
Profits: $28,800.00 (20% return)
Withdraw: $0.00
Ending: $172,800.00
Year 4 Beginning: $172,800.00
Profits: $34,560.00 (20% return)
Withdraw: $0.00
Ending: $207,360.00
WOW! Jill more than doubled her trading account in 4 years, whereas it will take Jack 5 years to double his initial stake. For Year 5, Jill would only need to make 9.7% to match Jack’s profit of $20,000! Or, she could match his 20% performance and more than double his profits for the year.
We all know the amazing results of compounding money, but hopefully this example of two hypothetical traders will get you thinking about what to do with your trading profits. If the freedom to access your trading profits each year is something you need, then regular withdrawals are for you. However, if you’ve got the savings put aside or an additional income to get you by, leaving your profits in your trading account even for a few years can do wonders for your trading results, even if your methodology never improves!
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
By the way, subscribing to this RSS feed will mean you won’t ever miss a post!
[tags]Trading Strategy, Stock Trading, Trading Account, Trading Profits[/tags]
