All Entries Tagged With: "Risk"

Why I’m Buying Financial Sector ETF’s

September 1, 2010 at 9:13 am

Financial stocks have been hideous.  Banks, brokers, you name it and it’s been taking it on the chin lately.  Shorts are getting cocky.

What’s so interesting though is that, like the market, many of these stocks have a shot at establishing a higher low on their daily charts relative to the July low – if this pullback finds buyers.

I should clarify, I was once told that “IF” is a really big word for only 2 letters.  That’s true, but let’s look at the financial sector ETF’s, starting with XLF.

By the way, the points stated below also apply to FAS and UYG, which I’ll review as well.

As a technician, I realize perfection isn’t to be expected when looking at a chart.  Algorithms and savvy traders alike recognize that the head fake breakout or breakdown can be a fabulous way to establish reversal positions.  And this is one such candidate.

With the July 1st low of $13.34 getting broken by a nickel just last week, XLF has stabilized (for now anyway).  I like that for a few reasons…

• First, it shook out some traders on that ‘breakdown’ through support.
• Second, it’s frustrating those who got short on the break, providing no follow through yet.
• Third, there’s a downtrend line just overhead which was established throughout August, which if crossed, would provide another technical reason for buyers to enter (or re-enter) the picture.

That leaves 3 potential trader types as would-be buyers if an advance begins…

1. Shorts would need to cover.
2. Shaken-out longs would want to re-enter.
3. New longs would want to establish positions.

So there is some appeal here, on both technical and psychological grounds.  Well-defined pivots like this from key zones can produce explosive moves – particularly when multiple groups of traders may be poorly positioned.

The Plan

With XLF churning over 70 million shares on an average day, this thing is not a fast mover.  Plus, it’s range-bound with the $15 zone offering formidable resistance over the past 3+ months.

I’m establishing a long position at current levels with an initial stop stop in the $13.20 area (1/2 position beneath last week’s low), and a final stop just beneath the $13 level.  That would be favorably offset with a potential move back up to the $15 neighborhood where key resistance resides.

The aforementioned $13 zone offered a multi-month peak back in May of 2009, and there’s an unfilled breakaway gap from August 2009 which could get filled on a continued slide from here.  So, I view that as an adequate loss-cut area for this trade.

If this thing is able to gather some traction, I’ll then lighten and tighten (peel off pieces on the way up and adjust my stop accordingly).  I’m expecting to be in it for a few weeks if it works, so I’ll be patient along the way.

Here’s a closer look at the XLF chart for you:

Chart courtesy of Worden

Not to be forgotten are the leveraged ETF’s, which offer more bang for the buck.  UYG is the Proshares Financial ETF, which is essentially the 2x levered version of XLF.  Using the same rationale, I’m looking for UYG to return to the $58.50 resistance area while using a stop of $46 should support happen to get broken solidly.

Here’s a closer look at the UYG chart for you:

Chart courtesy of Worden

Finally, the title of “most slippery” of the levered financial sector ETF’s goes to FAS, which is the Direxion Financial Bull, which is 3x the movement you’d expect to see in XLF.  Like the other charts, I’m looking for FAS to return to resistance, which is in the $24 area.  Should it happen to break down, a gap fill from August 2009 down to the $16.50 area would be my cue to exit.

Here’s a closer look at the FAS chart for you:

Chart courtesy of Worden

Trade Like a Bandit!

Jeff White
Producer of The Bandit Broadcast

Are you following me on Twitter yet?

15 Questions & Answers

August 24, 2010 at 10:48 am

My recent live interview with Charles Kirk generated quite a few questions. A number of them we were able to address during the chat, but many 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.  I’m also happy to answer questions via the comments section below, so feel free to post yours there!

Here are 15 unanswered questions from the session:

1. Kevin: Jeff, what timeframe do you normally use in your charts, and do you let the bar close before entering a trade?

• Thanks for your question Kevin.  I focus on the daily charts for swing trades, and the 3-minute charts for day trades.  I don’t wait for the bar to close before entering a trade.  That might save me an occasional failed signal, but I feel it will cost me many other trades which work right from the start, so for me it’s worth taking my entries as they signal.

2. Ryan: Do you have any execution techniques that you like to use?

• Hi Ryan! I like to keep things really simple, so I use basic stops for entries and exiting losing trades.  That way, once a level has been crossed, a market order is generated immediately and I’m in (or out of) the trade.  I’ve tried to get cute in the past with more complicated orders or execution techniques, but in the end it made me no more money and often cost me opportunity (buying breakouts with a limit order, for example, as the stock never looks back). When I’m booking profits, I’ll use limit orders at my targets and let the stock come up and hit me, but that’s the only time I utilize them.

3. Moe: How can you scan the market for setups or make trades when the market is so volatile and so driven by daily events and emotions?

• Yes Moe, it truly is a news-driven environment right now, and it might be that way for a while.  I think the key is recognizing that I’m not trying to get in front of any news or predict what news may come along.  Instead, I’m looking to put capital at risk when there’s an expected reward, and in order to do that I need to be hitting the charts regularly.  Training your eye to do that will always leave you with opportunity, whereas waiting for emotions to settle could leave you sidelined possibly forever.  Remember, that emotion and volatility brings with it opportunity.  On the flip side, a trendless market with nothing but uncertainty brings with it very little opportunity.  Keep looking for trades, and keep your capital moving.

4. Guest: What sectors are you finding most of your trades these days?

• Hello and thanks for your question.  In terms of swing trades, I’ve traded many sectors and there really has been no consistency there to speak of.  When the right patterns emerge, I take the trades.  In terms of day trading though, I’ve focused frequently on the ags, financials, and energy names quite a bit in recent weeks, as they’ve been in play regularly.

5. Jon: Isn’t the general rule of thumb that in a correlation study, most of the correlation comes from selection, then overall market, so what we are looking for in trading is the small fraction which lead the pack on a given day which will then beat just trading the index ETF’s?

• Hi Jon, the recent discussion of being in a highly-correlated market (to the S&P 500, for example) carries with it some weight, yes.  And I do agree that what we’re after is to locate leaders and trade them instead of the ETF’s.  Keep in mind though that there will always be outliers which exhibit extreme strength or weakness, and those carry with them some real potential for good trades.  So, seek out momentum whenever possible, and you should find far better bang for your buck vs. the ETF’s.

6. Sam: Do you ever trade options?

• Hey Sam, I do trade them on occasion.  In longer-term accounts, I’ll short puts to establish long positions, then sell calls to collect premium.  I don’t do a lot though in terms of directional trading with options.  Occasionally when a stock looks to be very high risk, such as BP recently, I’d rather hold options overnight than common, simply to have defined, limited risk.  The rest of the time, I’d rather have the shares for the greater liquidity, less slippage, and more flexibility to trade extended hours or pre-market (if necessary).

7. Tom: Do you hold stocks into their earnings report or do you only trade following the report?

• Hi Tom, actually I never want to hold a stock into an earnings announcement.  Being a technical trader, it’s important for me that I can use the price action to determine both my entries and exits.  That’s technical.  When it comes to an earnings announcement, we’re talking about a major fundamental event, and since those usually happen outside market hours, I can’t control my risk.  The stock is so likely to gap big after that news that I might have no shot at closing the trade at my planned exit.  The excitement of potential ‘free money’ lures many traders into acting on their hunch, but it’s simply a coin toss and I am not about that with my trading.  So, I want to stay responsible and only take trades where I expect to be able to manage my risk appropriately.

8. Frenchy: What is your favorite ETF you like to trade?

• Hi Frenchy.  When it comes to the main index ETF’s, I like the usual SPY, QQQQ, and IWM.  Typically I’ll avoid DIA since it’s only 30 stocks, and that can complicate matters more.  In terms of leveraged ETF’s, I’ll go with SSO/SDS, QLD/QID, and TWM/UWM.  Those are double exposure, and while there are some triple exposure ETF’s out there, I find the 2x levered funds are enough to provide nice moves.

9. Leon: Do you believe a high volume move to the downside can be a reversal signal?

• Hello Leon, that’s a good question.  The short answer is yes, but it depends on how it happens.  A stock which has been in a parabolic uptrend will sometimes signal exhaustion in this manner, reversing to the downside on heavy volume.  Often, that’s followed by additional weakness.  However, a stock that’s range-bound which sees a high-volume decline on a given day may see no downside follow through.  So it can happen, but I’d be careful not to put a blanket statement across all high-volume selloffs that they’re reversal signals.

10. Jon: Do you feel price follows volume, or volume follows price?

• Hi Jon, this is a real chicken-and-the-egg topic, and there are cases of both.  For example, consider a stock in a pattern like a bull flag.  Price is consolidating, but one day edges toward upper resistance on heavy volume.  That will many times signal an impending breakout, so volume in that case tends to lead the way.  In other cases, price begins to gain momentum, and as the stock gets more attention, the volume naturally increases (following the move in price).  See CAGC in recent weeks for an example of this.  So it can happen either way.  Nonetheless, I care the most about price, so if I’m seeing volume kick in ahead of a breakout, for example, I’ll still want to see price confirm that before I look to make an entry.  That keeps me sidelined until I believe a real move is starting.  Just remember, price is of utmost importance.  If you’re on the wrong side of a move, it doesn’t matter if the volume is heavy or not, it’s still going to hurt!

11. Ryan: Do you have any interesting research projects in the works?

• Hi Ryan, actually I just recently completed a huge project with the creation of the Advanced Trading Course over at TheStockBandit University. That was a major project and I put everything I know into that course, so I don’t plan to do any other big projects for a while.

12. Layne: What indicators do you like to use?  Certain ones in certain markets?

• That’s a great question Layne.  I should say right up front I don’t rely on any indicators across the board, and actually utilize them rather infrequently.  However, there are times when they can help in the trading process, so I’ll put them on the chart when it’s appropriate.  A moving average, for example, is really only helpful in a trending market.  I just put out a post explaining how and when to use moving averages.  I will sometimes add ATR to my chart to see just how much (or how little) movement there’s been lately, and that’s another one which has been helpful for me.  If anything, the ATR value lets me know when there’s just not enough movement to offer real potential relative to the risk I’d be taking.

13. Jake: What are the setups that you look for on the chart before buying and selling?

• Hi Jake, first I’m going to look for the presence of a trend.  If there isn’t one, I’ll take a completely different approach in terms of what types of patterns I’ll look for.  If there is a trend, then I’ll be watching for continuation setups like flag patterns, pennant patterns, and triangle patterns.  And along with the price patterns, it’s important that the volume activity is confirming the price action, so I monitor that closely as well.  Taking note of the rhythm of a trend is another key element, as it helps me gauge whether I should focus more on breakout patterns or utilizing pullbacks to get on board.  There are a ton of ways to skin the market cat, but I’ve found it most effective to adjust to the environment you’re in rather than forcing one particular style at all times.

14. Ryan: Do you see the growing awareness and popularity of ‘technical analysis’ translating into an easier market to trade in the future, or a more unpredictable one as more retail money uses the same methods?

• Hello Ryan, another excellent question.  Technical Analysis 101 has certainly become more embraced by retail traders than it was even a few years ago, but my response to that is somewhat complicated.  First of all, I don’t think there’s a uniform usage of technical analysis methods across retail traders.  Take 10 traders and ask them to define a particular pattern, or ask when they should use a particular indicator, and you’re likely to get a variety of answers.  So that’s one issue I think that keeps everyone from seeing the exact same patterns or acting on them at the exact same time.  Another issue is a bit more vague, which is the program trading we’ve seen such a growing amount of in recent years.  Computer algorithms are likely preventing some patterns from fully maturing, or the institutional money heavily fades a breakout, causing many retail traders with tight stops to dump shares, only to see the stock head right back up.  So it can be pretty tricky out there, and for those reasons, I do not think the rise of Technical Analysis has resulted in an easier market to trade.  Bottom line is, ‘they’ will never make it easy.  You and I have to keep paying attention to what’s working and what isn’t, and do more of that which is working!

15. Guest: Have there been any patterns you’re finding that are working well in this environment?

• Thanks for your question, and yes there are.  I’ve focused more on trading the rising and falling wedges, as well as the “tilted” trend line breaks (like ascending or descending trend line breaks) for swing trading. For day trading, I’ve looked more for those exhaustion moves where news has caused an overreaction and the stock needs to come back in, so those are the ones I’d say have been most profitable to me in recent months. I also detail the most profitable one in the Advanced Trading Course.  The key is to remember that what’s working well right now will eventually morph into something else, so we have to stay on our toes and be willing (and able) to adjust when conditions deem it necessary.

Trade Like a Bandit!

Jeff White
Producer of The Bandit Broadcast

Are you following me on Twitter yet?

Three Pillars of Risk Management

July 14, 2010 at 6:41 am

As a Seinfeld fan, I really enjoyed The Fatigues episode where Jerry dates a woman with a mentor.  George needs to give a report on Risk Management, and passes off the task to Jerry’s girlfriend so she can read all about it and save George time.

But Costanza isn’t the only one who doesn’t fully understand Risk Management.  In fact, far too many traders struggle with this very topic, and it keeps them from surviving and from succeeding.

So, let’s look at 3 pillars of risk management as a way to keep it simple.  If you can nail these down, you should be alright.

Protect Capital

This is a biggie, no doubt about it.  Simple on the surface, but not easy to put into practice.

As traders, our capital is what keeps us in business.  Ignoring the consequences of mismanagement is a major mistake that’s not easily recovered from.  Those who fail to understand the importance of first preserving what they have tend to place profits ahead of protection.  That leads to the age-old error of eyeing new trades with only potential gains in mind, rather than placing equal importance on potential losses if the trade fails.

Capital comes in two forms…psychological capital and trading capital.  Both must be protected with vigilance.

Psychological capital is the amount of inner strength, confidence, and willingness to take risks that a trader possesses.  It can be eroded through many mistakes, and it’s not easy to replace.  Protecting one’s confidence as a trader is paramount to staying in this game, because the trader who’s unwilling to pull the trigger when good opportunities come along won’t ever win.

Trading capital is what’s available in your account, and it’s of course the type of capital most are familiar with.  Money can be more easier to replace than confidence, but it’s still critical to manage risk in such a way that your account stays intact.  Traders who disregard the importance of keeping an adequate capital base find out quickly they’re unable to profit big enough to matter, even when they’re right.  So, try to maintain account highs as often as possible, and you’ll find your account is growing on a regular basis.

Trade YOUR Proper Size

This one will vary for everyone, so the secret is to make sure you’re trading position sizes which allow you to be at your best.  That means avoiding trades which mean too much, both psychologically and financially.  Let’s look at those one at a time.

Psychologically, the ability to recover from a loss is something we all must ensure.  Taking a big hit from a trade which didn’t work out leaves us vulnerable to anger or despair, and neither are beneficial to our trading.  Anger promotes revenge trades, and that typically leads to digging a deeper hole than that which we may find ourselves in.  Despair leaves us so focused on our emotions that we fail to recognize good opportunities when they come along.

Financially, we never want to be trading so large that we can’t recover from a loss.  Taking a fairly large position when you’re confident is one thing, but dumping your entire account into a single idea is another.  Consider the math behind poor trades, for example.  A 20% loss in your account will require a 25% gain to get back to flat.  And the deeper that loss gets, the more that’s required to make it up.  Taking several smaller trades instead of one big one might require more management, but it can also greatly help to avoid one major disaster.

Exit When You Know You Should

This sounds really simple, and it is, but it’s the follow through which makes this one difficult for some.  Making a trading plan is one thing, but sticking with it can be another issue entirely.

It’s all about discipline, and that isn’t going to change.  You know at which point you’ve stayed too long in a position and the time has come to kick it to the curb.  All of us know what it means to blow stops, and most likely, it doesn’t pay off when we do.  That’s a self-inflicted mistake that can be avoided, provided some measures are taken to help automate the process.

Here’s the thing…defined risks are the best kind.  Pick your exit at the same time you select your entry, and commit to it.  If you struggle with that, set a stop order the moment you’re filled on your entry, and then you won’t have to make a decision under the gun.  If you get stopped, you most likely just saved yourself some additional pain.  But you’ll be managing your risk effectively and reinforcing discipline even when you’re wrong.

If you’ll protect your capital, trade your proper size, and get out when you know it’s time, you’ll be doing 3 of the things the most successful traders focus on.  How can there be any downside to that?

Trade Like a Bandit!

Jeff White
Swing Trading & Day Trading Service
www.TheStockBandit.com

Are you following me on Twitter yet?

Making it Back

June 29, 2010 at 7:01 am

Anytime the market makes as big and consistent of a run as it did from March 2009 to the April peak, there’s a growing confidence that invites new money to the game.  Those who were completely spooked in early 2009 saw an impressive rebound, not only in prices but in their willingness to participate.

Of course, the longer in the tooth a rally becomes, the closer the end of it naturally gets.  That’s unfortunate for some, but it’s simply the nature of risk in the market.  After all, those who step out on a limb first will stand to make the most if they’re proven right, while others who wait for more of a sure thing may be among the last to the party right before it ends.

It’s natural for someone who buys at or near the peak to quickly find themselves underwater, and at this point just a short time removed from the April highs, there are no doubt many folks who were late to the party now feeling serious pain.

That feeling of panic has set in for them, and in most cases, there’s no exit plan.  The failure to designate a safety net prevents level-headed execution of a game plan, so now they’re forced to think fast in the heat of the moment, sparking a slew of potential mistakes.  Making it back now becomes the primary goal, as if there’s something magical about getting out unscathed.  Nevermind the fact that the entry was made in hopes of turning an actual profit.

Exaggerating Errors

Traders face this dilemma on every timeframe when in a bad trade.  With a negative P&L on the day, week, month, or year, the focus turns from sticking with a strategy to doing anything that might get them out of the hole – and fast.

Along with this mindset comes an urgency factor which may not have been present before – uh oh! The sudden recognition that they might be perceived as having been wrong strikes fear in their hearts and now the race is on to erase the losses.

I’ve been there plenty of times, and it’s no fun.  But over the years, I’ve found several ways to reduce the impact of my errors.  Here are a few things I try to do when I find myself underwater:

• Slow down. Often times the desire to just get into anything that might be moving means it’s also easy to overtrade.  Spinning my wheels won’t help my P&L, and it sure won’t help my objectivity.
• Get selective. Rather than jumping quickly on anything that comes along, I’m going to be much more effective if I wait for the cream of the crop to surface.  Waiting for the best risk/reward opportunities to arrive means passing up many other plays along the way, and returning to holding a high standard for where my capital is allocated.
• Trust your method. Some stretches of trading are better than others, absolutely.  At times it’s extremely frustrating, while other times it feels almost easy.  So there will be ups and downs, but over time my method has served me very well.  When I find myself with the wrong color P&L, I remind myself that I’ll eventually get my groove back, so long as I don’t stray far from my style.  As they say here in Texas, “dance with the one that brung ya.”

Translation for Timeframes

On a day trading timeframe, it can be tough to take a few hits early in the session.  Your confidence gets quickly shaken, and you wonder whether it’s just a tough start from which you can recover, or if instead it just isn’t your day.  The key is to avoid emotion-based decisions, which will lower your standard for trades and shift your attention to the money rather than the price action.  Never do you want your losses to cause you to force trades, so if that’s your primary motivator, get away and return another day.  If instead there are still ample opportunities for good trades, patiently wait for the best risk/reward setups and then make the most of them.

For a swing trading timeframe, streaks will happen where at times it seems you’re on the wrong side in every trade you place.  Making it back will take a little longer, but it can be done if you’re methodical about it.  Cut down your size immediately while you wait to find your groove, as that will slow the pace of your losses if you continue to time trades poorly.  Become selective, because confusion can set in quickly if you aren’t following a clear strategy with a known objective.  Patience will be crucial, but it can pay quite well, too.

Finding yourself down in a hole is no fun, but it’s a reality of trading that each of us will face from time to time.  So take a long-term view with your trading career, even if your timeframe for each trade is quite short-term.  Doing so will keep you level-headed when it’s the hardest, and it’ll make you tougher and better as you find your way back on the right side – and you will!

Trade Like a Bandit!

Jeff White
Swing Trading & Day Trading Service
www.TheStockBandit.com

Are you following me on Twitter yet?

Are You Too Motivated to Make Money?

June 7, 2010 at 1:38 pm

I know you aren’t lazy.  The fact that you’re reading this tells me you care enough about your trading to hunt for clues that will make you better.  You’re motivated.

Many of us think of ourselves as hard workers.  Lazy gets us nowhere.

The problem is that when it comes to trading, motivation doesn’t always translate into greater profits.  Incorrectly applied, motivation in trading can actually bring on some serious heartache.

The ‘O’ Word

It’s definitely true that the timeframe you trade should match your personality.  Those who are patient can take longer timeframes while waiting for larger moves to develop.  Those who are less patient will tend to find that the shorter timeframes suit their needs for knowing if they’re right or wrong.

But…that’s not what I’m referring to.

Regardless of your preferred timeframe, the fact is that you can still overtrade.  Whether your average number of transactions per week is 100 or 3, there will still be a point at which you should be done.  Perhaps the move of the day has already happened, and you’ve got a sense of that, but you keep pushing buttons in an attempt to make something happen.  Maybe your P&L is flat, and you hate the idea of fighting to a draw.  So, you lower your standards and take some trades in hopes of either making some money or losing some.  Hey, at least you’ll have something to show for your time, right?

Or consider another scenario in which you’ve turned a quick profit, whether through an overnight position that gaps in your favor, or simply some quick trades early in the session which put you nicely positive on the day.

If it were 90 minutes to the closing bell, you’d probably shut it down, but it’s only an hour into the session and you’ve got no idea what to do with your day if you quit now.  So…you stay and trade and give some or all of it back.

You hate yourself an hour or two later, wondering why you didn’t just ring the register on the early profits and call it a day.  In hindsight, up a little is much better than flat or down.  But your greed and your ‘motivation’ really cost you.

Sound familiar?  It is to me.  I’ve been there way too many times, so these are mistakes I’m all too familiar with.

The Real Meaning of Lazy

For me, it really stems from the (incorrect) notion that not trading = lazy.  That’s dead wrong, but periodically I’ll operate under that mindset and later on wish I hadn’t.  I’ve never been a lazy person, because there’s always something to do.  I like the feeling of getting things done.  And when the market’s open, I know what my job is – to trade.  Or so I tell myself.

In reality, my job as a trader is to put money at risk when there’s an expected payout of greater proportion.  That should translate into profits.

My job isn’t to continually churn my account, try to grab every stock on the move, or to hit a daily volume target.  I need to feed the family, pay bills, and build my wealth through my trading.  That’s it.  Pretty simple, but easy to forget when quick gains come along or when I battle several hours and make no progress.

Oddly enough, being lazy as a trader involves sitting at your desk when you should be doing something else.  It’s hard to get up and walk away when that ticker’s still on the move.  The allure of ‘what if’ drives too many to stay right there in their seat for just a little longer, and it’s costly.

3 Tips to Stay On Track

There are several ways to stay on track with your trading, so let’s take a look at a few of them.

1.  Remember your goal. This seems obvious, but a regular reminder of what you’re striving to achieve through your trading will be a tremendous help to you.  Maybe you keep a photo of your family close by as a reminder that you can’t afford big down days, and it helps you walk away when you aren’t seeing the tape clearly.  Or maybe you keep a picture of that boat you want to buy close to your screens, helping you to focus your efforts on only the cleanest chart patterns so you can reach that goal sooner.

It’s a fine line to walk between fixating on something that’s actually a distraction, versus keeping a reminder in front of yourself to maintain the proper mindset.  However, if you’re keeping yourself reminded of what it is you’re after, you won’t leave yourself much room to stray from the route you’ve laid out to get there.

2.  Define your job. The word ‘trader’ might suffice when you’re telling someone else your occupation, but when it comes to the daily tasks you set out to accomplish in your trading, some boundaries should be defined.  With greater experience comes greater clarity, so this will be easier for those of you who have been in the game a while.  Nonetheless, it’s important to outline for yourself which kinds of market conditions you’ll be active in and which conditions will warrant standing aside.

Outside the realm of market conditions, you also should have some general guidelines for your P&L on any given day, week, or month (depending on your trading timeframe).  For example, as a day trader, perhaps you structure a typical max-loss amount which will mean no more trades.  That might be $500 per day for some, or $5000 per day for others.  But having it in place will serve as a system breaker and avoid overtrading when you’re clearly out of sync.

You can also designate a general target for gains, that when it’s reached, you’re then committed to retaining a certain amount of those gains.  Suppose once you’re up $1000 on the day, you’ll commit to keeping $500 of it, no matter what.  You can keep trading and add to it (if the right setups come along), but you’re going to book an up day regardless.  These things will help to protect not only your capital, but your confidence as well.

3.  Have something else to turn to. Simply put, if you’ve got a go-to list of things to tend to always at the ready, then you’ll have that much more reason to shut down your trading once you’ve hit your loss limit or booked nice gains on the day.  Rather than falling into the trap of sitting at the PC and pushing more buttons out of boredom, you’ll always have something to move on to when the time comes.  That might mean you run some errands, get organized, go for a bike ride, or grab a book.  It’s not so important what it is, so much as you have another activity to turn to when you recognize you shouldn’t be trading.  Have that ‘thing’ in place at all times, and you’ll avoid overtrading.

In summary, dirt-cheap commissions and sophisticated trading platforms with all kinds of bells and whistles are really great to have, but remember one thing…they only exist to help you do your job.  Don’t use them as reasons to be active when you should be sidelined.  Know your objective for the current conditions, for the next trade you take, and for the reason you’re trading to begin with – and be not distracted.

Trade Like a Bandit!

Jeff White
Swing Trading & Day Trading Service
www.TheStockBandit.com

Are you following me on Twitter yet?

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

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Stack the Odds for Daytrading Success

September 3, 2009 at 5:04 pm

Trading is all about stacking the odds for success.  Risks must be taken in order to get paid, but the key is gauging under which circumstances the potential reward really outweighs that risk.

I discussed taking risks in a recent post, and I felt that a follow-up and an example of what I was referring to was in order.  Here it is.

Many of my trades are continuation plays.  They can be great for offering situations which warrant putting some money on the line once clues of a continued move are present.

However, there are many opportunities on the intraday timeframe which are exhaustion/reversal kinds of setups.

Buy or sell programs, news, and just plain old momentum drive stocks far beyond the pain thresholds of traders, carrying price a considerable distance in one direction or the other.  That opens the door for some recoil, and catching the turning point can be quite lucrative.

Stacking The Odds

Here in a moment, I’m going to show you exactly what I mean in a video, but first let me outline a few keys which combined to produce a great trade in this situation.

• Corresponding market action.  With the indexes having a distinct possibility of a short-term turnaround, conditions were ripe for similar price action in individual stocks.  This is a point I make over and over in the weekly index videos.
• Prior key level on the daily chart of this stock was being tested.  A huge intraday move which carries price right to a previously important level on the daily chart will increase the odds for a quick recoil move.
• Intraday price action suggested the move was becoming exhausted.  That indicated that a reversal could quickly develop in the stock.

Here’s a video explaining it. Select the HD option and go full-screen for best quality:

Stack multiple factors in your favor for a great trading situation.  They’re worth waiting for!

Trade Like a Bandit!

Jeff White
Producer of The Bandit Broadcast

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