Practical Risk vs. Reward
January 11, 2008 at 8:59 am
A close friend of mine began trading a few months ago, and in his first days we had a discussion about some things he needed clarification on. We discussed order types and stop losses and why chart patterns tend to repeat themselves, but then he asked this question:
“So, if I buy 100 shares of XYZ at $25 per share, I’ll have $2500 at risk?”
My answer was no.
I do have a calculator, so I am aware that the cost of 100 shares of a $25 stock would be $2500, but when considering what is truly at risk, it all depends on your exit strategy.
If you’re willing to hold XYZ until the bitter end and that company goes to $0, then yes the risk is the full amount. But if you’re a trader, your true risk is really limited to how much room you’re going to give the stock. With a prudent stop loss in place of, say, $24, your “risk” on the trade is only $100.
Taking the conversation to the next step, we have to consider only those trades which we feel will offer us a profit amount which is a multiple of our true risk. If you knew you might lose $100 on a given setup but might stand to make several times that, maybe $400, wouldn’t you take that trade? Absolutely. On the other hand, if you were putting $100 at risk and you felt the potential reward was only $100, would you still take the trade? I wouldn’t think so – you’d head for the blackjack tables in Vegas because their bets pay even money and the lights are prettier!
The point is this: weigh your true risk in every trade you consider taking, and only enter that position if the reward is substantial enough to justify putting your money on the line. Only take trades which offer you a lot more if you’re right than they will cost you if you’re wrong. That’s how you protect the downside.
It’ll keep you in the game and help you grow your trading account. 😉
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]
Patience Takes Courage
January 3, 2008 at 1:09 pm
Trading means many things to different people. Some love the excitement and the thrill of a financial adventure. Some people want something to talk about and discuss, while others simply want a hobby. However, plenty of us are in it for the money.
For those who are purely seeking profits, there are many ways to play the game. Different approaches and timeframes will require a variety of strategies, but we all have something in common: if we choose to play at the wrong times, it’ll cost us.
Opportunities will surface on a regular basis though, regardless of your trading style. A big part of becoming a consistently profitable trader lies in the recognition of those circumstances, so it doesn’t simply boil down to selecting a strategy. The proper implementation of your strategy is what matters most, and if you aren’t seeking to learn that then the market won’t hesitate to teach you.
I like to trade actively. The market’s always in motion, and that means certain stocks are on the move as well. It can be so easy to step off the sidelines and into the game, but timing is the biggest issue in whether those ventures will be profitable or not.
There have been some big moves in this market for the past couple of weeks, and that means there has been no shortage of opportunities. However, the moves have been swift and violent, so they’ve catered to a certain type of trader. The contrarian is one such trader, who may have been calling for a top on the way up and initiating short positions as the market climbed. Obviously that meant some pain while the advance was underway, but now it means profits. Another type of trader who has been able to benefit from the recent conditions is the momentum scalper. They are willing to chase stocks which are already on the move, darting in and out quickly to catch snippets of the moves, adding numerous small gains together to make their day’s pay.
While I have traded each of these strategies at different times in the past, neither one defines my current style. That means that when conditions changed quickly recently, my best plan was to shift into capital preservation mode. Recognizing the change of market character has saved me considerable money these past several weeks, while others have fought and lost because of their unwillingness to protect their trading capital.
Every one of us has a choice of how to manage our trading business. We can throw caution to the wind and hope that we get lucky, or we can be methodical in our approach and choose a path which improves our odds of survival at all times. Choosing the latter keeps us in the game, allowing us opportunity to collect profits when conditions do cater to our specific style.
Trading success does not come easy – we have to earn it. That includes putting in the week-to-week effort, but it also means controlling our emotions and urges in such a way that we stick with our game plan. At times those plans may need altering, but that generally comes after a prolonged period of having something else work better.
Right now the market is trading with higher volatility than we’ve seen. Of course there’s no way to know just how long the extreme moves will stick around, but fortunately as traders it isn’t our job to predict. All we have to do is react to what we see. At some point we’ll see calmer conditions surface, and that’s when those of us with a multi-day to multi-week trading timeframe will be able to return to higher levels of activity.
Until then, protection of capital is the top priority, and we simply must be patient until our favorite conditions return. That way we can pick up where we left off. It may be uneventful while we wait, but it certainly beats the situation so many others are now in who have to make up lost ground. Don’t insist on activity if you don’t see what you like. Have the courage and discipline to wait for your pitch, and if you’re new to the game spend some time determining just what you need to see in order for your strategy to work. It’ll be well worth it!
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]
Don’t Forget to Prep for 2008
December 23, 2007 at 11:28 am
Lately everyone’s discussing the so-called Santa Claus rally, and I suppose that is rightfully so given the recent upside. Rarely does the Santa Claus rally actually come on time, because the market is so forward-looking. Often it happens early or simply not at all, but this year it is right on time.
OK, so that’s kinda nifty but let’s talk about something that really matters: 2008.
The holidays are officially here, giving each of us the ideal time to reflect on 2007 and look ahead to the coming year. We can review what we’ve learned and consider ways we’ll apply those lessons going forward.
The idle time between now and January 2nd should offer you an
occasion or two to find some quiet time and get real honest with yourself. Take it and put some effort into reviewing your year. Don’t just run the quick numbers on your P&L – take a good look at where you can improve. Look at your trades, look for reasons why you lost and made money, and determine how to avoid the former and increase the latter.
Do you need to improve your skill set? Find a trusted resource where you can learn about tools you’re lacking. Understand the chart patterns. Educate yourself on trading psychology. Learn to improve your execution and expand your use of various order types. Whatever it is, equip yourself with the tools necessary to be a better trader.
What about your discipline? Are you slow to cut losing trades, hanging around in lame stocks when you know you should be bailing out and moving on to the next opportunity? Discipline applies to winning trades too – make sure you’re allowing your original game plan to play out and don’t cut the legs out from under those trades which are working in your favor. And are you exhibiting the discipline each day to do your homework and get prepared for the trading day? If not, create some new habits for yourself come January 2nd that will improve your odds of success.
Every single one of us has ways we can improve as traders, and it’s an ongoing process. What is holding you back from achieving the trading success you want so badly? Let me encourage you to find that area of your trading you feel you’re lacking in the most, and make it your focus to improve it in 2008. It could mean a major difference in your performance going forward, and that progress is exactly what each of us wants.
So spend some quality time with loved ones and friends over the holidays, but be sure to reserve some time just for you so that once January hits you’ll be right on track with your objectives and goals.
Merry Christmas & Happy New Year!
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]
Take Cues From Failed Patterns
December 18, 2007 at 6:35 am
Chart patterns are great for selecting trade entries, but rarely do I see them being discussed from the perspective of risk management. One of the best things about them in my opinion is that they show me clearly when I should be in or out of a trade. When they fail, the signals are clear and I can limit my loss. What else could I possibly want when I’m wrong??
Take SOLF for example. This stock recently tripled in just a few short weeks, putting it on the radar of every momentum trader around. With ample liquidity and lots of strength, it’s no wonder it hit my watch list. I particularly liked the symmetrical triangle pattern it formed as it consolidated recent gains, creating a nice pivot point for an entry on the long side.
I bought it on Friday morning for a trade as it cleared $27.25 at the upper trend line of the triangle, but the stock couldn’t hold the breakout and failed soon afterward. I took a loss of 2% on the failed trade (I’ve certainly had worse). Although a losing trade isn’t any fun, I definitely felt the setup deserved a chance, and if faced with the same opportunity again I’d take it. However, I limited my loss because the pattern failed.
The stock is now 10% below my exit price just one session later. Taking my cue from a failed pattern really prevented additional pain, allowing me to move on to the next trade and protect my capital rather than babysit a stock which had reversed and hope for a comeback.
Here’s a look at SOLF and the failed symmetrical triangle pattern:
(Click for full-size image, courtesy of TeleChart)
Trade great setups which offer big potential rewards when you see them, but be sure to let the patterns you’re trading guide your exits as well.
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]
Recovery Facing a Test
December 16, 2007 at 6:24 pm
The current recovery is facing a test at this juncture, as the rising channels which have formed from the November lows are starting to give way to some selling. This of course introduces the threat of new lower highs if the bulls don’t step in quickly, and that places great emphasis on the next few days as we wait to see how the buyers respond.
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 index charts and some market commentary which were posted tonight (and every Sunday). It’s actually the top portion of the nightly Bandit Broadcast (without the trading ideas), which is published on the Market View page as a weekend bonus for readers of this blog – hope you enjoy it!
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]
Beware Late-December
December 14, 2007 at 12:54 pm
The end of the year is a great time. If you’re like me, you’ll enjoy the holidays, pig out on great food, and spend some quality time with family. There’s also that end-of-the-year examination of how our goals went this year and what adjustments we need to make for next year.
As we enter into the final couple weeks of the year, keep in mind that things are as tricky as ever. Cross-currents of all kinds are swirling during this month that aren’t seen at any other times of the year. Performance anxiety of fund managers, rebalancing of indexes, tax loss selling, and a host of other things will motivate market participants in unique ways.
Considering the already wild market environment we find ourselves in (the past few weeks have truly been volatile), December might just add fuel to the fire of confusion.
Let me caution you as you review where your year stands not to make bold year-end bets in order to reach your goals. Stick with your game plan, trade the good setups when you see them, but mostly just remember to take what the market offers. Don’t increase your size or take sub-standard plays for the sake of finishing big and trying to go out on a high note.
I’m a positive thinker and I love to trade. I like to set lofty goals and work my tail off to reach them. But these next couple of weeks aren’t the time to go big or make unusual plays. Cruise into the New Year with your objectivity intact, and focus not on what you need between now and December 31st, but instead on what you’ll want to aim for once January 2nd arrives.
Just don’t let December’s whirlwind of cross-currents throw you off balance.
Happy Holidays!
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]
Bulls Breathing New Life?
December 9, 2007 at 10:45 pm
Last week, the bulls bought a dip for the first time since October, and the major averages reached new recovery highs. The August closing lows for now appear to have been successfully tested, opening the door for some additional rebuilding if the bulls can stay in gear. Of course, the lacking element last week was volume, which is a necessity for lasting upside if we are to see it. To see it light in front of this week’s FOMC meeting on interest rates (Tuesday @ 2:15pm ET) isn’t surprising, so the key will be if we can see some follow through this week on improving volume levels.
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 tonight (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]
