All Entries Tagged With: "Capital Preservation"
Peace of Mind With Bracket Orders
August 12, 2009 at 9:54 am
Trading is stressful enough on it’s own, and all of us can at times have outside distractions which pull our attention away from the trading screens. Whether it’s a work project, a trip to the doctor, travel plans or tax season, there can be a constant flow of interruptions to your trading.
Some of them can mean actual losses while others mean missed opportunity, but the bottom line is that that’s life and we have to find ways to get around them if we want to push ahead with our trading.
Enter the Bracket Order
I’ve been using these with thinkorswim for some time now, and I’ve really been pleased. Their platform has a ton of features for options traders, but they didn’t neglect those of us who trade stocks.
I particularly like the bracket order capabilities, and I use the ‘1st Triggers OCO’ all the time in my swing trading. It’s nice to be able to set up a trade when you know your entry, stop and target, and be able to trust that it is being taken care of so that you don’t have to watch it. That allows me to spend my time seeking out new trades rather than managing existing positions.
These conditional orders are pretty amazing, and they’ve gotten sophisticated enough that they can accomplish pretty much whatever you want done at whatever time you want it. What originated as a simple alert has evolved into a multi-faceted tool which many of us will never again trade without.
Traditional order types are available everywhere, and if used properly can sure help you implement your trading plan better than you could without them.
But why ride the bus if you can be chauffeured around in a limo?
Using old-school order types like a stop buy order can certainly help you catch an entry on that trade you’ve been stalking, but won’t you need to protect your capital with a stop loss order rather quickly after your order is filled? What happens when that busy life of yours prevents you from being at the PC when it’s time to put in that safety net? You’re up a creek without a paddle.
If you could structure your entire trade in one order, wouldn’t you do it? If you know the price at which you’ll enter a trade, stop out, and take profits, then let technology help you. I can’t think of an excuse good enough to avoid using these orders, because they truly are the best thing out there.
How it Really Works
I’ve been using this functionality in the form of ThinkOrSwim’s “1st Triggers OCO” orders, so let me explain. The “1st” portion is my entry order, such as ‘buy XYZ @ $25.” The ‘Triggers OCO’ portion means that once I am filled on my XYZ purchase, a One-Cancels-Other order is immediately and automatically placed.
This latter portion is actually a pair of orders which the system will manage for me. If I set a limit sell at a higher price for taking profits, and a stop loss down below as my safety net, then I’ve structured my XYZ trade in such a way that I know my risk and my potential reward. Because I only want to sell my shares once but yet have two sell orders, the system will automatically cancel the remaining order once the first one is filled. So if XYZ climbs to my target and I sell for a gain, my stop loss order is canceled. If on the other hand XYZ were to fall to my stop level before reaching my profit target, the system will execute my stop and cancel my remaining (unfilled) limit order since I no longer own shares to sell. Pretty sweet!
Here’s a video explaining it. Select the HD option and go full-screen for best quality:
Bracket orders are excellent tools which offer the trader a ton of flexibility (there are many more of these advanced order types), but in my opinion the best thing they offer is peace of mind.
There’s just something about knowing that your plans for a trade will be carried out whether you’re at the PC or not. That gives me the freedom to put my trading ideas into motion, knowing full well that I will be able to book profits where I see fit and yet limit my losses in case I am wrong (barring an adverse price gap in the stock of course).
If you’re not using conditional orders in your trading, you should be! They can quickly become a part of your daily routine, giving you the ability to trade to your heart’s content without letting life’s distractions interfere with your plans!
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Stop Loss Placement, Part 4
August 6, 2009 at 8:50 pm
As we complete this series on stop loss placement, we’re going to discuss trailing stops. But be sure to catch Part 1, Part 2 and Part 3 first!
In this segment, I specifically want to discuss the importance of managing our risk throughout a trade, not only to reduce losses but also to preserve profits. This is achieved by adjusting our stop, or through the use of a trailing stop.
When and Why to Adjust a Stop Loss
A rock climber knows the importance of anchoring himself to the wall along the way up, just in case he happens to slip. The anchor set early in the climb at a low altitude is every bit as important as the ones set at higher levels, but the more a climber ascends, the less useful a low anchor will become. As a result, it’s wise to keep raising it along the way.
Trading is similar in that the stop loss we initially set for a position may not be appropriate once that trade has progressed, so it’s likely to need adjusting along the way.
Setting some rules for ourselves, sticking with them consistently, and maintaining an adequate reward-to-risk structure throughout the trade can keep us in good shape.
Watch this clip and let me explain more thoroughly with some specific examples. It was also posted over at the Trading Videos site, but I’ve embedded it here for your convenience.
Let me highly suggest clicking the “HD” on the video player and then going full-screen for best quality.
Update: Check out Part 1, Part 2 and Part 3 of this series!
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?
Stop Loss Placement, Part 3
August 5, 2009 at 8:44 pm
To continue the series on stop loss placement, it’s time that we build on both Part 1 and Part 2 by taking things a step further.
In this segment, I specifically want to clarify a major advantage of basing our stops on the chart. Of course we’ll know where to get out if the pattern happens to fail, but there’s one thing many traders fail to focus on in relation to that. It’s an equation, and a simple one, but it gives us our position size.
Dollar Risk Per Trade
If every stock were the same price and carried with it the same volatility, and if every pattern we traded happened to carry the same exact chart scenarios, Part 3 of this discussion wouldn’t exist.
But each stock is a little different than the next. Each setup will vary from the previous one we entered. And of course, the distance from our entry to stop isn’t going to be the exact same from one trade to the next.
So what we need to do if we want to maintain a consistent dollar risk per trade is to determine an amount we’re willing to lose on each trade in case we are wrong. Let’s face it, some trades aren’t gonna work, and we’re going to get stopped out.
Once we know how much we’ll be willing to risk (in terms of a set $ amount, or a set % of our account value), then we can combine that into a simple equation to give us our position size.
$ Risk Per Trade / Distance from Entry to Stop = Position Size
Watch this clip and let me explain more thoroughly with some specific examples. It was also posted over at the Trading Videos site, but I’ve embedded it here for your convenience.
And if you have questions pertaining to stops, add them to the comments section or contact me directly and I’ll try to work those into the next few segments.
Let me highly suggest clicking the “HD” on the video player and then going full-screen for best quality.
Update:Â Check out Part 1, Part 2 and Part 4 of this series!
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?
Stop Loss Placement, Part 2
July 31, 2009 at 7:52 am
As we dive deeper into this series on stop loss placement, I want to be sure you caught Part 1 because it helps lay the groundwork for this ongoing discussion.
I’ll be posting segments of this series one segment at a time, both for convenience and better consumption on your part. I want you to have a thorough grasp of how this can all work. After all, it’s a topic every trader faces, regardless of risk tolerance or timeframe or style or the market we’re trading.
Let’s keep it moving…
The Importance of the Chart
Just as we discussed the value of timeframe & personality in Part 1, here in Part 2 we’re going to talk about the importance of the chart.
Given that my entries are determined by the chart, it’s logical and consistent to allow the chart to offer an exit. That might be based on an important reversal, or simply a failure of the pattern being traded if I need to stop out of the trade.
In each case, I’ll show you in the clip below exactly what I’m talking about, along with an explanation of why this works for me.
The beauty of basing entries and exits on the chart is that it’s consistent across multiple timeframes. The same principles will apply on an intraday 3-minute chart as they will on a daily chart. That means once you gain an understanding of it, you can use it for both day trades & swing trades.
Watch this clip and let me explain more thoroughly. It was also posted over at the Trading Videos site, but I’ve embedded it here for your convenience.
And if you have questions pertaining to stops, add them to the comments section or contact me directly and I’ll try to work those into the next few segments.
Let me highly suggest clicking the “HD” on the video player and then going full-screen for best quality.
Update:Â Check out Part 1, Part 3 and Part 4 of this series!
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?
Stop Loss Placement, Part 1
July 30, 2009 at 7:27 am
It is the most common question I’m asked:Â “How do you determine where to place a stop loss order?”
And it’s a great question. Newer traders need to know it. Experienced traders will often study it and refine it. It’s arguably as important as any other aspect of a trade.
So here I am setting out to create this mini-series as a resource. There will be several parts, so check back often for the segments to come.
There are several aspects to stops which I feel should be addressed, so I’m going to cover them in pieces. Small, bite-sized, easy-to-digest pieces.
Hopefully they’ll be helpful to your trading approach and enable you to specify some ways to protect the downside. After all, a stop loss can be your safety net.
Timeframes & Personalities
Deciding on the placement of an initial stop loss will boil down to a few things, not the least of which are (1) your trading timeframe, and (2) the personality of the stock being traded.
I’ll elaborate on each of these in the video, but essentially they’re my starting point:
Longer timeframes necessitate wider stops, and shortened trading timeframes warrant tighter stops.
Similarly, a lively stock deserves a wider stop, while a stock which tends to move very methodically will justify a tighter stop.
Watch this clip and let me explain more thoroughly, along with some examples. It is also posted over at the Trading Videos site, but I’ve embedded it here for your convenience. And if you have questions pertaining to stops, add them to the comments section or contact me directly and I’ll try to work those into the next few segments.
Let me highly suggest clicking the “HD” on the video player and then going full-screen for best quality.
Update:Â Check out Part 2, Part 3 and Part 4 of this series!
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?
Protect Capital Even in a Bull Market
July 27, 2009 at 8:03 am
This market sure has been strong – we have yet to see a pullback which has lasted longer than a few minutes!
Instead, we’ve merely seen brief pauses of sideways price action, which is quite nice…if you’re long.
A powerful market like this does have a downside though, which is fewer quality setups for new long side entries. And shorting? Well, let’s just say some feelings have been hurt for the bears!
We’ve come a long way since the July 8th lows, and right here, it’s very easy to chase stocks if you want to get long. It feels like it almost can’t go down (famous last words), and thus confidence is really high. But that doesn’t make buying here a good decision. In fact, sometimes it’s best to actually let the market come to us after such a move.
Protecting capital is the top priority of all successful traders. Making money is secondary.
Even strong bull markets like what we’re seeing right now require that we protect capital. It’s easy right now to think making money on the long side must be easy when the market rallies almost daily.
But trading out of fear that the market will run off and leave you behind is a recipe for forcing trades, which will usually cost you more money than it’ll make you!
Stay Focused
Our job as traders is to take only the best setups with the highest reward and lowest risk associated with them.
Keep that in mind here, as the market remains quite extended on a short-term basis. Manage your open positions the best way possible, and be willing to patiently let the market come to you. Once it does, then set up new trades.
There will be plenty of good setups in the next few days and weeks, but it isn’t wise to lower your standards and buy stocks that are technically extended just to get long.
A lasting bull move will offer plenty of chances to buy, and that’s best done on pullbacks or after resting phases. If this breakout sticks, we should see many opportunities in the weeks to come.
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?
The Importance of Losing Small
April 7, 2009 at 2:05 pm
Losses are inevitable, but small losses are easily overcome.
I put that first because if you don’t read anything else here, I want you to be sure and see that.
In fact, that one statement could be considered the key to my trading. I remind myself of it often, and when I’m staying disciplined, I am able to see it in action.
Take Monday for example. I took several trades…7 to be exact. I made money on only 2 of them (no, it wasn’t a great day), and yet my net P&L was only slightly red. Just a little bit negative – that’s all. It was a down day for me, and yet it was about as painless as they come. A minor loss. All because I was able to recognize quickly when I was wrong, and immediately focus on damage control.
The trading landscape has changed dramatically just in the past year. The market is moving differently, the stocks which are in focus are a different group, and there are even some new fees and rules making their way into the fray. Nonetheless, there is still one constant: the trader who is able to lose small is able to stay in the game. He’s able to survive, which means he’s able to profit. And that of course means he’s able to thrive.
Two Big Benefits
Keeping those inevitable losses at a minimum carries with it a pair of huge benefits…
First, when you’re wrong, the damage is far from devastating. Falling off a pony compared to falling off a Clydesdale sure makes it easier to get up and get back on that horse. And trading is all about getting back up. It’s an attitude thing. It’s important to stay in the game, and that means an occasional bump or bruise is far easier to overcome than the occasional amputation. The point is this – protecting the downside offers you a safety net to fall into. Why not use it?
Second, confidence stays high, and that’s a major factor for a successful trader. Confidence should be protected just as vigilantly as one’s capital, for it can be considered your psychological capital. Just as money isn’t easily replaced, confidence isn’t quickly replenished once it’s wrecked. Looking out for yourself by way of small and limited losses means you’re taking no big hits to your trading account or your psyche.
So on those days when you’re just not feeling it and you feel a step or two behind, be quick to recognize it and live to fight another day. Keep the damage minimized, and you’ll be able to return tomorrow fully prepared to erase that small deficit quickly.
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]
