Author Archive for Jeff White

Averaging Down

December 15, 2005 at 9:04 am

It’s common to hear that as a trader, you should never average down. After all, throwing good money after bad isn’t the best way to come out ahead in the long run. Investors with longer timeframes are happy to see lower prices to allow them to improve their cost basis, but a trader who makes a habit of adding to losing positions will at some point pay dearly.

But….

There is a time when it’s OK to average down – when you originally planned to do so. Maybe you’ve been stalking XYZ stock to short sell a quick rally right to resistance. It is looking like a double top to you, so you decide to put on a partial position to see if you’re right. The stock begins to roll over, bounces a bit past your entry but resistance holds, and you put on more shares. This is the kind of scenario in which adding to a losing trade is acceptable with your stop-loss nearby. You planned to do so, and adding to the trade only took you to a full position size – not above it.

On the other hand, we’re all plenty familiar with the blown stop loss and that urge to improve our average price by adding to a losing position. Those are the times when emotion is taking its toll, and the need to be right overcomes goal number 1 of capital preservation. You’re soon over-exposed in a stock that you’re clearly wrong about. Adding shares in times like that are a recipe for pain and an eventual disaster. Getting away with it a few times just reinforces a bad trading decision, and it’s gonna hurt down the road when it fails to work!

So if it’s part of your original plan to add to a trade at worse levels, then go ahead and do it if you still have the conviction. If you’re stuck in a bad trade and you’ve already got more than you want, look for a good spot to exit and rid yourself of the trade ASAP.

Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com

Goal Number 1

December 14, 2005 at 8:39 am

New traders want to know how much they can make. If they have X dollars in their account, how much stock can they buy and how soon can they get rich?

Veteran traders know better. They became veterans by surviving. They endured the occasional painful losses, yes, but even more so, they were able to withstand the times when trading just has very little to offer. Veterans are willing to wait out the slow trading times without putting it all on the line to make a quick buck or add some excitement. A veteran trader will tell you that goal number 1 in trading isn’t about how much you can make. Goal number 1 is all about protecting your capital and staying in the game.

Trading capital includes the cash you have to trade with…….your seed money…..your bankroll. It’s what you absolutely must have to stay in the game, and only then can you reach toward goal number 2 – making money. Protecting the cash in your account will enable you to seize opportunities when they arrive so that you may profit.

I think there’s a certain amount of emotional trading capital each trader begins with as well. To me, it’s as important as the cash in my account, because I could always borrow additional funds to trade with if it came down to it. I take as many precautions to protect my emotional capital as I do to protect my cash. If I lose my confidence trading, then it won’t matter if I have cash left to trade with! If I get on a losing streak or overtrade when the market is choppy, then I end up confused and clueless what to do next. That’s no way to make money trading! Protect your emotional capital too – get smaller when you’re trading poorly, or step away entirely when things aren’t clear.

Always keep these two goals in the proper order and don’t ever forget your primary objective every day: survival! Protect your capital and you’ll stay in the game plenty long enough to reach goal number 2.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

The Do-Not-Trade List

December 13, 2005 at 8:51 am

In the world of small inconveniences, few things are worse than getting caught by some telemarketer at 7:05pm just after sitting down to some Pei Wei spicy chicken. I loved the introduction of the “do-not-call” list, and I quickly added my numbers to it.

Similarly, I’ve almost always had a “do-not-trade” list. There’s a ton of fish in the sea, so with literally thousands of stocks out there to trade, it’s OK to refuse a few of them.

It’s important to trade your personality, as well as the stocks that match it. That means there will just be some that don’t move the way you may anticipate. Some stocks give clearer signals than others, so why mess with the ones that don’t seem to work for you?

As a full-time trader now for several years, there have been plenty of stocks which looked good enough to me on a chart to warrant an entry. Soon after entering, however, some of them reversed and left me with a loser on my hands. Now I’m sure not the most stubborn trader around, but I am willing to give a good setup the benefit of the doubt in most cases and give it another shot if the stock breaks out again. After all, maybe my timing was just off. But in the case of the “do-not-trade” list, additional entries cost me additional dollars, requiring that a stock be added to the forbidden list for at least a short time.

Stocks on your D.N.T. list do not all have to remain there forever, although some will. Some stocks might have legal issues pending which will soon blow over and allow that stock to behave normally again. Others might just act funky and it’s best to avoid them as long as that is the case.

The goal is to turn a profit and make money. Don’t insist on being right! If you try a stock a couple of times and it’s not cooperating, move on to the next trading idea. There’s no reason to tie up valuable time and trading capital in a stock that you’re not in sync with. Keep at least a mental list of stocks which are costing you more money than they’re making you, and stay away from them!

Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com

Trading Your Personality

December 12, 2005 at 8:45 am

It’s been said too many times to count – that you must trade according to your personality. In the movies they might call it “being true to yourself” or something cheesy, but it’s a necessity in this job.

Recently I was asked which chart patterns I prefer to trade, continuation chart patterns or reversal chart patterns. My answer was that while I will actually trade either, I suppose the continuation and breakout type of patterns are the ones I trade more often than reversals or buying on support levels.

I don’t think one setup is superior to the other, they both have their pros and cons, and you have to go with what fits your style best.

Buying on support is an anticipatory play, which may take a few extra days to get moving. It can give you a lower cost basis than another trading strategy, but will require greater patience on your part while you wait for the stock to find traction.

Buying a stock which is breaking out puts you (by definition) in a stock that’s already on the move. This is a confirmation play. You get instant feedback on how your trade is developing and how much momentum the stock has.

The setups you select for your trades need to incorporate your personality tendencies on managing those trades once you are in them. For me, I tend to be a bit impatient and I want to know as soon as possible whether or not I’m right or wrong on a trade. Other traders don’t live in the left lane, and they’re willing to give a stock some time to get moving one way or another. They place their protective stop and turn their attention to something else in the meantime while waiting for their trade to make a move. Personally, I prefer to have my money at risk for the shortest timeframe possible. I really prefer the times when the market conditions are producing breakout plays and continuation patterns like the bull flag or ascending triangle patterns.

So, when you’re doing your homework and looking for quality setups to trade, be sure to consider the ones which fit your personality and your style of trading. Those will be the trades which you ultimately will manage the best.

At TheStockBandit.com, winning stock picks of all kinds are shown from reversals to breakouts, so come check it out and take the free trial to find out how we make our living as traders!

Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com

Sam the Ugly Dog

December 11, 2005 at 2:26 pm

And you thought your last trade was ugly! Yes, it’s real……if you can believe it! All I could say when I saw this was YIKES.

Maybe you’ve seen this incredibly disturbing pic of Sam the Ugly Dog, the late Hollywood star that earned his milkbones the old-fashioned way – acting. Some Hollywood types die of broken hearts, but I don’t think Sam was as fortunate.

I had to get this out of my head, it’s just flat out scary! And by the way, he was alive when this picture was taken…..supposedly.

Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com

Diversification for Traders

December 9, 2005 at 9:17 am

They send me junk all the time, as if I really care.

Those long-term accounts of mine are magnets for the endless supply of “investment” idea brochures and write-ups.

It’s all about diversification, they say.

But I’m a trader! Can I still diversify? YES, and I should. But it isn’t the same. It’s not about finding some international exposure to offset the large cap growth in my portfolio (did I just say “portfolio?”). No, diversification in my world as a trader is entirely different.

I can diversify my timeframes. I may choose to day trade some of my funds, looking for quick intraday moves while I let a swing trading position play out over the course of a few days. I can diversify my timeframes by checking not just the 3-minute chart but also noticing what the 15 or 60-minute charts show. That’s something that can help me as a trader when I am trying to determine my next course of action (or inaction).

I can diversify the sectors I trade. Maybe I trade semiconductors on a day like today when they’re the talk of the NAZ, and other days I turn to the homebuilders or the energy stocks for movement. The bird flu plays have been active in recent weeks, and they move to the beat of their own drummer. Diversifying sectors allows me to find exposure in places that will move with the market or not at all, which it helps to stay aware of on trend days as well as range bound days.

I can diversify my trading by going long or short. It cracks me up when people I know see the DJIA down 80 points and think I must have lost money. They forget I’m a trader. It’s about movement, not always price appreciation. I can go long or I can short sell and still make money as long as I’m paying attention to the market.

Diversify your timeframes, the sectors you trade, and be willing to go short. And when you get a chance, trash that value fund prospectus!

Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com

Selling Your Stock – When and Why

December 8, 2005 at 2:20 pm

There’s another side to look at. It’s not all about buying. It’s not all about knowing where the entry is and when you should get in. Trading well doesn’t just come down to some timing indicators that tell you when to get long. To make money in this game, you’ve got to sell, and you’ve got to do it at the right time.

When it comes to selling, knowing your exit ahead of time is half of the battle. Trading according to a plan will take you miles beyond the results you see if you trade on whims. Is this a momentum trade? Is this a swing trading candidate? Is this a trend trade with a trailing stop, or am I looking for a particular number to be reached before I sell? These are the kinds of questions to ask going into the trade.

Once you’re in the trade, there are a number of reasons to sell your stock:

The most common time to sell out all of your stock is when you’re just plain wrong. You’ll know when you’re wrong, because your P&L will tell you so, every minute, tick by tick, dollar for dollar. When your stop-loss gets triggered, sell out! Be disciplined and pull the trigger when the time comes to do so, or else set an automatic stop-loss order through your broker.

Selling in the face of a stagnating market is also wise. Perhaps you caught a nice move but the trend has since stalled out. Your stock hasn’t yet rolled over, but it’s not going higher anymore either. Reducing your exposure and freeing up cash in a market that isn’t moving means less risk to you. You will then have cash on hand to put into new trades, whether for new buys or for short selling stocks if the market weakens.

When your profit objective has been met, do some selling. Making sales after an advance to the area you planned to see is simply good trading discipline. Sell all of your stock if it is now facing overhead resistance, because you can always re-buy if and when the stock clears resistance and breaks out. There’s just no reason to own a stock in an area where the sellers clearly have had an advantage.

You don’t have to sell it all at once! Many traders think they are either in or out of a trade. They look at it like it’s an all-or-nothing type of thing, and it doesn’t have to be that way. In fact, in many cases, it shouldn’t be that way. If you are following a trend, it’s often wise to make partial sales along the way. This books incremental profits, while freeing up cash for other trading ideas. It also helps to satisfy that urge to sell that so many of us fight. Selling off stock in pieces as the trade shows you a profit is a good way to manage money AND emotions.

When you plan your next trade, consider where you will want to sell and where you’ll need to sell. Whether it’s on the profit or loss side, know your exit!

Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com