Archive for November, 2007
Consider Risk First, Then Reward
November 29, 2007 at 8:31 am
Anytime I am eyeing a trade to make, the first thing I consider is what is my risk in case I’m stopped out. Theoretically I might not be able to foresee all that could happen to a stock, but barring a major news event or gap in the stock, I want to first determine at which point I’ll need to exit the position. Only after this step do I take a look at the positive potential for the trade and then move towards a decision for an entry.
A major difference between amateur traders and professionals is the fact that amateurs consider the potential reward first and then may look at their risk, while professionals consider their risk first and then look at the potential reward. This is a big deal!
Keep Your Head On Straight
The market carries a lot of allure and it can entice you into making larger or bolder trades when all you look at is the reward side if it pans out. However, surviving the trading game and sticking around long enough to make a living at it will require that your risk be quantified before anything else. Even with those home-run types of plays you might feel very strongly about, you still need to determine at which point you’ll bail out of the trade and cut your loss in the event that you’re wrong.
Consider the earnings play by the amateur trader trying to make a quick, easy buck on a favorable gap from the announcement. This play is attempted all the time, but the truth of the matter is that while the odds are high that a gap will come, the direction and size of it simply cannot be determined. This leaves the trader hoping to hit it big but very uncertain as to their exit plan if the stock moves against them.
Trading Like A Pro
Professional traders operate in a completely different manner. What appears to be a good trading opportunity is examined before the entry is made. This closer look may not take a long time, but it will reveal to the professional key information that will make up his mind on whether or not to take the trade. Determining an adverse exit level will allow him to define his risk, size his position accordingly, and then decide if a favorable move will pay him a multiple amount of what he’s putting at risk.
This principle is at the heart of profitable trading, because we are going to have our losing trades, sometimes frequently. Ensuring that those losses are contained will make them very easy to overcome with winners that we will find, but a methodical approach which begins with a look at the risk is where it all begins.
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]
A Head-Shaker’s Market
November 27, 2007 at 11:55 am
This column was originally published today at 11:09am EST on my Market Commentary thread of the trading forum over at TheStockBandit.com. It’s being republished here as a bonus for TheStockBandit.net readers.
The bulls are putting together another nice rebound this morning with much of yesterday’s downside being erased with today’s buying. This has quickly become the typical day-to-day routine for the market, as it sells off in apparent desperation one day, only to bounce big the following day. We have seen this happen now for 4 straight sessions and at other times this month, which is making active traders dizzy and causing those of us with high cash levels to simply shake our heads at the indecision out there.
While this price action is out of the ordinary and difficult to trade, it is what it is and we have to deal with it. As traders, we cannot control what the market does, but we can always control how we respond to it. In a very tricky environment like what we’re in, the best plan is to either become very short-term with trades, flipping them for quick gains and keeping losses very small, or we get very selective and limit our activity altogether.
I’m sticking with the latter, but am really looking forward to the time when things smooth out a little bit and offer us some better opportunities for swing trades, as that is my preferred timeframe. It will get here eventually, but this market is running high on emotion right now and both bulls and bears have been quick to press their bets only to throw in the towel on the following day.
Stay patient out there, if there’s anything worse than an indecisive and reversal-prone market, it’s overtrading it and losing money! Hang onto that trading capital of yours and once the clouds break up we’ll be in a far better position to grow it. Right now it’s all about capital preservation.
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]
Bears Maintain Control
November 25, 2007 at 10:00 am
Last week, the bears maintained control of the major averages as they produced declines across the board. Downtrends remain intact for each of the indexes. The August closing lows have been penetrated on the DJIA and RUT, while the NAZ and S&P 500 have yet to test theirs. That may mean varying degrees of correction have been seen, but no matter how you slice it, it’s still a downtrend and it commands the respect of anyone considering the long side right now.
Be sure to check out this week’s Market View page over at TheStockBandit.com before you start your trading week for a closer look at the indexes and some chart comments which were posted today (and every Sunday).
Trade well this week!
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]
Welcome TraderInterview Readers!
November 22, 2007 at 6:45 am
Just wanted to say thanks for stopping by to those of you who heard my interview at TraderInterviews.com this week. I thoroughly enjoyed the visit with Tim Bourquin as he runs an excellent site and knows a lot about the trading industry. I also hope that you found something useful from hearing about my approach to the market during my interview.
Those of you who haven’t visited TraderInterviews.com should check it out, there’s lots of great info provided by quite a few traders of varying styles and timeframes. Needless to say, I am honored and humbled to have been invited to participate!
While you’re here, I should point you to a post I put up last week when I welcomed Barron’s readers. That post outlines some key posts here at the blog and explains a bit about what I do and my trading style. It’s a great way to get an overview of how I operate. I’m glad you’re here and hope you’ll return frequently in the future.
Happy Thanksgiving to all, and I will be back next week with some new posts to share here. See you then!
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]
What It Means To Wait On The Market
November 21, 2007 at 10:54 am
One comment I make frequently over on the main site is to “wait for the market” to produce good trading setups. Those of you who read me over there understand what I mean, but the rest of you have no doubt heard the phrase. I thought it might be helpful to explain just what it means and give some examples of how it’s done, particularly because it is so important in this wild market environment.
A good trade is usually a planned trade. For me, that means scouring the charts in search of patterns which I’ve found to be repeated over time. They also give me a black & white entry and exit as they confirm or fail their patterns. My style is such that I won’t trade unless and until I see these patterns emerge. Oh sure, I’ve forced plenty of trades from the usual boredom trade to the revenge trade, but those kind rarely pay me. The ones which pay the bills are the ones which come along and really stand out from the charts, the ones which I can’t pass up.
Waiting on the market means that you don’t go hunting excessively to find a good trade. It means you do your homework and take what the market gives. I’ve found that when I have to dig and dig to find a trade that it’s usually not worth taking. The best trading periods offer up plenty of opportunities for entries and new trading ideas, so when you’re not seeing what you like don’t force it.
The current trading environment is a sloppy one, so I’m having to put this theory into practice daily right now. After a prolonged uptrend, the market entered a corrective phase a few weeks ago and volatility is running extremely high all of a sudden. Emotions are swinging back and forth as traders take profits and fund managers worry about getting left behind every time a bounce begins. This means that the daily charts which typically offer a steady flow of multi-day trade candidates are now just not offering much without drastically increased risk.
As a result, I’ve been doing more day trading than swing trading, reducing my trading timeframe so that I can keep my risk in check. Even planned trades which have abbreviated timeframes (like day trades) are requiring extra patience right now, because the frequent reversals and morning price gaps which have been so common in recent weeks are preventing many of them from triggering entries. So rather than lower my standards purely for the sake of activity and put on lower-quality trades, I wait!
If you’re new to the game, be aware that trading shouldn’t be full of excitement and thrills every moment of the day. It’s easy to want to be actively trading at all times, but sacrificing your objectivity for the sake of entertainment will mean a quick exit from the game. There are times which will be downright boring as you wait for your pitch to come along before you swing the bat. Your ability to accept this fact will put you miles ahead on the learning curve, and you’ll pay far less tuition while learning the ropes.
Patience is probably the most underrated attribute of the successful trader, but it’s the one most-often exercised by those of us who make our living in the market. So whether you’re letting a good trade develop or simply looking for your next play, wait on the market to provide the conditions you’re seeking and you’ll eventually be glad you did.
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]
Safety Nets for Trading
November 14, 2007 at 7:05 am
All of us could use a safety net from time to time, and fortunately every single one of us has access to one! It’s called the stop loss, and it’s an invaluable part of any trading strategy.
Regardless of trading style, we all know that there will be occasions when we’ll be wrong and lose money. Knowing that if we play the trading game it’s unavoidable, the next best thing to do then is to limit those losses the best way we know how and protect the downside. That may involve setting an initial stop loss level on a new trade, or it may involve tightening up stops on existing trades, but either way it’s important to have these safety nets in place.
Last week’s steep selloff caught many by surprise, bringing untold levels of pain to those who failed to employ a stop loss order. It’s an excellent reminder that truly anything is possible in the market at any time.
But you’re different, right?
Think of it this way…. an experienced driver still wears his seatbelt, a great climber still uses a safety harness, and any trader worth his salt will employ the stop loss as a safety net. Doing so will prevent the kind of long-term damage that hope can do to a trading account when positioned on the wrong side of the market.
Setting stops appropriately is an art which requires constant monitoring and modification. Even if you’re not a very experienced trader and may not even know the proper areas to place your stops, do not forget that having some kind of stop in place is better than nothing at all. Don’t walk the high wire without some protection! Your trading capital is your lifeblood as a trader, and it deserves your protection. Play great defense and you’ll have plenty of opportunities to put your offense to work!
The idea is to keep moving forward.
Last Thursday and Friday I was stopped out of 2 positions, one for a gain and one for a loss. However, obeying those stops saved me from further losses which I’d be sitting on had I merely ignored them or hoped for a recovery. That prevented further pain, and although taking those stops was no fun at the time, I was still very glad to have done so by the end of the week. After all, I’d rather be sent to the sidelines with a few paper cuts than be carted off the field on a stretcher with a broken leg (or worse). Don’t become a stuckholder – babysitting underperforming positions is no fun!
There will be plenty of times when we’ll be wrong as traders, so accept that fact as part of the game. As soon as you can do that, you’ll ensure your longevity as a trader, and vastly improve your odds of great success.
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]
Remember Your Trading Objective
November 13, 2007 at 9:31 am
Emotions sure are running high right now! We’ve seen tremendous moves take place in a very short amount of time, and it may not be over yet. Momentum leaders like GOOG, AAPL, RIMM, and BIDU, which were only days ago running to new highs have since fallen out of bed, getting hammered with profit-taking. The directional change has been fast and fierce, and it has opened the doors of opportunity for nimble traders.
But nimble traders aren’t the ones suffering. The part-time traders are. Obviously any bull lately has suffered some pain, but that’s not what I’m referring to. I’m talking about the traders who aren’t quick on the keys, the ones who are just trying their hand at some dip buying. They don’t realize the sheer panic of so many other market participants which they’re buying in the face of. They don’t realize that even on a bounce bulls can become sellers. There’s a lot of supply just waiting for a chance to get liquidated once some relief comes along and higher prices are seen, and that’s precisely what can bring the pain to the uneducated part-timer.
There’s a huge urge for traders to catch market turning points, probably because so many traders fail to check their ego at the door. That desire can cause a trader to step out of their usual routine and attempt to catch a falling knife like this market or call a top when things get stretched to the upside. Rarely does it pay off. Usually it costs some money and objectivity, and what mojo you had before will quickly disappear.
This is an incredibly volatile market right now, and it’s no time to be trying new aggressive strategies (such as trying to buy the low). Your trading objective is to stay patient and wait for the conditions to arrive which suit your trading style. If you don’t see those conditions, then don’t play. Wait patiently and spend your time tending to other matters. Because the truth is, eventually this phase will end and a new one will begin which may be far more suitable to your trading style. Being willing to sit out volatile times like this will preserve capital and allow you to resume profitability once your ideal conditions surface again.
Shun the urge you may have right now to add new trading styles to your arsenal. Stay focused on what you know, and if you don’t see it then be willing to wait.
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]
