Does this trade fit my chosen trading style? Whether it is: swing trading, momentum, break out, trend following, reversion to the mean, or day trading? Does this trade fit into the parameters of who I am as a trader, or is it just based on my own fear or greed?
- How big of a position do I want to trade? How much capital am I going to risk? Am I limiting my risk to 1% or 2% of my trading capital? Knowing where my stop will be how big should my position size be to limit my risk?
- What are the odds of my risk of ruin based on my capital at risk?
- Why am I entering the trade here? What is the entry trigger to take the trade? Is this a quantified entry on my trading plan?
- How will I exit with a profit? A price target or trailing stop? (more…)
Archives of “trailing stop” tag
rssThe 7 Best Ways to Exit a Trade
In trading the money is not made in the entry, it is in the exit. The art of the exit is crucial to a traders success in the markets. Profits can disappear if you do not take them at the right time, small losses can become huge losses if you do not cut them. Small profits can become huge profits if you let them run until they truly stop. Keeping capital tied up in a trade going nowhere and just letting it sit there can cause you to miss out on other great opportunities.
So what is a trader to do?
- Use stop losses, only risk 1% of your total trading capital on any one trade, when you have lost that 1%, get out. Position sizing, stop losses, and understanding volatility is key.
- Enter trades right at break out points to new highs or off key price support levels or key moving average support levels. If it loses that support later and fails to retake it quickly then sell it.
- Buy when a stock is one ‘R’ multiple above a key support level, sell if it falls back and loses that support level. (One ‘R’ multiple = 1% of total trading capital).
- Use a ‘stale’ or ‘time’ stop: Set a time limit on how long you will give a trade to move a certain amount, if it fails to move enough fast enough, get out.
- Volatility stop. The market or your stock has a big expansion in its daily price range or starts moving against you the full daily range. You either cut your position down in size or get out due to increased risk.
- You trail a stop loss behind your winner, when it reverses and hits that stop you sell. A trailing stop can be a moving average or a percentage you your gain.
- You sell your position because you have found a much better trade with a better probability of success or a bigger upside.
The key above all else is always to have a plan to get out of every trade before you get in. Before each trading day begins think about what you will do based on the price levels your open trade is at.
11 Steps for Successful Trading
- You must have a Mission Statement. What’s your real motivation behind your trading?
- You must spell out your trading/investing Goals and Objectives. You cannot get from A to Bvery easily unless you truly know where B is.
- You must spell out your Trading/Investing Beliefs and Market Beliefs. Please remember this very important statement, “You cannot trade the market. You can only trade your beliefs about the market.” Therefore, it’s a very good idea to identify your beliefs about the market first.
- Spell out your exact Trading Strategies. How do you go about analyzing the market and what are the key things you look at in your market analysis? What trade set-ups do you use before entry? What are your timing signals for market entry? What is your catastrophe stop loss? Where and when will you take profits? Will you use a trailing stop? Will you scale into the market? What exactly is your trade management system once you’re into the trade?
- What are your Position Sizing Strategies? This is part of money management and is very important in reaching your trading goals and objectives in terms of profitability.
- What are your typical Psychological Problems in following your trading plan? What is your plan for psychological management for dealing with these problems?
- What are your Daily Trading Procedures? What should you be doing on a daily basis, not only to become organized, but to become methodical in everything you do as a trader, on a day-to-day basis.
- Do you have an Education Plan to Help Improve Yourself on a continuing basis? If not, you should have one. Like anything else in life, you need to be continually working on yourself to become better and better.
- What is your Disaster Plan? What can go wrong, and how will you deal with each item?
- What is your Planned Income and Budget for Trading Expenses? This is pretty simple and straightforward; write down everything you can think of and try to be as realistic as possible.
- How do you Prevent Trading Mistakes and Avoid Repeating Them… if they occur? Really sit back and think about this and write down any and all mistakes that you might make during your trading. Once you do that, come up with a solution to each potential mistake that you might make so you don’t allow that to happen.
Writing your trading plan?
Why am I trading? This is not a trivial question to ask; and you must answer it honestly. Are you trading to make money? Or are you trading for the thrill? In other words, are you trading like an investor or like a gambler?
- What are my trading goals? Again, not a trivial question. Are you trying to gain a few dollars for extra spending money? Trying to fund your retirement? Trade for a living? Or are you trying to amass a fortune and retire early to a life of luxury? How you answer this question will identify the level of risk that you will have to endure.
- What is the size of my trading account? An obvious question.
- What is my skill level? Be honest.
- What is my tolerance for risk? And does that tolerance bear any relation to my skill level? It’s no good having a high tolerance for risk if your skills are inadequate.
- What must I do to improve my skill level?
- If my skill level is low, what trading size can I use to ensure that a single bad decision will not wipe me out? Preserving capital and staying in the game long enough to LTP good trading practices is crucial.
- What is my preferred trading instrument and have I familiarized myself with the behavior, range and velocity of that instrument? Some trades, like bonds and the ETF’s can move at a glacial pace.
- What indicators will I use to identify my entries and exits? Here, “the more, the merrier” may not be the wisest choice. Remember, there can be paralysis by (over)analysis.
- Where will I place my initial stop; and how will I manage them? You may have a trailing stop strategy, or you may plan to just exit when your indicators say, “Get out!”
(more…)
Why am I trading? This is not a trivial question to ask; and you must answer it honestly. Are you trading to make money? Or are you trading for the thrill? In other words, are you trading like an investor or like a gambler?The Ten Tasks of Top Traders
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10 Foolish Things a Trader are Doing
- Try to predict the future movement of a stock, and stay in it no matter what.
- Risk your entire account on one trade with no stop loss plan.
- Have a winning trade but no exit strategy to get out, no trailing stop or exhaustion top signal.
- Ask for and follow the advice of others instead of trading with your own trading plan, method, rules, and system.
- Trade your emotions instead of signals: buy when you are greedy and sell when you are afraid.
- Trade your opinions, not a quantified method.
- Do not bother to do your homework on trading, just jump in and trade, you are smart, you will figure it out.
- Short the best and most expensive stocks in the stock market and buy the cheapest junk stocks.
- Put on trades you are 100% sure are winners so you do not even need a stop loss or risk management.
- Buy more of a trade that you are losing money in and sell your winners quickly to lock in small profits.
10 Foolish Things a Trader Can Do
01. Try to predict the future movement of a stock, and stay in it no matter what.
02. Risk your entire account on one trade with no stop loss plan.
03. Have a winning trade but no exit strategy to get out, no trailing stop or exhaustion top signal.
04. Ask for and follow the advice of others instead of trading with your own trading plan, method, rules, and system.
05. Trade your emotions instead of signals: buy when you are greedy and sell when you are afraid.
06. Trade your opinions, not a quantified method. (more…)
Recipe for catching a reversal:
Ingredients: For this recipe you will need one (1) well-known or “classic” technical chart pattern on a daily time frame, preferably near the high or low of the mid-term price range. When your pattern of choice has been observed, you will then need to collect at least two (2) or more instances of public expressions of sentiment which confirm the prognostication of said pattern: pre- or post-market media bytes, business news website headlines, confident/fearful declarations on your favorite trading forum, or any other variety of before-the-fact assumption.
Preparation: When the above ingredients have been secured, wait for a daily close which would confirm “ripeness” of the pattern. Next morning, enter a stop order at the confirmation price in the opposite direction of pattern breakout to initiate position. If stop is triggered, immediately enter protective stop at prior low/high.
Parboiling: If market moves quickly in your favor, take profits on at least a partial portion; mentally “set aside” closed profit for re-entry if market pulls back towards initial entry price with next few days. If pullback manages to hold above prior high/low, re-enter full position at your discretion. (more…)
7 Things for Traders
The definition of man·age:
- To direct or control the use of; handle.
- To exert control over.
- To make submissive to one’s authority, discipline, or persuasion.
- To direct the affairs or interests of.
- To succeed in accomplishing or achieving, especially with difficulty; contrive or arrange.
1. Traders must be great risk managers.
“At the end of the day, the most important thing is how good are you at risk control.” -Paul Tudor Jones
2. Traders must manage their own stress.
Trade position sizes that keep your stress level manageable, if you can’t talk calmly to someone while trading you are trading too big.
3. Traders have to be able to manger their emotions, we have to trade our plan not our greed or fear
“There is nothing more important than your emotional balance.” – Jesse Livermore (more…)
The Wisdom of Jesse Livermore
Here are seven lessons from Jesse Livermore who is considered by many as one of the greatest traders who ever lived.
Lesson Number One: Cut your losses quickly.
As soon as a trade is contemplated, a trader must know at what point in time he’ll be proven wrong and exit a position. Risk management should dictate the size of the trade and how much you can lose. Deciding where to exit when a position is going against you is not a winning strategy.
Lesson Number Two: Confirm your judgment before trading a larger than average position.
Livermore was famous for throwing out a small position and waiting for his thesis to be confirmed by it going in his favor. Once the stock was traveling in the direction he desired, Livermore would maximize his trading size for out sized wins.
There are many ways to add to a winning position — pyramiding up at key pivot points, building a position as the trade goes in your favor, being 100% in no more than 5% above the initial entry — but the take home is to buy in the direction of your winning trade – never when it goes against you. Never add to a losing position.
Lesson Number Three: Watch leading stocks for the best action.
Livermore knew that trending issues were where the big money would be made, and to fight this reality was a loser’s game. Shorting monster stocks is a very dangerous undertaking when they are under accumulation by large funds. (more…)