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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.conditional-orders

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

Follow TheStockBandit on Twitter or Facebook to keep up!

Video Review of the Indexes 8-9-2009

August 9, 2009 at 2:52 pm

The upside momentum off the July lows continued last week as the indexes surged higher once again.  Strength on Monday and Friday made the difference, taking the market to its best levels of the year.

We’ve seen very little rest in recent weeks, and certainly no pullbacks lasting longer than just a few hours.  With the bulls having clearly established their dominance, will they finally move to book some profits this week or instead will they continue to frustrate the bears?

Let’s examine some important levels in the indexes to keep an eye on in the days ahead, as that will have the greatest influence on how individual stocks are going to move.

This clip was also posted over on the Trading Videos site (as always), and perhaps you’ve seen it there – but in case you didn’t, I wanted to put it here on the blog for you.

Let me highly suggest clicking the “HD” on the video player and then going full-screen for best quality.

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

Trade Like a Bandit!

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?

Chat Archive with Charles Kirk

August 7, 2009 at 12:01 pm

Today’s live chat with Charles Kirk of The Kirk Report was a lot of fun, and I hope you were able to join us for the discussion.

For those of you who were unable to attend, I’ve embedded the chat transcript below so that you can review the conversation sometime over the weekend. Hope you find it helpful!

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 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:  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?

Scale Out of Winning Trades with Partial Exits

August 4, 2009 at 12:55 pm

It’s common among traders to think that you either have to be all-in with a stock or all-out of a stock, but that sure isn’t the case.

Many of us do our buying in one piece, entering a full position at one time as an important level gets crossed. This is my personal preference, as I continually seek out trading opportunities where a ceiling is shattered or a floor implodes, enabling price to make a nice move through it.

And when I am wrong (yes, when, not if ), I’ll exit in one piece.  As events occur or conditions emerge to show me that the stock is clearly moving in the opposite direction of what I had expected, I’m going to bail out of the trade and protect capital.

So, I’m getting into trades in one piece, and I’ll stop out of trades in one piece.  But rarely will I exit a winning trade in just one piece.  Instead, I’ll scale out.

Advantages of Incremental Profit-Taking

Over the years in dealing with traders from literally around the globe, I’ve found that very few of them will get out of favorable trades in pieces.  Adopting this method of booking profits can be an excellent way to trade, and particularly in a momentum-based market like the one we currently find ourselves in.partial-exits

Taking partial profits and peeling off a portion of your position on the way up carries with it several advantages.  Let’s look at a few…

1You can lighten your exposure into favorable moves. As your trade makes its move, it’s a great idea to start reducing your position size.  The idea is that as a move progresses, it naturally becomes more difficult to capture similar returns to the initial move.  Typically stocks surge early, so this is a way to take advantage of that early momentum.

2Make room for new opportunities. This isn’t just for those who may be trading with a smaller account and need to raise cash to put toward a new play.  In fact, even traders with larger accounts may find it difficult to manage a lot of positions in terms of the attention they can devote to each trade.  Catching the move you initially were seeking can remind you that it may be time to shed some shares and seek out another stock to put your money and/or attention into.

3Let slippage work in your favor. Posting offers on the way up means you’re capturing the bid/ask spread – not paying it.  I use market orders for entries and for stopping out, because when I need to be in or out of a trade I don’t want to haggle over a few cents.  But when it comes to booking profits, limit orders resting at higher levels mean you’re out there offering out some inventory, letting someone else pay up for it.

4Satisfy the urge to take cash off the table, yet still stand to gain from a continued move. This is a big confidence booster as well as a way to manage money wisely.  Turning some of those paper gains into real profits not only pads your account, but it also reinforces that you’re on the right track.  Gaining some momentum in your trading is a great thing, both for your account and for your psyche.  And by adjusting the stop for remaining shares, keeping even a portion or a core position allows you to benefit from a major move, should it occur.

Trade Like a Surfer

Just as a surfer catches one wave after another, a good trader maintains the same mentality.  Ride the best moves you can find, but don’t be shy about easing out of a trade once you’ve caught a nice move.  Paddling back out to locate the next one will require your availability, so when you start smiling about a trade, it’s probably time to start scaling out.

The fear of missing out on a giant run keeps many traders from selling at all, but scaling out carries with it the best of both worlds.

Consider making partial sales in your next winning trade, and see what it does for your bottom line.  It just might be the best adjustment you make this year.

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?

Momentum Trading – A Different Mindset

August 3, 2009 at 7:17 am

After a lengthy period of indecisive, range-bound price action, we’ve seen the market gather some momentum in recent weeks.  The push from the July low was rapid and relentless – clearly a change of character.momentum-trading

The landscape tends to shift like that from time to time.  Sometimes key levels serve as steadfast boundaries for price and don’t allow it to gather any steam in either direction.  But at other times, we’re in a run-and-gun market where we get trend days after trend days, and follow through is far easier to come by.

Let me be clear though:  that doesn’t mean it’s easy.

In fact, the momentum game really requires a different kind of mindset for success.  Dare I say, it can be much tougher on the experienced trader.

Let me explain why.

Mindsets of the Amateur and the Adept

First, let’s examine the novice.  Generally, their approach can be quite simple…

See green, go long.
See red, sell.

Often times, they may not even consider how much green they’ve just seen – all they know is that there’s strength present, so they buy without concern.

This mentality contributes to the momentum, and when it’s particularly strong, they make money without much stress.  Soon they’re saying, “I think I might quit my day job!”

On the other hand is the experienced trader.  A guy like me finds it particularly difficult to chase stocks, because in my post-beginner trading phases I’ve bought the top or sold the low.  It isn’t fun.  Experiences like that can leave you a little gun shy, and it becomes a habit to recognize at which point a play has moved too far for a new entry.  Thoughts creep in, such as “Is this market ever gonna rest?”

So, seeing a stock which just ran 5% intraday, for example, leaves me far more likely to respond with an I’ll catch the next move mentality.  I know how nice it is to have some inventory to flip out to those late-comers after a big pop, so when moves start getting extended, my preference is to start lightening up instead of adding.

This “I forgot my track shoes today, so I won’t be a chaser” mentality might frequently serve to help me protect capital, but during those times when powerful momentum is present, it can actually cost me opportunities.

Shifting Gears

Knowing this, how bout we take a look at 3 ways to identify and trade momentum.  That could help us adjust when the conditions warrant hopping on board the train when it’s already in motion.

1.  Recognize a change of character. Paying close attention to the environment you’re trading in will make it more obvious that your approach should change accordingly.  Perhaps recent advances have been 3-4%, and suddenly a 6% move arrives and shows no signs of fatigue.  That’s a change of character, and it’s a signal to shelve your current strategy for the time being.  And if you don’t have another style to turn to, then it’s time to seek out another way to profit.

momentum-rally-volume2.  Watch the volume. Under normal circumstances, even with a trend, we can compare upside volume to downside volume and notice some patterns emerging.  For example, an uptrend might see spurts of strength accompanied by higher volume, and periods of rest accompanied by lighter volume.  But when real momentum arrives, the volume may not follow that same pattern.  Price simply gets on the move and keeps the pedal to the metal, and volume doesn’t have to play a major role.  Market participants are simply caught off guard, and there’s a persistent move as they jockey for position.  Many times that results in consistent volume levels which don’t surge and contract like they do during a rally-rest-rally type of phase.

3.  Notice when a pause is ignored. If you’ve been trading for almost any length of time, you’ll notice times when price starts to get a little stretched and is getting due for a rest.  If that rest is not allowed, then momentum is definitely present.  Lace up those running shoes, you’re probably gonna need ’em.

Emotion in Motion

One last note on this topic, which is that support and resistance levels are largely ignored when the momentum train is running.

That means if you’re looking for reversals or pauses at ‘logical’ zones, fugettaboutit!  Not likely to happen.  Momentum arrives when more emotion is present than logic, and emotion stops for no level.

Those typical reversals near key levels we tend to see during quieter times just aren’t going to happen, so go with the flow and don’t fight it until the tape tells you it’s tired.

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?