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What constitutes a “good trade?” Is it a profitable trade? Is it one that works quickly and provides you with a gain? Those are certainly nice!

But I’m not so sure that we can define our trades solely by our results. In fact, I’ll go ahead and say that a truly “good trade” can be declared regardless of your results - so long as certain conditions apply.

We had this discussion recently in the member’s forum over at TheStockBandit.com. A trader had commented that he was concerned about a day trade he had just made. Although he closed the position for a profit, he said “(his) only concern was (his) stop loss was greater than his profit…the risk reward wasn’t there when the trade was all over.” He followed with the question, “was it still a good trade?”

Interesting topic, to say the least! Here’s the reply I offered:

“I’d say that if before the trade you saw a risk/reward which fit your preference, that it was still a good trade. We have to roll with the punches after we are in (a trade), and sometimes we make a gain which is less than what we originally planned for. I think the measure of a good trade is whether the risk/reward was there from the beginning.”

We’ve all faced this issue as traders. We enter a trade with a certain game plan, do our best to follow it along the way, but when conditions change and we adjust, sometimes we’re left with a smaller gain than what originally would have offset the risk we took in the very beginning.

Seeing every twist and turn before they happen isn’t a requirement for good trading (fortunately!), so we don’t have to attempt to. What we have to do is evaluate the situation as it unfolds, and make the necessary adjustments to our stop loss levels or price targets, managing the trade to the best of our ability.

It’s like a pilot after takeoff, he keeps navigating toward the goal but a safe landing is of utmost importance. If that means he chooses an alternate spot to set it down, so be it. Exiting a trade at a spot not originally planned is sometimes necessary, but that doesn’t mean our choice was flawed to take the trade initially.

It’s important to remember that if the risk/reward profile of the setup was appealing from the outset, then taking the trade was the right thing to do. That means regardless of if you get stopped out for a loss or if you realize a huge gain. Taking high-quality setups with proper risk-reward profiles is at the core of how we manage our risk as traders. If you’re doing that, then you’re making good trades regardless of the results.

When it comes to results, we all want good ones and it’s important to review them from time to time and make sure we’re on track (as I’ve discussed before), so I’m certainly not diminishing the importance of that aspect.

However, making good decisions with not only which trades we choose to enter, but also taking logical steps along the way to manage each trade accordingly is what keeps us trading with a level head. So long as that’s the case, you’re protecting your objectivity and therefore able to keep making good decisions.

Trade well out there!

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

Thanks to Jonathan Burton of MarketWatch for including some quotes from me in today’s WSJ article on stop losses. Jonathan brings forth some interesting discussion regarding the use of stop loss orders, so be sure to check out his article.

Click to visit WSJ article

I’ve discussed the subject of using the stop loss order here before, and it’s one habit that I think is imperative for traders who care anything about consistent results and capital preservation.

Some additional comments on stops:

* A stop loss is your emergency exit, your safety net, your plan B when things don’t work out quite like you had planned.

* Even if you’ve never been taught how to set stops or an approach to determining which levels could serve as locations for your stops, choosing an arbitrary price to set your stop is better than not having one at all. Deciding on stop loss levels will largely depend on a couple of factors: the individual stock in question’s personality, and the overall market’s behavior at that time. Taking those into consideration should help you gauge an appropriate spot for an exit, which also is related to position sizing.

* Capital preservation is a priority to traders, but even longer-term investors would be better off incorporating some risk management elements into their plan. It all boils down to respecting the market and setting that ego aside. Your need to be “correct” can become costly if you allow it. So respect the market, or it will force you to respect it! We have to accept some level of risk in order to profit in the market, but even a small measure of humility should be a part of the plan because your timing may be off.

* Consider setting multiple stops for a longer-term position so that you won’t get shaken out on a small dip but at worst you’ll be reducing your position size as the stock moves against you. Your final stop would be in an area that on the chart it’s clear the entire trade has reversed course. Partial sales offer a lot of freedom, so remember that you don’t have to be “all in” or “all out” of a position. Scale out appropriately to reduce risk when you see fit.

* You don’t have to win on every trade, so look at stop loss orders as a way to protect your long term odds of success. Give yourself the best chance of profiting over time by preventing big hits to your account. You want to avoid ever going from stockholder to STUCKholder! Getting deep in the hole on any trade or investment costs you opportunity elsewhere, along with costing you your objectivity. All of us are wrong from time to time in the market, but the best traders know how to limit the damage done when they are wrong. The stop loss allows you to emulate that trait.

* Today’s commission rates are low enough that it’s sensible to use stops and then re-enter the stock later if you see fit. Stated otherwise, it’s easy to reverse that sale and quite inexpensive to do so.

* Every broker offers at least a basic stop loss order, with many brokers (including mine) now offering advanced order types which let you specify multiple conditions that must be met before your stop order gets triggered. That’s a huge tool for today’s traders and investors, so use conditional orders if they’re available to you.

The bottom line is this: small losses are the key to long-term success, whether you’re an investor or a trader. The stop loss order exists for the very purpose of limiting your “wrongs,” so use them!

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

Technorati Tags: Stock Market, Day Trading, Stock Trading, Swing Trading, Stop Loss, Investing

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

Technorati Tags: Stock Market, Day Trading, Stock Trading, Investing, Swing Trading

Last week, the market took a turn for the worse. A move like we saw on Friday inevitably leaves more than a few traders caught off guard as they watch profits evaporate and losses escalate. Take for example the energy sector, which has been such a leadership group for many months. Numerous stocks within the group took quick dives after making 52-week and, in some cases, all-time highs. This likely left many traders scrambling to make a decision – sell or hold?

Many traders tend to gravitate to the strongest sectors and the strongest stocks within those sectors for trading. This is a good approach to trend-following, but what happens when a move like last week comes around and you get smoked? A reader e-mailed me over the weekend with valid questions about this very topic. Here were a few of my solutions. My answers were applied to the energy sector which this trader has been playing, but it applies across the board to those individual trades which sometimes just turn and misbehave.

When a trade goes bad, cutting losing positions has several benefits.

For one, it will free up cash which can be used for other trading ideas. If your capital is tied up in a trade in which you are wrong (losing), you are suffering opportunity losses. A cash position is better than a losing position (and cash IS a position). Other stocks could be showing you a gain, so consider at least partial sales to free up cash for new ideas, possibly even on the flip side.

Secondly, selling or lightening up on losing positions will help to free up your mind and help you start fresh. Leaving some mental baggage behind is always a good idea - none of us want it! Some of my worst stretches of trading were a result of having just one losing trade on my screen which I should have already kicked to the curb. I would turn my screens on in the morning and there it was looking back at me. This not only put me in a poor frame of mind to begin the day, but it had effects on other trade ideas I should have taken but was afraid to put on because I didn’t want to lose any more. A losing position should be cut down in size at a minimum, and often times should be cut completely. Starting fresh allows you to get back to your big-picture game plan of taking trades in good setups without the mental baggage of big, ugly losers which weigh down your confidence.

Finally, a losing position should be cut because you are flat out wrong. Naturally, stopping the loss will save your hide! Some traders refer to losing positions as “paper losses” and convince themselves of the old argument that “it’s not a loss until you take it.” This could not be further from reality, because the damage has already been done. The market is telling you what the stock is currently worth. Take some responsibility - those red numbers mean you’re on the wrong side and it’s time to get out and stop the pain.

So the next time your stocks take an ugly turn, remember to at least lighten up on your position. You’ll reap a number of benefits and immediately feel better about your next trade!

Don’t let a losing trade turn you into a loser!

10/24 UPDATE: Jonathan over at A Trade A Day expanded on this concept and has made some excellent points along these lines. Check it out.

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

Technorati Tags: Stock Market, Day Trading, Stock Trading, Investing, Swing Trading

I love to trade breakouts, and we’re seeing a lot of them in the current market environment. Many stocks have rallied back up near their summer highs, built new bases, and are starting to move higher once again. In general, there has been no shortage of breakout candidates in recent weeks, and if the bulls keep running then we’ll only see more in the coming weeks.

I’ve talked before about gauging the character of how a stock moves, and that certainly holds true on breakout plays. Ignoring things like weak volume on a breakout, late-day selling to come down from the highs, or simply the way a stock might clear resistance and yawn, are all ways to deny an underlying lack of strength which should really be monitored closely.

Let’s look at an example. Last week, I really liked the setup in SYNO. The stock had been in rally mode for a few weeks, and more recently had settled into a nice consolidation phase to digest the gains of the past few weeks. As the stock rested, it built a well-defined bullish pattern in the form of an ascending triangle. Volume had slowed during the rest phase, and I set up a trade to go long once resistance was cleared. My buy point was $23.25 as the upper horizontal trend line was cleared. Here’s a look at SYNO’s chart the day before entry:

(Click for full-size image, courtesy of TeleChart)

On Friday, I got my entry signal and went long. However, the stock wasn’t acting the way I would have expected it to as it got back on the move. The buying was sluggish and upside traction was short-lived. Although the stock closed higher on the session, it fell back into its base, finishing on a weak note to end up right back below the trend line.

Over the weekend, I raised my stop on the trade. This is quite common for me as a trade progresses, particularly when I’m facing a potential failed breakout like this was setting up to be. The best breakouts will trigger and rarely even look back, but that isn’t what this one did. On Monday, the stock gapped lower and never turned back up, so I was stopped out right after the opening bell. Here’s a look at SYNO’s failed breakout:

(Click for full-size image, courtesy of TeleChart)

While the failed trade cost me money, it certainly could have been worse. I could still be in the stock having to babysit a losing trade. I could have left my initial stop intact and taken a larger loss than necessary. I suppose I could have decided it’s now an “investment” and cling to hope that it will turn back up.

But I didn’t.

Sluggish breakouts can’t be trusted, it’s as simple as that. When you enter trades as stocks clear key levels, it’s difficult to know just how far a good move can carry. However, it isn’t too difficult to know when a stock is stinking up the joint and sending smoke signals that it lacks the gusto to keep going. Pay attention to those signals!

Keeping close tabs on the character of moves will let you hang onto more of your trading capital on those occasions when you’re wrong, which is the name of the game. Small losses are very manageable, but stubbornness isn’t. So the next time you notice a breakout play starting to falter, cut it quick and move on to the next setup.

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

Technorati Tags: Stock Market, Day Trading, Stock Trading, Investing, Swing Trading