All Entries Tagged With: "Capital Preservation"

Prepare for Anything

January 21, 2010 at 7:00 am

On several occasions in recent years, I’ve taken a spring trip with my dad and some friends to Arizona to play golf for a few days.  I love the desert, and it’s fun to spend some time with the guys and make a few birdies (let’s not talk about the bogeys!).

Around Scottsdale, and particularly to the north of town, it’s quite common to see single-engine planes buzzing around the skies.  Maybe it’s the great weather and silence of being on the golf course that made me notice them, but they seem to be everywhere.  They’re pilots in training, and they’re starting small before they work their way up to something larger (like perhaps, something with more than 1 engine!).  I respect that approach, and we’ll touch on that shortly.

But one thing that really caught my attention is that they actually shut off their engines – on purpose – over and over.  What?  It’s one thing to hop in that little thing with what sounds like a lawnmower motor on it, but hey, it’s no glider.  Why would they do this intentionally?

They’re creating stall conditions and learning to recover.  Learning to purposely manage a malfunction in a controlled environment (well, partially) helps them avoid panic should it ever happen unannounced.  Eventually, they’ll become the kind of pilot I wouldn’t mind flying with.

From One Cockpit to Another

As a trader, sometimes that malfunction happens without warning.  Sometimes right after an entry is made, the position rips right against you, perhaps even before you’ve had time to place a stop.  Sometimes it’s an overnight trade which has unexpected or unscheduled news hit which causes the stock to gap against you, perhaps even beyond where you had intended to exit in the event of a failed trade.  It’s painful and shocking, and more often than not, it results in panic for the untrained trader.

So how do you deal?

It’s almost impossible to mimic the emotions that go along with such a situation, but here are a few simple things you and I can do in order to avoid panic.

1. Expect it to happen. That doesn’t make us negative thinkers, mind you, but rather traders who are mentally prepared for anything – including the worst-case scenario.  After all, if we’re prepared to face the worst, what could possibly cause us to panic?  The point here is that through logical thinking as well as visualization, unexpected events and adverse moves can be mentally rehearsed to the point that when it does happen, we’re focused on the solution rather than the problem.

2. Keep a level head. By doing #1, we’re freed up to maintain our wits.  Throwing a temper tantrum or freezing up entirely is only going to make it worse.  The deer in the headlights stands motionless (at least here in south Texas), which means it’s up to the car to change course if something awful is to be avoided.  Don’t be the deer – you can’t base your protection on hope that the stock will change course for you.  Cooler heads will always prevail, so exercise self-control when you find yourself in a sticky situation and your mind will be available to strategize.

3. Expect to survive. Trusting that you’ll be alright in the long haul will help keep things in perspective, just as they should be.  What might feel like a catastrophe to the inexperienced trader might be a little unsettling to you, which is something you can absolutely recover from.  At the worst, it’s one bad trade out of your next 1000 trades, so consider it a spot on the windshield to look beyond rather than something worthy of doing more damage to you than it already has.

4. Never allow one trade to be too important. This of course takes into account position sizing and position risk, because the financial hit is the one that comes first.  Putting on trades which are larger than they should be is nice when they work, but when they don’t, look out.  Staring at a loss which is bigger than you’ve faced before will bring instant regret.  Similarly, trading within one’s limits also means that no trade is ever emotionally too important.  The aftermath which follows a big loss can be more emotional than financial, so walk the line carefully when choosing position size, and you’ll avoid a tailspin.

The market will dish out surprises from time to time, no doubt about it.  Train yourself to expect it, and mentally rehearse some ways you’ll respond when it happens. You’ll ultimately feel as though you’ve been there, and your second reaction (following ‘oops’) will be a remedy rather than crippling anxiety and fear.

Trade Like a Bandit!

Jeff White

Are you following me on Twitter yet?

Keys From a 6-Month Streak

January 13, 2010 at 3:18 pm

Anytime you find yourself in the midst of a streak in your trading, it’s worth paying attention to. When you’re winning, you need to find out why.

A few years ago, I was fortunate to put together a 13-month streak of consecutive net profits (profits every month for 13 months). The longer the streak continued, the more I thought about it, and the better it made me to sort of ‘observe myself’ during that run. I made note of not only my routine and the kinds of plays which were working, but I also included my thought process and the mentality I was bringing to the table. I still occasionally reflect on those notes to stay sharp.

For the past 6 consecutive months, we’ve put together net profits in each month over at TheStockBandit.com (July, August, September, October, November, December).  Results can be found here.

Although I am trading confidently, I’m not telling you this in order to boast. I’ve been at this long enough to know the market will serve up a healthy dose of humility when it’s needed!

Rather, I want to share with you some of the things I’ve been focused on in recent months that have brought consistent success, hoping it can improve your own process.

Here are 5 Keys I’ve taken from the past 6 months:

* Be Patient. I have not forced trades.  When setups were plentiful, I would get more aggressive.  Hence the reason some months had more trades than others.  When the setups were harder to come by, I was willing to wait.  The year is long, and there will be an abundance of opportunities, so there’s no need to try to make something happen.  Watching and waiting for the must-take setups to come along pays off.

* Picky is Good. Before committing capital, I have been requiring high-quality chart patterns and situations which carry a nice potential payout.  Lowering your standards to second-rate setups will result in overtrading and a higher barrier to success, and trading is already hard enough without that.  You deserve the best, so require it if you’re putting money into it.

* Take the Conservative Route. The occasional home run is nice, but they don’t always happen on purpose.  In fact, swinging for the fences will send you right back to the dugout more often than it’s likely to put you on base.  My approach has been to hit singles and ring the register more often, paying myself when I catch a nice move, but now wearing out my welcome.  The conservative route brings with it consistency and confidence, two things I strive for.

* Have Directional Flexibility. A willingness to trade both the long and short sides has led to my booking winning trades on the short side in every month during this run, despite the fact that the market has pushed relentlessly higher.  This was extremely helpful during July, September and October when we saw some brief market pullbacks as well.  Looking for outlier stocks can pay off, both in terms of winning trades and the occasional hedge to long positions.

* Monitor the Behavior of Positions. Never trust a skinny chef, or any stock you hold a position in.  I don’t mind giving trades some wiggle room, but I do keep a close eye on the price action and how volume corresponds with it.  During this run, whenever I started to notice a discrepancy between what I expected to happen and what was actually happening, it was a clue that an adjustment may be necessary.  Every stock has some personality associated with it, so if that begins to change, give it your attention and be willing to modify your trade parameters.

The next time you find yourself in the midst of a nice run, take a little time to see what you can learn from it.  Take note of what’s working and what isn’t, do more of that which is working, and keep plugging along.  It will help you not only perpetuate the process you’re already in, but it’ll help you return to the same mode later on.

Trade Like a Bandit!

Jeff White

Are you following me on Twitter yet?

How to Lose Like a Winner

December 15, 2009 at 1:48 pm

I recently heard that in relationships, you can be happier if you choose to accept the whole person.  The idea is that instead of trying to weigh everything you like vs. everything you dislike, accepting them as generally positive is a better decision. Thankfully, my wife does that for me, looking beyond my numerous flaws and allowing my positives to overshadow them.

If you stop to think about it, this is a pretty good way to measure everything and everyone in our lives.  Staying objective about ‘it’ lets you recognize that overall it’s a positive thing.

The successful trader is no different.  He looks at his overall trading operations for a given timeframe, and if the profits are there, then the mission was accomplished.

That’s not always an easy thing to do.  In fact, I’d suggest that your inability to view your trading in that general light could put you in the popular camp of those who can’t cut it in this game.  It’s much more natural to allow specific trades to stand out and influence our line of thinking.  It can result in a directional bias, a pet stock, or a slew of other closed-minded patterns of thinking – all of which can lead to the destruction of one’s account.

What we want to do is to win.  And if winning is defined as overall profitability, then winning will involve some losses along the way.  You and I have to be able to lose like winners!

Here are 4 ways you can do that:

1.  Allow no single trade to define your trading. Dwell on it for a short time if you must, but then move past it whether it was a big win or a disappointing loss.  You might have put a lot of preparation, concentration, and capital into that one great idea, but it’s over now.  Either pat yourself on the back for a trade well done, or brush yourself off and get back on your feet.  Think about how you can use it to your advantage.  Maybe you fattened your account with the profits from it, or expanded your comfort zone because of it.  Great.  Get back on your horse.

2. Win the war, not every battle. Put on individual trades which have sensible risk/reward, but place emphasis on your overall operations rather than each individual effort.  Basically, see the forest and not just the trees!  Accept that there will be some some losing trades, perhaps frequently, depending on your timeframe, and aim to overcome them with larger or more frequent winners.  The point of taking this step is not to go to battle with every trade due to the mindset of having to be correct.  Accept it when you are wrong, and no single ‘battle’ will ever sink your ship.

3. Cast fear aside. Fear is arguably our biggest enemy in trading.  It can cripple you if you allow it.  This is manifested in ways like trading so small that a win or loss has virtually no impact, or maintaining stops so tight that the stock isn’t able to fluctuate naturally without shaking you out.  Those who spiral down the drain of losing are often times gripped by fear.  Don’t allow that to be you.  Maintain a healthy respect for the market, but don’t be afraid of it.

4. Learn from every loss. You’ve paid the tuition, so you might as well get the lesson!  This makes a loss something you can still gain from, and every winner does it.  Always seek out ways to increase your trading knowledge, whether through specific education like a stock trading course or simply picking up on subtle behaviors in price action that are starting to surface.  Is the market starting to change, or are you refusing to avoid methods which aren’t paying off?  Keep an open mind, always look for the lesson, and let the long-term losers be the stubborn ones.

Lose like a winner this week, and you’ll have more to show for it.

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?

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:  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?

21 Questions from Last Week’s Chat

August 13, 2009 at 11:41 am

Last week’s trader chat generated quite a few questions.  A number of them we were able to address during the chat, but many more went unanswered.

If you were in attendance and didn’t get your question answered, look for it below. But even if you weren’t there, hopefully you’ll find this useful to observe.

Here are 21 unanswered questions from the session:

1.  Footbargain:  Jeff, what kinds of things do you look for to “trade the trader?”

• Thanks for your question Footbargain.  I wrote about this 3 1/2 years ago, and I still think it’s a very good exercise to regularly consider the flip side of your trade.  Obviously “they” are looking for a move in the opposite direction as you, but weighing their possible reasons, emotions, and technical exit criteria can really shed a lot of light on what it is you’re up against.  Of course, you’ll need to abide by your own designated levels on each trade, but understanding when the other side may get frustrated or overconfident can certainly give us a better feel for the trade  and whether or not it deserves to be on our screen.

2.  Tom:  Greetings Jeff, assuming we do get the “inevitable pullback,” what support levels would you be looking at to re-enter long positions?

• Hi Tom!  Using levels from the S&P 500, spots which have served as resistance or support in recent months would mark logical areas for other buyers to step in.  The ones I’m watching are 956 and 875.  I might add that if the market is selling off sharply into those levels I would not look to jump out in front of it.  Some stabilization in those areas would have far greater appeal.

3.  Jeff: Hey Jeff, I’m a paid subscriber and I do like your work.  Is Worden the main charting software that you use?

• Yes Jeff, TeleChart and StockFinder are the only charting programs I use.  I’ve found them to be very powerful and robust programs which offer many more features than I could ever possibly utilize, and yet they’re very simple to use.

4.  Dharm: Do you believe it is a bear rally?  Or are you in agreement a bull trend has begun?

• Hi Dharm, this really is a timeframe-based question, which leaves it open-ended.  In the short term and intermediate term, we’re without question in bull market mode.  The move up from the lows has exceeded 50%, which certainly qualifies as a bull market for me.  However, zooming out to the long-term timeframe, we are still well off the highs set less than 2 years ago.  We also on the long term timeframe have yet to pull back and produce a higher low, so for that timeframe I’m reluctant to classify this as a technical trend change yet (although I do think it will ultimately result in one).

5.  Ken: On stops being too tight, where would you place percentage wise on entry?  How often do you adjust the stop once you’re in the trade?

• Hi Ken, check out this post on stop loss placement for adjustment purposes(also includes links to prior stop loss posts which you may find helpful).  When it comes to the entry, I don’t have a set percentage I go by.  Rather, I’m going to base it on the chart, and most notably a failed pattern.  For some setups that might mean 3%, for others it might mean 6%, so it will vary.

6.  Ron:  Do you ever stay with the levered ETF’s more than a day, say a week?

• I do trade them in retirement accounts that way Ron, although I don’t want them to become long-term holdings.  What I prefer to do is start a position when I think the market is at an important turning point, then do my best to stick with that trend until it seems to have exhausted itself.  I have done well with the levered ETF’s in this fashion, and because they’re also optionable I don’t mind selling calls against them along the way.

7.  Julie:  I have lightened up significantly during the past three days.  The long I do have is an ETF.  How far down would you be comfortable seeing a pullback on the S&P?

• Hi Julie, I wouldn’t at all mind seeing a pullback reach the 956 zone or even 875 again (a level which has proven itself several times over the past year).  When it comes to your trade though, your original basis for entry and the timeframe you intended it to be should be the biggest consideration.  If it’s worked out well for you, then be sure to retain the bulk of those gains.  That may mean a partial sale up here after the run, or it may mean raising your stop, or a combination of the two.  I’ve found in my own trading once I start getting uneasy with a trade that it’s probably time to draw some lines in the sand and ensure that I get paid from that winning trade without giving it too much room back down should a pullback happen to arrive sooner than later.

8.  BullishBeauty:  Jeff, I do believe the correction is coming and I’ve lightened up as well.  Question is when a position gets to almost profit today, close it or hold til Monday?

• Hi BullishBeauty!  This question was referring to last Monday, so since we now have that hindsight let me instead address this from a conceptual standpoint.  When you’ve designated a target which is nearly reached but not quite, it’s decision-making time.  You either (A) stay patient and allow the stock to move away from that target and trust that it’ll eventually move through it, or (B) you recognize that your target may have been just a little too aggressive, and that therefore you should book (at least some of those) profits now.  My tendency is to go with choice B since I like to keep my capital turning over frequently and I like to ring the register often.  If you’re a more patient trader, the former scenario may be the way to go.  I do want to stress though, that whichever you choose, be consistent in it!  That way you’re decisive and the law of averages will run its course.

9.  Charles:  For the rookies can you explain the price and volume you use?

• Hello Charles.  I really like to focus on these 2 things, as they are the most important.  All else is derived from them, so they are the source of technical info for us as traders.  Price is of course where the stock is currently trading, but it’s also the price action.  I like to see how price is moving.  Is it moving fast, is it moving steadily, is it indecisive and confined to a trading range of some sort?  Basically, who is winning the battle?  And with volume, I want to see how it corresponds to price.  Is volume spiking as price climbs?  If so, it indicates to me that there’s a lot of participation among buyers and that therefore the move may have further to go.  Volume is the fuel that propels prices higher, so the more gas that’s in the tank, the farther it can go.

10.  Tom:  Jeff, can you offer some relevant scanning criteria for day/swing trading?

• Hi Tom, this is something I get asked quite often.  For me, I don’t rely heavily on scans to locate the plays I take.  What I actually do is start with all the stocks out there, then knock off some huge chunks of stocks which I know I don’t want to trade.  Those are the low-priced, illiquid stocks which hold no appeal to me as a trader.  By eliminating those, I get stocks with the ability to fluctuate regularly and which carry adequate volume for trading actively (I want plenty of buyers when I’m selling and plenty of sellers when I want to buy).  This generally means I’ll eliminate single-digit stocks and anything with fewer than 500,000 shares traded on an average day.  That still gives me a large list of stocks, and from there it’s a matter of spending the time to eyeball the list, extract the setups with some potential, and continually refine the list until I get some trading candidates.

11.  Dirk:  Hi Jeff & Charles…first of all thanks a lot for this great opportunity to share your knowledge with us.  I have a very general question regarding position sizing:  Given a certain allocation of money to swing trade, and based on that amount, a fixed amount (like 8-10%) one is willing to risk on a trade, is a large position (cheaper stocks) with a tighter stoploss preferable over a smaller position (higher priced stocks) with a wider stop loss?

• Hi Dirk, thanks for your nice comment and this question.  There really is no right answer here, as it will simply boil down to your own preference.  Give each style a try and see which one works best for you.  And I should clarify, that isn’t necessarily based upon the stock’s price, but rather how tight the pattern is that’s being traded.   I’d say it will really depend on your personality.  If you’re a patient trader and don’t mind waiting for a move to develop over the course of several days to several weeks, then wider stops are suitable.  If on the other hand you’d rather keep your money moving more often, then the tighter stops and more of a ‘base hit’ mentality for more frequent but smaller moves would be appropriate.  Personally, I fall into the latter category of tighter stops as I prefer to know rather quickly whether I’m right or wrong in the play.

12.  Brian:  What event do you think could cause the second leg down?

• That’s a great question Brian.  I suppose it could be economic data which begins to disappoint, or it could be that the prospects for growth begin to subside and a wave of profit-taking evolves into a deeper correction.  I honestly don’t know what it might be, but I’m also not a macro guy.  I figure sticking with the technicals will tell me all I need to know (when momentum slows, when selling pressure intensifies, when dips fail to get bought aggressively, etc.).

13.  Jon N:  I have a stock purchased as a medium to long term holding.  At what point would you consider changing this position and just taking profits (I am using trailing stops to protect profits)?

• Hi Jon.  I’m big on beginning with the end in mind and therefore knowing an exit strategy before entering a position.  Perhaps you designated some targets for this position when you initiated it, so I’d encourage you to stick with them.  But if you did not, then as I told Julie, I’d encourage you to weigh your comfort level in the trade.  If you’re getting uneasy about possibly giving back substantial open profits, then make some of those paper gains real by selling a portion of your position.  There’s some real value in making partial sales.  By lightening up into strength, you’re booking profits and raising cash to be re-allocated after a pullback takes place.  Having cash on hand after some widespread weakness sets in will be a great thing, and although many have forgotten right now that the market can still go down, they’ll eventually be reminded.  So I’d say once you’re uneasy, sell some and designate a stop for remaining shares as a safety net on the rest.

14.  Erb:  I have witnessed a lot of traders who I deem to be professional traders use terms like “I really just don’t have the feeling today” or another example would be what you just mentioned confidence.  I find these terms confusing as I do my best not to trade emotionally.  The chart is what it is, the price action is what it is.  So as a newbie again I find this quite confusing.  Not sure what is meant by the “feeling” or confidence if we are supposed to just trade what we see?

• Hello Erb, this is an excellent question.  And I never want to be confusing, so allow me to explain.  Newer traders don’t yet have a basis for ‘confidence’ or ‘feeling.’  Those both come over time after many many trades and lots of time spent watching the market.  Observing it closely over time will develop the occasional “I’ve seen this before” moments which will then play a role in the decision-making process.  But early on in one’s trading career, you are correct in that trading what you see should be the sole basis for decisions.  I also do not advocate trading emotionally, but what I’m saying here is that over time as you develop a feel for the markets, that will become part of what you see.

15.  George:  How do you build your watch lists for swing trades or longer?

• Thanks for your question George.  Beyond my comments for #9 and #10 above, it really is a process of digging through the charts to find setups which are being constructed and then weighing the risk/reward associated with each of them.  What I do is spend considerable time nightly to hunt through hundreds of charts, designating the occasional stock to be reviewed again.  The second run through will be on that limited list of stocks which seem to be exhibiting some momentum and/or are behaving as if they’re ripe for a move.  I’ll draw my trend lines to clarify the pattern being built, then I’ll gauge the urgency of the pattern based on price and volume in the most recent days.  Once I weigh that and decide if there’s a clear-cut entry and exit for the play, then I’ll set up the swing trade.  The key here though is that when I’m swing trading, I understand my entry, stop, and target levels before I place that bracket order for the trade.

16.  Juergen:  Jeff, I often get stopped out because of too tight stops.  I do this because I don’t want to lose money when I’m positive.  Any advice to change this (set a wide stop first and narrow it down when the stock moves in my direction)?

• Hello Juergen, I’m glad you asked this.  Getting shaken out of trades frequently can be frustrating, unless it’s an acceptable part of your methodology.  For example, the trader who takes many small losses but catches the occasional huge winner can be just fine over time.  But it sounds like you’re not satisfied with that so let me offer a suggestion.  First, cut your trade size in half.  Ultra-tight stops and the fear of losing tend to come along with positions which are too large, so change that first.  Next, start setting wider stops.  Consider how much the stock in question tends to move on an average day, or set stops beyond short-term support zones.  That will allow the stock to fluctuate normally and keep you in the trade longer, taking you out only once the stock has truly shown a change of character.

17.  Naif:  Jeff, can you name a couple of your favorite books on trading?

• You bet Naif.  Jack Schwager’s Market Wizards series is excellent.  They are each interview-style books where each chapter is a conversation with a different trader.  There are many markets, timeframes, and styles represented in those books, and they offer a ton of insight.  Another book is by Martin Schwartz and is called Pit Bull.  He was in a Market Wizards book, and his candid story offers a ton of value, making it another excellent read.  Nicolas Darvas’ How I Made $2,000,000 In The Stock Market also is one of my favorites.  He shares the tough early beats of his trading career and explains how he devised a method to avoid making his most common mistakes, leading him to big success.  Finally, Edwin Lefevre’s Reminiscences of a Stock Operator is right at the top of my list when it comes to favorite trading books.  A very old book, it carries with it countless lessons applicable to today’s trading, making it a timeless book and a must-own.  I’ve read each of these multiple times and I gain something new from them each time I re-read them!

18.  Eric:  It looks to me like a blow-off top in FUQI.  Am I reading this right?

• Hi Eric.  FUQI has certainly been a huge mover in recent months, and it’s gone parabolic in recent weeks.  As you know, the largest moves tend to occur during parabolic uptrends, but trading them also involves added risk.  Currently the stock is basing between $26-30, but I have no desire to call a top there yet.  Although a sharp drop could develop there at any time, the momentum train is running and deserves respect.  If you’re long, this is a great spot to do some selling, but if you’re looking to initiate a short sale, then waiting for some confirmation of a top (with the formation of a lower high) would be best.

19.  John:  Jeff, to develop your style of trading, did you do backtesting or did you mainly use trial and error?

• Hello John, thanks for your question.  Truth be told, I am not a proponent of backtesting.  I believe that might reveal some insights for what has historically happened when certain conditions are present, but when it comes to basing confidence of trades on what data says, it’s incredibly difficult to make the transition.  Backtesting involves no emotion, and yet trading carries with it a lot of emotion, so there’s a major disconnect there in my opinion.  Instead, I go with trial and error, or what I recently referred to as testing 1-2-3.  When I have real money on the line, I will learn faster and more intently than simply reviewing data.  By doing this, it also elevates my trust in a certain methodology over time, whereas taking a computer model and converting it into trading a real account is a very different story.

20.  Jay:  Can you speak a bit about how you track your trades, and do you use a trading journal?  Thanks.

• Hi Jay.  I’ve always noted my trades on a sheet of paper, an actual grid marking several conditions (Time, Prices, P&L, etc.).  Noting the reasoning for a trade, what was thought about it during the trade, and of course having the hard numbers to help calculate a variety of things tied to one’s results are imperative to have in my opinion.  My newsletter also serves as a diary of sorts for me, as I note each day when I’m in swing trades what I like or dislike about the price action and why I’m adjusting my stop.  So that’s my current system.  For those who would rather automate this process, there’s an excellent tool called StockTickr which can import trades from various brokers and is capable of generating all kinds of reports tied to your results data.  It’s a great way to see visually what’s working and what isn’t, usually shown to you in a different light than you’ve ever considered.

21.  Benjamin:  Hi Jeff, thanks for doing the Friday chat and am really enjoying it. What do you make of the relatively light trading volumes in the last few weeks, especially in the face of rising stock prices?  Do you view them as bullish or bearish signs or neither?

• Hello Benjamin, I’m happy to have had the chance to do the chat (and this follow-up).   With the relatively light trading volumes, I think there are a few factors there.  One is that there’s a lot of contentment in the market.  Prices keep rising, volatility is very low, and therefore fewer see the need to take action on the sell side.  So traders accumulate gradually, and we see some lighter volume than we saw last fall when the bottom was falling out.  Another factor is that it’s summertime, and that’s just common.  Traders take vacations, leaving fewer at their desks to buy and sell, and resulting in some lighter volume.  I’m not trying to read too much into it, because the biggest issue is what price is doing.  Right now it’s trending higher, so I’m reluctant to get bearish until price gives me a reason to.

Thanks for stopping by and I’ll see you here soon with more. Until then…

Trade Like a Bandit!

Jeff White

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