But Costanza isn’t the only one who doesn’t fully understand Risk Management.  In fact, far too many traders struggle with this very topic, and it keeps them from surviving and from succeeding.

So, let’s look at 3 pillars of risk management as a way to keep it simple.  If you can nail these down, you should be alright.

Protect Capital

This is a biggie, no doubt about it.  Simple on the surface, but not easy to put into practice.

As traders, our capital is what keeps us in business.  Ignoring the consequences of mismanagement is a major mistake that’s not easily recovered from.  Those who fail to understand the importance of first preserving what they have tend to place profits ahead of protection.  That leads to the age-old error of eyeing new trades with only potential gains in mind, rather than placing equal importance on potential losses if the trade fails.

Capital comes in two forms…psychological capital and trading capital.  Both must be protected with vigilance.

Psychological capital is the amount of inner strength, confidence, and willingness to take risks that a trader possesses.  It can be eroded through many mistakes, and it’s not easy to replace.  Protecting one’s confidence as a trader is paramount to staying in this game, because the trader who’s unwilling to pull the trigger when good opportunities come along won’t ever win.

Trading capital is what’s available in your account, and it’s of course the type of capital most are familiar with.  Money can be more easier to replace than confidence, but it’s still critical to manage risk in such a way that your account stays intact.  Traders who disregard the importance of keeping an adequate capital base find out quickly they’re unable to profit big enough to matter, even when they’re right.  So, try to maintain account highs as often as possible, and you’ll find your account is growing on a regular basis.

Trade YOUR Proper Size

This one will vary for everyone, so the secret is to make sure you’re trading position sizes which allow you to be at your best.  That means avoiding trades which mean too much, both psychologically and financially.  Let’s look at those one at a time.

Psychologically, the ability to recover from a loss is something we all must ensure.  Taking a big hit from a trade which didn’t work out leaves us vulnerable to anger or despair, and neither are beneficial to our trading.  Anger promotes revenge trades, and that typically leads to digging a deeper hole than that which we may find ourselves in.  Despair leaves us so focused on our emotions that we fail to recognize good opportunities when they come along.

Financially, we never want to be trading so large that we can’t recover from a loss.  Taking a fairly large position when you’re confident is one thing, but dumping your entire account into a single idea is another.  Consider the math behind poor trades, for example.  A 20% loss in your account will require a 25% gain to get back to flat.  And the deeper that loss gets, the more that’s required to make it up.  Taking several smaller trades instead of one big one might require more management, but it can also greatly help to avoid one major disaster.

Exit When You Know You Should

This sounds really simple, and it is, but it’s the follow through which makes this one difficult for some.  Making a trading plan is one thing, but sticking with it can be another issue entirely.

It’s all about discipline, and that isn’t going to change.  You know at which point you’ve stayed too long in a position and the time has come to kick it to the curb.  All of us know what it means to blow stops, and most likely, it doesn’t pay off when we do.  That’s a self-inflicted mistake that can be avoided, provided some measures are taken to help automate the process.

Here’s the thing…defined risks are the best kind.  Pick your exit at the same time you select your entry, and commit to it.  If you struggle with that, set a stop order the moment you’re filled on your entry, and then you won’t have to make a decision under the gun.  If you get stopped, you most likely just saved yourself some additional pain.  But you’ll be managing your risk effectively and reinforcing discipline even when you’re wrong.

If you’ll protect your capital, trade your proper size, and get out when you know it’s time, you’ll be doing 3 of the things the most successful traders focus on.  How can there be any downside to that?

Trade Like a Bandit!

Jeff White
Swing Trading & Day Trading Service
www.TheStockBandit.com

Are you following me on Twitter yet?

Attention: Unless you are reading this post in an RSS reader, you
are reading a scraped feed. This site has violated copyright laws by
stealing the content of TheStockBandit.net. Please
let us know where you read
this so we can take legal action against the scraper!

©
TheStockBandit.net

Sponsored By: TeleChart 2007 #1 Charting Software

With the recent correction, many stocks now are starting to appear ‘low’ on the scale, and that’s enticing - but dangerous - to those who have been waiting for a shot at getting in. The trouble is, that age-old “wisdom” doesn’t tell the whole story.

Cause for Caution

Merely buying a stock on the basis that it’s cheaper now than it used to be is no formula for success.  The goal is to be buying when there’s an expectation of higher prices. When prices are declining, the trend is of course down, which means it’s best to wait for some technical proof that the correction has ended before aggressively buying.

Think of it this way.  At the department store, escalators come in pairs.  There’s an up escalator, and a down escalator.  Buying stocks on the slide in expectation that they’re going to go right back up is like getting on the down escalator in hopes of it rising.  It makes no sense.  Eventually, the down escalator will end at a level floor, which in the world of technical analysis will be support.  Only once that’s found can you step onto the up escalator with a realistic expectation of a ride back up.  Wait for stocks to do the same thing.

Proof of Change is Needed

After a long-lasting bull market like we saw from March 2009 to April 2010, there’s going to be new money attracted to the game.  So we know right now there are some new traders in the mix who are aiming to buy low, and it’s no surprise many are getting hurt with the recent ‘discounts’ we’ve seen in prices.  The market has been in a correction phase for several weeks now, and it hasn’t been pretty.  More importantly, it might not be done yet.

The real key here is to wait for the technicals to shift, and that will come in the form of a higher low on the daily chart.  We’ve already seen higher highs get established in the NAZ, S&P 500, and DJIA, but they have yet to create higher lows.  That may happen soon, or it might be a while, but that’s the next element to watch for before committing to the long side for anything but quick trades.  On the premium site, that’s the stance I’m taking for now, and June’s been good so far because of it.

Trade Like a Bandit!

Jeff White
Swing Trading & Day Trading Service
www.TheStockBandit.com

Are you following me on Twitter yet?

Attention: Unless you are reading this post in an RSS reader, you
are reading a scraped feed. This site has violated copyright laws by
stealing the content of TheStockBandit.net. Please
let us know where you read
this so we can take legal action against the scraper!

©
TheStockBandit.net

Sponsored By: TeleChart 2007 #1 Charting Software

Around Scottsdale, and particularly to the north of town, it’s quite common to see single-engine planes buzzing around the skies.  Maybe it’s the great weather and silence of being on the golf course that made me notice them, but they seem to be everywhere.  They’re pilots in training, and they’re starting small before they work their way up to something larger (like perhaps, something with more than 1 engine!).  I respect that approach, and we’ll touch on that shortly.

But one thing that really caught my attention is that they actually shut off their engines - on purpose - over and over.  What?  It’s one thing to hop in that little thing with what sounds like a lawnmower motor on it, but hey, it’s no glider.  Why would they do this intentionally?

They’re creating stall conditions and learning to recover.  Learning to purposely manage a malfunction in a controlled environment (well, partially) helps them avoid panic should it ever happen unannounced.  Eventually, they’ll become the kind of pilot I wouldn’t mind flying with.

From One Cockpit to Another

As a trader, sometimes that malfunction happens without warning.  Sometimes right after an entry is made, the position rips right against you, perhaps even before you’ve had time to place a stop.  Sometimes it’s an overnight trade which has unexpected or unscheduled news hit which causes the stock to gap against you, perhaps even beyond where you had intended to exit in the event of a failed trade.  It’s painful and shocking, and more often than not, it results in panic for the untrained trader.

So how do you deal?

It’s almost impossible to mimic the emotions that go along with such a situation, but here are a few simple things you and I can do in order to avoid panic.

1. Expect it to happen. That doesn’t make us negative thinkers, mind you, but rather traders who are mentally prepared for anything - including the worst-case scenario.  After all, if we’re prepared to face the worst, what could possibly cause us to panic?  The point here is that through logical thinking as well as visualization, unexpected events and adverse moves can be mentally rehearsed to the point that when it does happen, we’re focused on the solution rather than the problem.

2. Keep a level head. By doing #1, we’re freed up to maintain our wits.  Throwing a temper tantrum or freezing up entirely is only going to make it worse.  The deer in the headlights stands motionless (at least here in south Texas), which means it’s up to the car to change course if something awful is to be avoided.  Don’t be the deer - you can’t base your protection on hope that the stock will change course for you.  Cooler heads will always prevail, so exercise self-control when you find yourself in a sticky situation and your mind will be available to strategize.

3. Expect to survive. Trusting that you’ll be alright in the long haul will help keep things in perspective, just as they should be.  What might feel like a catastrophe to the inexperienced trader might be a little unsettling to you, which is something you can absolutely recover from.  At the worst, it’s one bad trade out of your next 1000 trades, so consider it a spot on the windshield to look beyond rather than something worthy of doing more damage to you than it already has.

4. Never allow one trade to be too important. This of course takes into account position sizing and position risk, because the financial hit is the one that comes first.  Putting on trades which are larger than they should be is nice when they work, but when they don’t, look out.  Staring at a loss which is bigger than you’ve faced before will bring instant regret.  Similarly, trading within one’s limits also means that no trade is ever emotionally too important.  The aftermath which follows a big loss can be more emotional than financial, so walk the line carefully when choosing position size, and you’ll avoid a tailspin.

The market will dish out surprises from time to time, no doubt about it.  Train yourself to expect it, and mentally rehearse some ways you’ll respond when it happens. You’ll ultimately feel as though you’ve been there, and your second reaction (following ‘oops’) will be a remedy rather than crippling anxiety and fear.

Trade Like a Bandit!

Jeff White

Are you following me on Twitter yet?

Attention: Unless you are reading this post in an RSS reader, you
are reading a scraped feed. This site has violated copyright laws by
stealing the content of TheStockBandit.net. Please
let us know where you read
this so we can take legal action against the scraper!

©
TheStockBandit.net

Sponsored By: TeleChart 2007 #1 Charting Software

A few years ago, I was fortunate to put together a 13-month streak of consecutive net profits (profits every month for 13 months). The longer the streak continued, the more I thought about it, and the better it made me to sort of ‘observe myself’ during that run. I made note of not only my routine and the kinds of plays which were working, but I also included my thought process and the mentality I was bringing to the table. I still occasionally reflect on those notes to stay sharp.

For the past 6 consecutive months, we’ve put together net profits in each month over at TheStockBandit.com (July, August, September, October, November, December).  Results can be found here.

Although I am trading confidently, I’m not telling you this in order to boast. I’ve been at this long enough to know the market will serve up a healthy dose of humility when it’s needed!

Rather, I want to share with you some of the things I’ve been focused on in recent months that have brought consistent success, hoping it can improve your own process.

Here are 5 Keys I’ve taken from the past 6 months:

* Be Patient. I have not forced trades.  When setups were plentiful, I would get more aggressive.  Hence the reason some months had more trades than others.  When the setups were harder to come by, I was willing to wait.  The year is long, and there will be an abundance of opportunities, so there’s no need to try to make something happen.  Watching and waiting for the must-take setups to come along pays off.

* Picky is Good. Before committing capital, I have been requiring high-quality chart patterns and situations which carry a nice potential payout.  Lowering your standards to second-rate setups will result in overtrading and a higher barrier to success, and trading is already hard enough without that.  You deserve the best, so require it if you’re putting money into it.

* Take the Conservative Route. The occasional home run is nice, but they don’t always happen on purpose.  In fact, swinging for the fences will send you right back to the dugout more often than it’s likely to put you on base.  My approach has been to hit singles and ring the register more often, paying myself when I catch a nice move, but now wearing out my welcome.  The conservative route brings with it consistency and confidence, two things I strive for.

* Have Directional Flexibility. A willingness to trade both the long and short sides has led to my booking winning trades on the short side in every month during this run, despite the fact that the market has pushed relentlessly higher.  This was extremely helpful during July, September and October when we saw some brief market pullbacks as well.  Looking for outlier stocks can pay off, both in terms of winning trades and the occasional hedge to long positions.

* Monitor the Behavior of Positions. Never trust a skinny chef, or any stock you hold a position in.  I don’t mind giving trades some wiggle room, but I do keep a close eye on the price action and how volume corresponds with it.  During this run, whenever I started to notice a discrepancy between what I expected to happen and what was actually happening, it was a clue that an adjustment may be necessary.  Every stock has some personality associated with it, so if that begins to change, give it your attention and be willing to modify your trade parameters.

The next time you find yourself in the midst of a nice run, take a little time to see what you can learn from it.  Take note of what’s working and what isn’t, do more of that which is working, and keep plugging along.  It will help you not only perpetuate the process you’re already in, but it’ll help you return to the same mode later on.

Trade Like a Bandit!

Jeff White

Are you following me on Twitter yet?

Attention: Unless you are reading this post in an RSS reader, you
are reading a scraped feed. This site has violated copyright laws by
stealing the content of TheStockBandit.net. Please
let us know where you read
this so we can take legal action against the scraper!

©
TheStockBandit.net

Sponsored By: TeleChart 2007 #1 Charting Software

The back-and-forth nature of the market makes it easy to jump to conclusions that a turn may be right around the corner, perhaps even a painful one.  As a result, it can be really difficult to stay in good trades, or to continue riding a trend which has gotten a little bit long in the tooth.  The flight to safety plagues us all from time to time - often prematurely.

An example is the current environment.  The indexes have made a tremendous move up from the March lows, making it hard for those with inventory to stay long or for those with cash on hand to put it to work after such a surge.  What if the trend changes?

Or take that trade you were in last week.  You nailed it - well, the entry at least.  Sure would be nice if you were still in there, huh?

Well, I’ve been there.  I’m familiar with that frustrating feeling.  And you know what I’ve come to realize?

There’s always something to worry about in the stock market.

Earnings, upgrades/downgrades, the Fed, interest rates and inflation, terrorism, nukes, the economy, elections, geopolitical events, strained relations with other countries, etc. It’s virtually an endless list.  Looking back over my past 11 years in the market, I can recall “major” concerns for every calendar year.  And yet for every single year, there were some phenomenal stretches of trading.

There’s literally always something going on.  That something may be a driver of prices, or it may simply be a sideshow - a distraction, if you will.

But here’s the thing… for traders like you and me, what matters is how we respond to the conditions - not what the actual conditions are or our ability to determine what’s going to happen next.  We have to walk that fine line between making wise decisions to protect our capital and allowing some fluctuations to occur so we remain on the right side of the tape and fatten our accounts.

Profits come from putting money at risk when there’s some potential payoff.  For individual traders like you & me, it means we need to be agile enough to hop on board with whatever it is the big money is doing.  Doesn’t matter why they’re doing it.  It only matters that we pay close enough attention to determine the trend and find appropriate spots to take action.  We get paid for taking risks - especially the right kind.

Silence is Golden

Don’t be surprised if you can at any point in time find arguments for why the next bear market is about to begin, or why prices will never decline again.  Not only is there a constant difference of opinion, but there often is some decent logic behind those arguments, whether bullish or bearish.  That’s what makes a market - thank goodness!

But those opinions will be shrugged off many times, so our flexibility is critical.

Bears and bulls alike will constantly beat their drums as to why they’re positioned the way they are. Don’t let that be the reason you put cash to work or pull cash out of good trades.  Get long during uptrends, and get short during downtrends and you’ll come out just fine. It isn’t necessarily ‘easy’ but it is simple.

Stick to the charts and keep ‘reasoning’ in check, because the market can defy logic for extended periods of time.  Is it doing that right now?  Who cares!  Prices will do what they do, and it’s our job as traders not to predict anything - but to react accordingly.  Trade what you see - not what you think - and you’ll usually be far better off.

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?

Attention: Unless you are reading this post in an RSS reader, you
are reading a scraped feed. This site has violated copyright laws by
stealing the content of TheStockBandit.net. Please
let us know where you read
this so we can take legal action against the scraper!

©
TheStockBandit.net

Sponsored By: TeleChart 2007 #1 Charting Software

I’m open to either, so why not both!  I like swing trading for the set-it-and-forget-it benefits it offers, as I can structure my trade and manage it with little effort on a multi-day timeframe.  The time requirements are minimal, and the payoffs can be great.  But I also like day trading and the flexibility it offers.  I can enter the day with zero directional bias, and still find some opportunities to capitalize on from the intraday chart patterns.

Trading multiple timeframes is one of the best ways to diversify as a trader, there’s no getting around it.  But let’s explore this idea a little further of managing day trades, because that’s one subject so many seem to struggle with.

R & R

It’s no secret that the key to good trading - for most of us anyway - isn’t how frequently we’re correct, but rather how big we’re correct.  After all, we’re going to be right sometimes and wrong sometimes, so the net difference is where the rubber meets the road.  For me, that comes directly from the size of my winners as compared to the size of my losing trades, or my risk-reward ratios.  Let me repeat:  it’s not really the frequency of wins that matters… it’s the size of them.

So if that holds true, then it’s true across all timeframes.  From the position trades you might hold for a few months, to the swing trades of a couple weeks, to the day trades which might last a couple of hours, the key is risk vs. reward.

Deciding on Day Trades

In the Bandit Hideout, there’s a nightly video newsletter called the Bandit Broadcast.  It contains setups for plays across multiple timeframes, from the swing trades I’m considering over the coming days, to the day trades I’ll be making tomorrow.  The day trades are for brief, short-term moves of up to a few hours. They look like on the daily charts that they could make a quick move but not necessarily a lasting one, so instead of holding them overnight I simply look to grab them for the initial move and then ring the register and set them free.

For these plays, I’m not trying to endure pullbacks or wait around to see if it’ll keep running for several days.  So once I’ve determined if a stock is trade-worthy, I tend to watch 3-minute bars and simply look for the same kinds of chart patterns I seek on the daily charts….channels, flags, wedges, triangles, etc. The same patterns will still play out across timeframes, which I’ve long said is the beauty of chart patterns and technical trading.

The Other ‘E’

When I find a setup that looks suitable for a quick play, my attention isn’t solely based on where my entry will be.  Too many traders focus on that alone, and in return, fail to recognize the other half of the equation - the exit.

For stops, I usually set about 1% from entry as a stop (as outlined in the day trading strategy). The previous day’s low is often much farther from there, so I really just focus on today’s chart and try to first and foremost limit risk.

After that, it is a matter of gauging momentum by monitoring the volume, strength, and pace of the advance so that I don’t overstay my welcome.  I’ll gladly offer out shares in chunks on the way up, scaling out and using the strength to my advantage.  Once the momentum fades, I’m outta there.

I really like the advantages that swing trading offers me when it comes to setting up plays and letting them work, but I simply can’t deny some of the aspects of day trading which offer flexibility and potential for grabbing short-term moves.

So as you construct your day trading strategy, be sure that it’s suitable to your unique needs as a trader.  You might be willing to withstand more risk than the next trader - or less.  You might prefer to exit in pieces, or you might like jumping out all at once when your stop or target levels are hit.  Whatever your style may be, just be sure to stick to it for maximum consistency.  It’s how you’ll manage your day trades most effectively.

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?

Attention: Unless you are reading this post in an RSS reader, you
are reading a scraped feed. This site has violated copyright laws by
stealing the content of TheStockBandit.net. Please
let us know where you read
this so we can take legal action against the scraper!

©
TheStockBandit.net

Sponsored By: TeleChart 2007 #1 Charting Software

But there is a flip side to the coin.

Sometimes you can be overly patient with a trade, giving it more and more time (dare I say too much?), just waiting for it to make its move.  And I’m not referring to letting it move farther and farther against you - you know better than that!

I’m talking about the trade that simply goes nowhere.

Fortunately, there is a solution to the flatlining trade, which is to implement a time-based stop.  This is essentially a countdown placed on the trade, that if nothing happens by a certain time, then either an adjustment is made to stop & target levels, or the trade is simply closed out.  You know - so you can move on with your life!

After all, why tie up capital in a position which isn’t performing as expected?  Kicking a stagnant trade to the curb can translate into more money to be put toward another opportunity, plus it enables us as traders to put our attention toward something more worthwhile.

Show Me the Money!

Just this week I faced this dilemma.  I was swing trading SHLD on the short side due to the breakdown from a bear pennant pattern (see chart 1 below), but aside from the initial weakness, there was no follow through (see chart 2 below).

I had designated 2 targets for my exit, and of course 1 stop loss in case the stock reversed and went back above resistance, but none of those levels were reached.  The stock refused to go down far enough for me to start booking profits (according to my trading plan), and yet it wasn’t bouncing enough to stop me out either.

Chart 1:

StockFinder Chart courtesy of Worden

Chart 2:

StockFinder Chart courtesy of Worden

Although SHLD was certainly underperforming the market, and I felt confident if market weakness ever arrived that SHLD would crack pretty good, that never happened.  The stock simply formed a trading range, and I began to realize it was essentially a stagnant trade.

Time to Move On

Over the weekend, I decided I’d give the stock through Monday before making any moves, and so when it remained in its range, I tightened my stop heading into Tuesday, and today as the stock reached my adjusted stop I closed the position for a minor loss.

I know what some of you are thinking… Why give up on what might eventually develop into a good trade?

Don’t think of this as surrendering or giving up on a trade, because I know that can be difficult for traders who don’t mind being patient.  Rather, consider it your responsibility as a trader to keep your capital working for you in the best manner possible.

That means putting it at risk when there’s a good possibility of profiting, and it means protecting it from risk when that potential isn’t present.

The longer we’re in a position as traders, the more we become exposed to company-specific, unplanned news…a surprise, if you will.  Leaving a position at risk indefinitely raises the likelihood that news will eventually push the trade one way or the other.  The problem with that is that a trade initiated from a technical standpoint should not evolve into a trade which is hopeful for news to make it move.  We want real selling or buying to be the deciding factor, and when that turns stagnant then the basis for the trade is negated.

So as you work through your position sheets this week, consider whether some of those stocks are merely resting or if instead they’ve completely lost momentum and are now simply range-bound.

Do your best to determine if a little more patience is needed, or if instead a little less patience is warranted.  Time is money, especially for a trader.  It might be time to put that trade on the clock and set a deadline.  A far better trade just might be waiting for you.

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?

Attention: Unless you are reading this post in an RSS reader, you
are reading a scraped feed. This site has violated copyright laws by
stealing the content of TheStockBandit.net. Please
let us know where you read
this so we can take legal action against the scraper!

©
TheStockBandit.net

Sponsored By: TeleChart 2007 #1 Charting Software

I discussed taking risks in a recent post, and I felt that a follow-up and an example of what I was referring to was in order.  Here it is.

Many of my trades are continuation plays.  They can be great for offering situations which warrant putting some money on the line once clues of a continued move are present.

However, there are many opportunities on the intraday timeframe which are exhaustion/reversal kinds of setups.

Buy or sell programs, news, and just plain old momentum drive stocks far beyond the pain thresholds of traders, carrying price a considerable distance in one direction or the other.  That opens the door for some recoil, and catching the turning point can be quite lucrative.

Stacking The Odds

Here in a moment, I’m going to show you exactly what I mean in a video, but first let me outline a few keys which combined to produce a great trade in this situation.

• Corresponding market action.  With the indexes having a distinct possibility of a short-term turnaround, conditions were ripe for similar price action in individual stocks.  This is a point I make over and over in the weekly index videos.
• Prior key level on the daily chart of this stock was being tested.  A huge intraday move which carries price right to a previously important level on the daily chart will increase the odds for a quick recoil move.
• Intraday price action suggested the move was becoming exhausted.  That indicated that a reversal could quickly develop in the stock.

Here’s a video explaining it. Select the HD option and go full-screen for best quality:

Stack multiple factors in your favor for a great trading situation.  They’re worth waiting for!

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?

Attention: Unless you are reading this post in an RSS reader, you
are reading a scraped feed. This site has violated copyright laws by
stealing the content of TheStockBandit.net. Please
let us know where you read
this so we can take legal action against the scraper!

©
TheStockBandit.net

Sponsored By: TeleChart 2007 #1 Charting Software

But are you getting the proper rewards for those risks?  Are you taking the most appropriate kinds of risks? And perhaps most importantly, do you recognize the extent of the damage which can be done when you take on risks which are larger than you can handle?

I’m in the midst of re-reading a great book on risk right now (I’ll put up a post before too long about it, because it’s something you should read), and it’s got my wheels turning.  I’m reconsidering exactly what is risk, how much I should be taking, and why I need to embrace it.

Before sharing too much about the book, let me share with you a couple things which are on my mind right now, and I’ll lay out the rest in a later post once I’ve finished the read.

Defined Risks are the Best Kind

Option traders often refer to their ‘max risk’ on a given trade, because on some strategies they are able to truly limit their downside risk to a set amount.  If they’re long premium, the most they can lose is 100%, for example.

But an equities trader like me needs to think in terms of a different kind of risk factor.  Yes, I could buy 1,000 shares of XYZ at $20 per share, and my max risk (in terms of capital outlay) would be $20,000.  But that’s not realistic risk, because it’s so incredibly unlikely that stock is headed to $0 - especially over the course of a few days when I’d expect to be in the trade.

Instead, it’s important when trading stocks to think in terms of max $ risk if the trade fails (not if the underlying company fails).  I touched on this concept of dollar risk per trade earlier this month, but let’s look a little closer at it.  If I know my entry and I can designate a stop loss on the trade, then barring any drastic circumstances I’ll be able to exit at or very near that stop should an adverse move occur.  That’s the risk I want to be familiar with.  The kind of risk that says “if this trade doesn’t work out, what do I stand to lose?”

That’s very different from simply looking at every trade from a capital outlay perspective.  It’s a major shift for some of you to start thinking this way, but it can also make a major impact on your trading to implement it.

Know Your Exit

Making what could turn out to be a difficult decision before getting in the heat of the moment can be the most important part of your trading plan.  It’s one thing to hunt for entry after entry, locating breakout levels and spots where trend lines could get broken, but it’s an entirely different thing to know where you’ll look to exit that same trade, whether it moves in your favor or not.

I’ve said before that a good trade is usually a planned trade, and that definitely involves knowing your exit from the outset of the play.  So before you place that order to enter your next trade, decide on where you’ll get out of it.  Set a bracket order or jot it down, or at least verbalize it somehow!  That’s still better than thinking you’ll get around to it later.  Don’t procrastinate - decide on an exit.

Have a Goal

There is no reward without risk, and there should be no risk without reward.  Knowing this, there’s absolutely no reason why each trade shouldn’t have some favorable objective associated with it, so set a goal for each trade.  A realistic one that could quite feasibly be reached during the course of the trade.

Perhaps you’ll set a hard target and book profits once that level is reached regardless of how strong the momentum seems at the time.  Or perhaps you’ll plan to book partial profits at intervals along the way.

At the very least, having some idea of a level where your stock could move to is still going to help you formulate a game plan, even if you don’t choose to leave a resting order in that zone to book profits.

If you know your stop and you have some kind of upside expectation, then you’ll have a far better grasp of just what your risk is on a given trade and whether or not it should be taken.

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

Trade Like a Bandit!

Jeff White

Attention: Unless you are reading this post in an RSS reader, you
are reading a scraped feed. This site has violated copyright laws by
stealing the content of TheStockBandit.net. Please
let us know where you read
this so we can take legal action against the scraper!

©
TheStockBandit.net

Sponsored By: TeleChart 2007 #1 Charting Software

This set-it-and-forget-it style of trading works well for me on the multi-day timeframe.  First, I don’t need to watch every tick.  I can trust that my orders are doing the job for me, because generally those stop and target levels are several percentage points away.  Second, it helps to keep me from micro-managing trades.  I don’t get so consumed with the intraday chart that I abort my original game plan.  That’s good.

But when it comes to intraday plays, or day trades, I often times will take a slightly different approach by using a mental stop.  There are a few reasons for this:

1. I’m watching the price action closely and developing a feel for the move that’s taking place.  I will know the area where I’ll plan to exit the trade before getting in, but in the first few minutes I may not have a specific, hard number that I’m ready to commit to.  That’s simply part of tape reading on a trade that may only last minutes.

2. Because I’m watching the price action, by default I’m at the PC.  That means I’m able to blow out of the trade instantly when I realize the time has come that I’d rather have the cash than the shares.

3. Since my intraday timeframe is about minutes or hours, it’s often a bit tougher to continually place and cancel orders for the same trade as it progresses.  Ideally, the stock is moving in the intended direction and I’m eyeballing areas on the chart where I’ll need to book some gains or begin to lighten up (or even exit entirely).  Those levels change continually based upon the momentum of the stock, so I often times defer to sort of a “mental trailing stop” whenever that’s the case.

4. Fortunately, I’ve never struggled with blowing stops, so I can trust myself to bail on a trade when it’s time to.  And again, I know going into the trade the general area where I’ll get out, so even if that’s crossed right away then my decision is made.  My struggle generally lies with staying with big winners and allowing them to become huge winners, but that’s a topic for another discussion.

Which One is Right For You?

The answer to this depends on your personal style, and some real honesty is required on your part with this one.  But it is rather simple.

If your tendency is to blow mental stops, then set hard stops in your trading platform and leave them alone.  End of discussion. It’s for your own good.

If you prefer mental stops, insert support or resistance levels on your chart (literally draw them) so that you’ll at all times have a visual representation of where your trade stands and if the time to bail out is approaching. I often set red support levels and green resistance levels as sell and buy markers for trades. Whatever you do, be consistent and don’t hesitate to kick that trade out the door when it stops behaving.

Bottom line:  if you know deep down inside that you lack the discipline to cut a losing trade when the time comes, put a hard stop in place. And if your problem is simply staying in a winning trade when you know you should, consider scaling out on the way up.

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?

Attention: Unless you are reading this post in an RSS reader, you
are reading a scraped feed. This site has violated copyright laws by
stealing the content of TheStockBandit.net. Please
let us know where you read
this so we can take legal action against the scraper!

©
TheStockBandit.net

Sponsored By: TeleChart 2007 #1 Charting Software