Had a few comments about losses and stops so I thought I’d roll them into a new post and maybe shed some light on the subject.
It is a very complex issue. Being comprised of many factors which have to be given due consideration and then decisions made on a timely basis. What time is it? When are new candles due to start/finish? What are the markets doing and have previously done today? To what level did a stock reach? Is it pulling back or bouncing? How much volume? What is my gut feeling say to do? to name a few.
First, last and always it comes down to reading the momentum correctly. When you are in the flow and are tuned into the momo your entries become the key to easy trading. Easy trading is when the stock moves rapidly away from entry point in the direction that probability suggested it would. It moves away from your stop. It moves into the zone of profitability. Then you have to switch gears from seeking a good entry and into managing the trade and capturing what the opportunity has presented you. Both are learned skills which are vital to you as a trader.
Needless to say if you trade with emotions instead of a well practiced and thought out plan, you won’t be around for long. Decisions on where to enter, where to exit and take profits or losses, what events will cause you to take profits or losses must be clearly set out in your mind before the trade is made. Grappling with fear and greed during this process will undermind your efforts to be successful. All those related issues must be dealt with during your preparation for the trading day. You must be of one mind only during the day-executing your plan.
So when the time comes to enter a trade, how do I decide where to set a stop? I don’t go by percentages, only where the near time price level has demonstrated its limit. The near time price level goes back no more than ½ hour usually and most of the time only 5 or 10 minutes. If I’m shorting a stock I’m looking for new lows or a pop to get in. If it pops then stalls, I’ll set my stop just above the previous high. My stops are usually in the .10 - .15 range. Sometimes a little less or more depending on the volatility of the stock. The line is blurry and not clear cut, it depends entirely on the action of a particular stock. That's the amount I'm willing to lose to find out if the trade is going to work. NO more.
Currently the market is in more of a sell off mode. But it is not panic in the streets yet so I am not loading up the multiple 1000’s of shares. So I would rather trade normal size – 1000 shares of stocks say $40 and up and 2000 shares of stocks $20 and less. Now here is an important point about greed as it relates to stops – I would rather increase the # of trades per day I do than increase the size of my position. Doing this protects my account from suffering blow out losses yet still provides adequate returns. Doing this protects my decision making process so as not to let dramatic swings due to probabilities not working out affect me psychologically. I have total confidence in my ability to pick good trades and entries but I know that I will not be 100% correct in every decision due to the inherently unpredictable nature of the markets. It may seem a contradiction when you look at my style but I am not in a hurry to make money. I am not greedy. Certainly you have to be quick and know when to GTFO and take profits but that is more of just working at market speed and taking what the markets offer you to take. The big money comes from being right 30 or 40 times a day, or 70 times if the markets are on fire as you churn through the pops, drops and intraday trends. What I am saying is that I don’t need to put myself in a live or die moment by taking on excessive risk on an individual trade. Too much risk chips away at you and soon enough the probabilities will manifest themselves in a most unpleasant way. There are so many opportunities every day so I am not worried that I’ll miss out.
I know I’ve only touched on this whole stops subject but it really comes down to timing your entries in sync with the momentum. Getting in or out of a trade before the masses is the least risky play there is.
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5 comments:
Thanks for that, Scott.
I've noticed you don't add to your positions like you used to. The market has really lacked trend on most days. Pick your entry, get the pop, then gtfo as soon as it stalls or hesistates. If it doesn't go gtfo early. It's all about the entry isn't it? Most people would suffer death by a thousand cuts trying to do what you do.
I focused on SKF and FAS doing 1000 shares and FAZ/TZA doing 5,000 for the last six months. I'm only good for about 6 trades a day when I'm focused. I found I simply wasn't making enough trades to make up for the ones that wouldn't break out. You really have to be a machine to use your style of trading. Taking 6 losses in a row to start the day and not calling it quits is resilient.
Please do a post on holding on to winners. What do you do when you are up on a stock but it's not going anywhere, yet still above your stop? Do you have a time exit, or just hold on till either it moves or get stopped out.
Case in point, TROW. I bought at 49 today and it slowly churned up for the next hour or so. I bailed at 49.3 and right after it shot straight up to 51. How would you have handled the situation?
Thanks!
Blue- Since the markets aren't on fire one way or the other I am being conservative in my position sizing. With no firm conviction up or sown there are many countermoves and the trends just aren't everywhere yet. So no need to push your luck so to speak. I am prepared to go much bigger size should the overall conditions say it is safe to do. However there are still many, many solid opportunities all day long. When one ends, look for another and then another and so on.
It is all about the momentum and entry. A good entry minimizes the risk to the point that experiencing multiple losses doesn't affect you because they are so small.
Look at it this way - If you do 6 trades a day and some were losers, how many didn't you take that turned out to be winners? Those trades were available to anyone that was seeing them. This is a numbers game. The numbers are what make your edge repeatable. Picking 1 winning trade is more difficult than asking me to pick 7 winners out of 10 attempts. This is why I frequently trade both FAZ and SKF or FAS . They all usually trade the same or opposite but thats not good enough for me. I want the odds on my side and not all my eggs in one basket.
I have worked hard and long to up my game so that I can be a machine because I realized that what I've honed my skills toward. The approach I take is not for everyone but I truly believe it is the most stress free and risk free way to trade. I never hold overnight, I have $100-$200 at risk per trade, I have a well though out and practiced plan, I pre-play the days likely scenarios in my mind before the day begins. I am prepared.
It may not look easy from the outside but I assure you it becomes almost boring in repetition.
Addict- If a stock stalls out from lack of momentum I usually just get out. I don't want to tie up my cash in a dead play. I constantly move my stops up, that way a profitable trade does not slip out of my grasp. Taking profits adds up over the day.
On TROW I would have put alerts above and below that consolidation line and see if it breaks either way. That way you could have gotten a bit of that first big up candle and been in the play. AFter it consolidated again about 35-40 minutes later I would have bailed out.
Scott, thanks for the thoughtful reply. Trading the ETF's does get boring. Especially when they get chopped around after the opening 30min. flurry. At some point you get that .50 pop straight up. It's fun when you're in it. I need to re-invigor myself somehow. I burn out easily. Scalping $100 and nothing more over and over, or losing the $100-$200 is still better than working 9-5 for someone else.
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