All Entries Tagged With: "Volatility"

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:  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:  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:  “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:  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?

Are Conditions Shifting For Your Timeframe?

November 3, 2008 at 1:17 pm

The recent market volatility has been providing numerous opportunities for day trading if you’re quick on the draw, but it hasn’t offered much for swing trading. Those who prefer a little longer timeframe and trades which last a few days to a few weeks have grown accustomed to finding sloppy daily charts which lack well-defined technical entry and exit levels. Sound bases have been difficult to locate in the past few weeks, to say the least. As a result, either you’ve been forced to shorten your timeframe and day trade more, or you’ve sat on your hands in cash and waited patiently for quieter times to come along.

It’s a fact that risk must be taken in order to profit, but our ability as traders to manage those risks is of utmost importance. Anytime those risks cannot be managed appropriately, it’s not the ideal time to be trading. That certainly describes the recent price action for those who prefer longer timeframes than a couple of hours, but the good news is that it won’t be that way forever. Further, it brings up an important question…

Are Conditions Shifting For Your Timeframe?

Fortunately, it looks like we just might be entering into a quieter time, although getting there won’t be an overnight event. Volatility has been running extremely high, and it’s finally starting to back down. That isn’t to say that uncertainty is disappearing, because this market still has much to deal with (election, earnings, economy, etc.). However, we’re likely to start seeing smaller day-to-day moves in the weeks to come as a result of the declining volatility – if it continues to decline. That will not exclude the occasional jaw-dropping rally or gut-wrenching selloff, but it should make it easier to locate better bases for trade candidates, as well as improve our ability to set prudent stops when protecting the downside.

Day Traders

If you’ve been day trading, I hope it’s been good for you lately. There has been no shortage of intraday opportunities in recent weeks, offering quite a bit for traders who have the ability to move quickly. There will continue to be good conditions for day trading going forward, so don’t turn your back on that approach even as things settle down further – it’s great to be skilled in more ways than 1. Instead, just be sure to adapt accordingly so that you aren’t overtrading or forcing the issue once volatility contracts.

Swing Traders

To those of you who are swing traders and have stood aside in cash as opposed to taking trades with elevated risk, congratulations – you’ve made a great decision. That willingness to step aside when conditions aren’t suitable for your primary trading style has kept you objective while simultaneously preventing losses while you were waiting. You’re now poised to resume your trading without any emotional baggage, unlike those who lacked patience during the past several weeks.

Whatever your trading style, it’s always important to remember that the market is perpetually in motion and conditions are always prone to changing. Stay on your toes and watch for even subtle clues that a shift might be coming – it’s a great habit to be in.

It’s time to get back to doing your homework and working the charts in search of setups. We could start to see some nice opportunities surface soon, and those who are digging diligently for them will have a definite edge in the days ahead once they arrive.

Trade well out there!

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]