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General
Trading Information |
General
Trading Information
If
you are a beginner or an experienced trader,
the theory you need to learn is that you
have to "have a plan" when trading.
Trading is a business of "containing
risk" and "evaluating profit
potential". Sure, there is some "guessing"
that is done (we have to identify the
future and no one really knows what's
going to happen - right). But the practice
of using technical analysis to help determine
the "potential future price moves"
has been use for hundreds of years. So,
as we begin this section, I'm going to
discuss trading in three parts - "Planning",
"Technical Analysis" and "the
calculated risk". These are the three
components I feel we all MUST use when
deciding to place a trade.
Planning
your trade
The
first three elements...
This
process is very simple to understand -
everyone needs to completely understand
WHAT it is they are doing and WHAT is
the likely outcome (good or bad). When
I instruct my clients to "Plan your
trade", I want them to be able to
tell me EXACTLY how they will try to ENTER
the trade, where their stop (or EXIT)
level will be and where they expect to
pull profits in the trade. These are the
elements that all traders MUST learn to
accomplish. Not knowing exactly what to
expect from your trade can leave you in
a very dangerous position.
So,
let's recap a bit... What are the three
elements you MUST identify before you
decide to place the actual trade??
The First Three Elements of Planning
Your Trade |
How
do you plan to execute your
ENTRY trade (and Where)?
Where
wil you place your stop/exit
level/order?
What
is your projected profit level
(where you will exit your
trade)? |
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If
you can't identify these first three things,
then you are basically flying blind -
throwing darts so to say.
The
purpose of forcing you to identify these
three elements is so you can begin to
PLAN how you attempt to trade this signal.
Sometimes you have to adopt different
strategies and possibly increased or decreased
risk/profit levels. By identifying these
levels and knowing what to expect, you
can go into your trade knowing exactly
what you are risking and what you hope
to achieve. Let me give you an example...
My Example Trading Elements |
Assume
I found a buy signal in XYZ and
it closed at $22 today. Also assume
XYZ had been in a strong downtrend
for many weeks (from $40) and had
a recent low of $19.80. Let's also
assume I wanted to trade 300 shares.
This might be one way to plan our
trade.
How
do you plan to execute your
ENTRY trade (and Where)?
First
off.. because the recent
low is $2.20 away from
the current price ($22).
I also know the markets
often trend is smaller
up/down waves and I
believe I can increase
my profit potential
by trading with limit
orders (expecting a
pullback). This would
be my plan for the entry
trade..
Order
#1 - Place a BUY LIMIT
order @ $20.90 for 300
shares
Order #2 - Place a BUY
STOPLIMIT order @ $22.50
for 300 shares
Both of these orders
would be placed in an
OCA (one cancels all)
group - meaning the
first order that executes
would cancel the other.
Why
did I place the order
like this? The first
order expects XYZ to
pullback - thus reducing
my risk in the trade
and increasing my profit
potential. If this order
gets filled, I'll have
only about $1 risk for
the trade.
If
not, the other order
(which is $0.50 above
the current price) may
get filled. This order
is basically a "fail-safe"
order to allow my entry
if the market begins
to run upward.
What
happens if neither of
the orders gets filled
in the next few days??
This is when we would
re-evaluate our trade
decision and potentially
alter the entry mechanism
a bit. We may choose
to simply "go in"
with a market order
(especially if the current
price is below $22).
Or we might adjust our
two existing order price
levels a bit. Either
way, it is important
to have patience and
"let
the trades come to you"
- don't
chase trades.
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Where
wil you place your stop/exit
level/order?
Assuming
I got filled with my
entry order #1, I would
place my stop below
$19.80 (at first). This
is a support level that
appears to be holding
(meaning market price
should attempt to stay
above this level.
If
I got filled with my
second entry order,
I would still use the
$19.80 as a "key
point", but I might
now be able to widthstand
the risk of almost $3
per share ($900). Another
common method of placing
stops (that I like to
use) is to average the
current three bars lows
or highs. In this case
(because we are trying
to go LONG - we would
use the lows (and include
the current bar). Let's
assume that value was
$21.25. I would then
feel comfortable with
a stop level between
$21~21.25 for this trade.
Everyone
should understand that
"individual needs
and requirements"
often dictate "how
and where" you
place your trades. I
might trade a bit differently
than others, but the
theories I'm trying
to teach you are universal,
you just have to adopt
"levels" that
meet your needs.
Now,
let's assume neither
of my 2 entry orders
got filled and I'm deciding
to "jump in now"
with a market order.
The first thing I would
do is go back to the
chart and look at the
current price action
- obviously it did not
come down enough to
hit trade #1, nor did
it go up enough to hit
#2. So, it's kind of
"drifting".
Thus,
I could "jump in"
and place a stop order
(to protect my equity)
at a level that I feel
comfortable with. I
know that $19.80 is
support and I know the
market is drifting a
bit (but should continue
higher). So, let's assume
I "jumped in"
at $21.65.. I might
place a stop a bit higher
than the $19.80 lows
(to further reduce my
risk.. also knowing
if I do get stopped
out, I could always
get back into the trade
again). Remember, this
is a plan of calculated
risk. XYZ has not run
up yet, so we are attempting
to contain our risk
and plan for a future
price move. So, let's
assume I entered my
stop at $20 - my risk
is $1.65 (maybe a bit
high for others, but
remember.. our original
stop loss was going
to be about $3 - so
it is much more "contained"). |
What
is your projected profit level
(where you will exit your
trade)?
OK,
this side of the trade
we have not discussed
much (yet). You know
the stock came down
from $40 to below $20
and is not back to $22
(or there about) . So,
where do we place our
profit target levels??
There
are a few techniques
that I like to use to
help find these levels..
1.
Use support/resistance
levels to find locations
where market price has
stalled in the past.
These can often be good
levels in the future.
2. Find DOJIs on the
chart.. These are other
signs of support/resistance.
So they can also be
levels where the market
may move.
3. Average the last
3~5 candle ranges and
then multiply that level
by 2 or three. For example,
if the average range
(high-low) for the last
5 candles is $0.62,
then a decent (starting
point) profit target
would be $1.5~$2.0 (for
short term targets.
4. Use Fibbonacci levels
to identify potential
price levels.
5. Use longer term charts
(like weekly charts)
to identify other support/resistance
levels and trend channels.
You might be able to
find a level that was
not visible on the daily
or shorter term charts.
Now
that we have a number
of ways to find a profit
target level and have
already established
our stops, we simply
need to determine "what
we want from this trade".
Most of the time, it
is best to pick something
that is "reasonable"
and not "totally
unrealistic".
If
my calculations are
correct, we are risking
about $1~1.5 for a potential
gain of $1.5 or better.
Not very good really,
but still - lets assume
we made the trade. Would
you be happy with a
$600+ gain in a few
days/weeks if we were
right?
Remember,
we'll continue to re-adjust
our stop levels as the
trade continues. So,
our risk will decrease
over time. The PT levels
can be re-adjusted,
but I suggest traders
pull at least 50% of
their position at their
original projected profit
target levels - then
let the rest run with
a stop. |
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Dealing
with the "TIME FACTOR"
Most
traders often "forget about time"
as a factor of their trades. Sometimes,
they are right - other times they are
wrong. I generally use time as a factor
for the actions of the markets. What does
all this mean??
Assume
our BUY signal (above) happened yesterday
and we tried to get into the trade for
three days (without success). So, three
additional days of "nothing"
happened - is our buy signal still valid
or not? This is what I mean.
The
best advice I can offer is this... "Let
the trades come to you". This buy
signal is probably correct, but the timing
might be a little off. So, chasing this
trade right now might result in a loss
(if we don't see any upward price action
soon). One thing you can do if your original
trading signal "runs on........"
is to place a BUY LIMIT ORDER at a price
level ABOVE the trigger price. This is
a way of saying "I want to BUY this
stock when the market begins to RALLY".
You can still contain the risk values
by using stops and you will still have
a profit target in place.
The
general rule for using the "Time
Factor" is, if the trade does not
move in the expect direction right away
- don't freak out. Remember, the market
moves in little up and down waves all
the time anyway. The thing you want to
consider though is "how do you adopt
your trade to these new conditions"??
If
you are already in the trade and it has
gone nowhere, it is probably wise to tighten
stops a bit - to protect agains un-needed
losses. Remember though, stops that are
"Too Tight" could get you stopped
out with a loss just before a future move
- so leave some room in your stops for
the market to "fluctuate a bit".
If
you are not in the trade, then you might
go back to the top of this page and re-evaluate
your entry mechanism, stops and profit
targets.
Another
VERY VALID form of analysis is to use
the longer term charts for additional
confirmation of the signals.
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