Assuming you have either started day trading or are looking to get into the game, I am going to shock you in this article. What I will cover here would have saved me 20 months of headache if I just had someone give it to me straight. Recent studies have shown that the majority of Read the full article →
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The bottom tail formation is a trend reversal pattern that comes at the end of a down move. Below is the setup for the bottom tail pattern: There is a downtrend in progress Select two popular time frames that are close together (i.e. 1-min & 5-min or 5-min &15-min) Identify a bottom tail candle on Read the full article →
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The three bar patterns is one of the more common trading setups. The reason its so common makes it an easy target for newbie traders when they do their scans. The problem with the three bar reversal pattern when it comes to day trading is the setup can be found all over the place. So, Read the full article →
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price-and-volume from Tradingsim on Vimeo. Price and volume are the oldest indicators you will find in the market. As day traders we are always looking for an edge, hence the endless supply of indicators and trading methodologies. When you really boil it down to its root, trading is nothing more than capitalizing on the imbalance of supply Read the full article →
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A breakout of a range presents an opportunity to get long or short. But how do you know when the range has enough “juice” to generate a trending move. As day traders you will have a slew of data to analyze in a short amount of time. So, why not take the simple approach and Read the full article →
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Day trading requires you to have quite a bit of cash on hand for your trading activities. Margin aside, I have said you need 50 to 1 cash to monthly expenses ratio. There is a little bit of room here if you have other means for income to offset your expenses, such as rental income. Read the full article →
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Turtle Trading System vs. Al’s Trading System The turtle trading system fascinates me on many levels. First you have two guys (Richard Dennis and William Eckhardt) debating over whether they can mold untrained every day people into master traders. Apparently, Richard who was claiming you could was right in his belief that winning traders can Read the full article →
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Day trading is all about getting in a rhythm. Over time you will begin to identify day trading setups that consistently work for your trading style. Whether you have a high win ratio or the average winning profit runs much greater than your losers, you just need to come out ahead. Your trading style is Read the full article →
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Stop Loss Orders
If I had to define a stop loss order, it’s just that, a protective order which stops you from losing more money than you would like. In a nutshell these are orders that are placed a certain distance from your entry price and if reached your position is closed. This does not mean 50% of your position is closed, but an entire liquidation.
When you think of a stop loss order, you should get a visual of a defeated soldier waving a white flag on the battle field. It is a complete concession that your original plan was wrong.
As we probe deeper into the topic you will receive a compelling argument on both sides. One point of view that stop loss orders are a good idea, the other that if used incorrectly, this capital preservation technique could have the exact opposite effect on your equity curve.
There are a number of stop loss order types, so without confusing you or myself, let’s slowly ease into this one. Stop loss orders can be placed on both sides of the market: long or short. In addition, the orders can be placed as limit or market orders.
A buy stop loss market order is an order to buy a specific number of shares at the market or ask price. The buy stop market order is used to close short positions and is placed above your entry price. For example, if you are short Google at $1,000 and place a buy market order at $1,250, then your short position will be liquidated as a market order to buy back all of the shares on a price breach of $1,250.
A buy stop loss limit order is an order to buy a specific number of shares at a limit price. The buy stop limit order is used to close short positions above your entry price. As an example, if you are short Apple at $500 and place a buy stop limit order at $525, then your position will be liquidated at the set price of $525. This may seem in theory that you have more control over where you exit the position versus a market order; however, if your sell price of $525 is jumped by the bulls, you could be stuck holding your position.
Do you really want me to explain? It’s the exact opposite of the buy stop loss market order, but used to prevent further losses from a long position.
Again, not trying to put you to sleep, it’s the exact opposite as the buy stop limit order, but is used to prevent further losses from a long position.
If you want more in terms of definitions of various stop loss orders, please visit the following link to an article on Tradersedgeindia.com. They’ve done a pretty good job of explaining the basics.
You place your stop loss orders like any other order through your trading application. For short positions, you will want to place a buy stop loss order and for long positions you will want to place a sell stop loss order.
It’s a bit confusing because when I first started trading I expected to see an order type called ‘stop loss’. In actuality, stop loss is just the term used to signify you are attempting to close a losing position.
You will want to place your stop loss order some distance from your entry price, which signifies to you that the position has gone against you and it’s time to take the loss.
That sounds easy enough right? Wrong! Knowing where to place your stop loss order is more magic than science. As you read further along in this article you will see why.
Most traders will look at key levels of support or resistance as obvious points to place their stop loss orders. This can come in the form of a recent swing in an up or down trend, or the breach of a key top or bottom in a horizontal pattern like a head and shoulders bottom.
This sounds so simple enough, but it’s far too complicated to see on first glance.
It makes logical sense right, close your position when a key level is breached. Clearly, something is wrong and you must protect your capital.
Yes and no. The more you trade, the more you will realize the market is filled with more head fakes than the best bobble head at your local dollar store.
Why stop loss orders can cause you to lose more money than you would otherwise
The first reason stop loss orders can lose you money is you don’t know what you are doing. That sounds harsh, I know. But if you have been trading for a few months you are probably having enough time trying to figure out what’s going on, let alone have any idea of when you are wrong.
Your lack of understanding of the inner workings of the market will cause you to place stop loss orders at what will later be the turning point for the stock. The level of frustration you will face as your position is closed right before the stock takes off will feel like your 8th grade girlfriend dumping you right before the dance.
I go into detail of how was recently burned below…..
Market Maker
While the activity of market makers is completely legal, we have all cursed them at one point or another in our trading careers. The market makers will often see a number of orders clustered around a specific price and these orders act as a magnet for how these makers will bid the price of the stock. This is why you will notice that your order when triggered, will often lead to a bounce in the opposite direction.
This is because the market maker can use yours and other stop loss orders from newbie traders to provide the sell orders large enough for a big buy for the smart money.
Think I’m making this up? Notice how stocks will have these quick moves through support only to rally so hard that you don’t have the courage to jump on the trade.
One method of stop loss orders we have not covered to this point is trailing stops. This is where you have booked profit in a trade and you trail or move up your stop loss order as the stock continues to move in your favor. The great thing about trailing stop loss orders is that you will lock in profit at as the stock rises, thus lowering your risk profile and increasing your paper profits. It’s a great method for new traders who are learning the art of letting their winners run.
If you are trading a volatile stock, using stop loss orders is a difficult proposition. Think about it, the really volatile stocks can swing between high and low points wildly. It’s tough enough to time the swings, let alone know exactly where to place your stop loss order.
Trading tightly with a volatile stock is contradictory at best. Take a look at stocks like CHTP, NIHD, and VNDA. Pick any timeframe or day of the week; where do you place your stop? Notice how levels are breached with no regard, only to rally as if there is no resistance at all.
For these highly volatile stocks, you have to truly accept the risk. If you are long, you are long. If you are short, you are short. You need to wait until your profit target is reached and be prepared to lose money if it doesn’t. If you are not prepared for that reality, don’t get involved with the high flyers.
Secret
Before I go any further, I am not advocating you do the same. Only you can decide what trading strategy works best for you.
Over the years for me I’ve noticed that stop loss orders cause me more pain the help. In the past, I had so much fear of the market. While it’s always good to have a healthy level of respect for how the market can take your money, you should never be afraid.
My fear was causing me to place my stops at ridiculously tight levels from my entry price. This would work if my strategy called for tight stops and I used the same approach every single time. This however was not the case for me.
In my mind placing the trade and then establishing a stop loss order was proof to me that I was accepting the risk of the trade. This couldn’t have been the furthest thing from the truth.
I was just going through the motions of what I thought it meant to trade with a set of rules. Does this sound familiar?
In the end, when I decided to no longer use stop loss orders, I knew I needed another method for protecting myself against runaway losses.
So, if I am long, I will place an alert at a key support level. If that level is breached, I will be alerted of the price action. Instead of just panic selling, I will see the volume and price action at the key support level.
At this point I will make a call of either closing out the position, or moving my mental stop lower. Over time I have noticed that these breaches are just classic head fakes that the experts use to squeeze out the little guy before the big move.
If you look back over your trades and you notice that the ensuing move starts right after you are closed out, placing a mental stop and then evaluating the price action may be what you need to turn a sharp corner in your trading journey.
While thus far we have discussed stop loss orders in theory, there is nothing like the real world smacking you in the face. In the next few paragraphs I will cover an actual trade where I was squeezed out right before the big move.
The trade was in a stock that we all know and love named Tesla. Now Tesla had made a quite miraculous move up to a high of $194.50. After which the stock began a nasty correction back down to the $120 – $117 range.
I managed to avoid this blood bath, which looking back on it was a pretty good call. I entered the trade at $123 which was a little early, but I got in on 11/18/2013, where the stock had a $15 dollar range.
After entering the trade, Tesla began to move sideways for a number of days. There was a clean base which formed and as the stock dragged lower, there were three successive moves down which pushed the stock lower. You can see these swing points in the below 30-minute chart.
After the stock took out the previous day’s high, in my mind the move had started, so I placed my stop loss order directly below the last swing low as illustrated.
Everything about this to me even as I write this makes perfect sense. The only problem is the market of course went after that low, because odds are there were hundreds or maybe even thousands of other traders that did the same thing as I did on that day – place a tight stop.
As you can see, TSLA spiked down to hit a new intra-day low of $116.10 only to begin the sharp move up. As of the writing of this article (1/23/2014) TSLA hit a high of $182.38. Even with my awful entry price of $123, this still represents a profit of ~ 50%.
Now you could say, well the trade didn’t work out, but you were trying to protect your capital so it’s still a good trade. In my humble opinion, I say no. First off, at the peak of my paper loss I was only down 6% and on a volatile swing trade like Tesla, that’s less than a scratch.
The bottom line is that I was unwilling to take the risk. From what I remember on the trade, I was more concerned with the possibility of Tesla breaking down below $97, and that was all I could see. Makes perfect sense now why the move to $116 rattled my cage.
Has something like this happened to you in one of your past trades?
Stop loss orders can be a great mechanism for you to place controls around the anarchy that is the market. This is especially helpful for when you are starting out in your trading career. As you begin to understand how you react to the market (emotions, fears, greed, etc.) you will begin to see that these hard fast rules can hurt as much as help.
If you are struggling with where to place your stops or just looking to improve your trade management, please check out the cutting edge trading simulator at Tradingsim. We are helping traders like yourself make more money without risking their shirt.
Photos
Dice Photo by Incalido
Market Maker Photo by Wikipedia
Secret Photo by Jeremy Atkinson
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Trading Days in a Year
Since you have posed the question question of how many trading days in a year, let me first provide you an answer. On average there are ~ 251 days per year. This calculation is broken down into the following inputs:
# of Days in the Year – # of Weekends – # of Half Trading Days – # of Holidays = Total Trading Days per Year
Based on this formula let’s look at the number of trading days for 2014.
365 (number of days in 2014) – 104 (number of weekend days in 2014) – 9 (public holidays) = 252 days.
What most people forget to factor in are the days where the market closes at 1pm. In 2014 those dates are July 3, 2014 (day before July 4th), November 28, 2014 (day after Thanksgiving) and December 24, 2014 (day before Christmas). Once you factor in these three half-day sessions, you lose an additional 9 hours of trading which is equivalent to 1.4 trading days.
So, if you take the previous value of 252 trading days – 1.4 trading days you will have a total of 250.6 or ~ 251 trading days.
While we performed this calculation for 2014, the average of 251 days will be pretty consistent across any year (2015, 2016, 2017, 2018, 2019, 2020, and beyond).
251 days is based on the US market; however, you can use the same calculation for determining the number of trading days in a year for your respective Country (India, UK, Germany, etc.).
In this article we will cover how the number of days impacts you as a day trader or active trader. Unlike a normal 9-5 job, you don’t get sick days, vacation, or time off for training when you are an independent trader. If the market is open and you are not trading, then you are not making money.
On average people will take 2 weeks of vacation per year. I know for my European brethren, 10 days off is just the tip of the iceberg, for us in the states it’s the norm. If you factor this into the calculation there is a loss of another 10 trading days.
Trading Sick Day
Now enters the variable of sick days. At work, I know we all may fall ill on the unseasonably warm Friday in late February, but again when you are trading on your own, each day counts. Assuming you take your Vitamin Cs religiously and avoid large public places in the winter, I think it’s safe to say you will take about 3 sick days per year.
Now, if you are like me and you have kids, then you need to up this figure to ~ 10 days. While you can try trading with a sick kid at home, I don’t recommend it as your attention will likely be diverted with doctor’s appointments, medicine schedule and just general worry.
So, we’ll reduce the number of trading days by another 10 (if you don’t have kids you can use the standard 3 days).
Trading Slump
I don’t care how good you think you are, there will be some rough trading days along the way. These dark days will sneak up on you and out of nowhere it will be as if you can’t find a winning trade anywhere.
Some traders will just plow through this rough period and keep trading, but experience has shown me over the years this is a more costly approach.
Another option is to outright stop trading, which makes sense if you don’t let your ego get bruised so much you can get back on the horse.
What I have found to be the sweet spot is to continue trading through my slumps but use far less money and reduce the frequency of my trading. This allows me to regain my focus and reduce the noise of worrying about losing money or the need to be right.
On average you will lose about 1 day a quarter for these rough spots. So, we’ll need to reduce another 4 trading days for this as well.
We have all been there; you have a plan for how your day is going to go and things go crazy. Your HVAC unit goes out, or your internet connection is awful. Things will just happen. On average expect to lose another 3 days for this as well.
A sign of a good trader is that at times there are no trades available in the market. This may sound strange to newbie traders reading this article since there are thousands of stocks and there has to be something you can trade.
While the supply is always abundant, finding quality trades is another animal. I remember days where the market had no volatility. This lack of enthusiasm often occurs around holidays or after really big moves and the market needs a breather.
You can expect to lose another 7 days from the sheer lack of action over the course of a year.
So after all of these reductions you are looking at a total of 217 trading days where you will be able to make money. That means you are losing ~ 14 – 15%% of total available trading days to lack of a better phrase, the cost of doing business.
Now if you are swing trading or position trading, the loss of over 30 days or 1.5 months does not make that much of a difference. Reason being, you are buying and holding positions for days or weeks at-a-time. Your earning potential will not be as linear as that of a day trader, but may have a series of spikes up as you take profits on winning trades.
If you are day trading, you have to factor in 1.5 months a year where you will not be trading. The more you dedicate your life to trading, the closer you will land at the 251 trading days in a year. Remember though, it’s not how many days your trade, rather how much money have you made at the end of the year.
I hope you enjoyed this article. Please take a look at tradingsim.com, to see how we can help you improve your trading skills.
Photos
Calendar Photo by Joe Lanman
Sick Day Photo by Ryan Hyde
Trading Slump Photo by Lloyd Morgan
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Stocks, oh where do we begin? Let me first commend you for taking the time to try and understand how the stock market works. When researching this topic you will notice a lot of people attempting to sound super smart. Far too often the explanations for how stocks work are overly involved or just don’t make much sense.
Think about it. You just typed into Google or Bing the phrase “How Stocks Work”. This tells me that you want a straight forward explanation and not the overly complex mumbo jumbo. So, with that in mind, I am going to explain how the stock market works in such a way that your 5-year old will walk away with a firm understanding .
How Stocks Work
A stock is a right of ownership in a company. Just as you can purchase a home or a car, you can also purchase a piece of a company. The one difference is that unlike a car where maybe you or one other person are the owners, when it comes to stocks, there could be thousands of people that own the same company.
You like Coca-Cola right? Well if you want to buy the company that makes Coca-Cola then you buy stock.
Remember how you received a certificate when you graduated from kindergarten, which was proof you finished all of your lessons? Well, when you buy stock from Coca-Cola they give you what is called a stock certificate which proves you are the owner of their company.
Companies will sell their stock over what is called exchanges. These exchanges provide the means for buyers and sellers to exchange cash or equity for the company’s stock. In order to sell your stock on an exchange, the company will need the help of an investment banking firm.
The investment banking firm will help the company file all of the necessary paperwork with the Securities Exchange Commission and the regulatory agencies to ensure the company is a legitimate business.
Once everything is cleared, the company will have an initial public offering or IPO and the shares are presented to the public for trading. Based on the company’s projected earnings, and assets, the investment banking firm will set a price for each share or stock which will be the opening price when the company begins trading. After the IPO, the free market which is the representation of the collective man’s hopes, dreams and fears will now determine the value of the stock on a day-to-day basis.
Well you know how you see Daddy on the internet looking at the charts with the green and red candles? Well Daddy can buy a incy wincy piece of Coca-Cola by clicking the buy button on the screen.
For Sale
This was the hardest concept for me to learn how the stock market works. You have a great company, things are going well and you are making consistent money. Why take on the headache of hiring an investment banking firm, filing with the SEC every quarter and having to answer to investors?
The simple answer, going public or selling stock in your company gives you access to more cash. Let’s say you have a great yogurt shop. People from all over your local town line up to eat your yogurt. You realize that if your yogurt can touch people locally, what about people in the next county, state or even country.
In order to expand your business, it is going to take money. Money to buy machines, money to hire people, and the list goes on and on. If the company takes out a loan, then the bank will want interest and a guarantee on that money.
But if you sell stock in your company to the public, then you receive the cash without any strings attached to the investor. Let’s pause for a second there, because you have to grasp this concept, so let’s break it down a little further.
Yogurt Shop
# of shares available to the public – 5 Million
Value per share – $10
Amount Raised from IPO $50 Million
Now I could bore you with the fees you need to pay the investment firm and the fact employees and owners are often restricted from selling their shares for a period of time (a.k.a holding period), but I think you get the point.
A price is set, the public pays that price if they see value and the company receives cash in hand.
Coca-Cola wants to sell Coca-Cola to little kids all over the world and in order to do so, Daddy is helping Coca-Cola by investing or giving them money to make more Coca-Cola. This will make other little kids happy just like you are when you get that special treat of drinking Coca-Cola.
Cash
If the company needs more cash, then they simply issue more stock. The issue with this is depending on the health of the company offering more shares could dilute the company’s value.
(Let’s not complicate things with why Coca-Cola would need more money). It’s Coca-Cola for heavens sake.
So, the companies have the money from the IPO, why do they care? Well for a number of reasons.
The company’s founders often do not sell their stock because they want investors to see they are still believers of their own company. Therefore their net worth is still heavily tied up in the company. An example of this are Zuckerberg and Facebook.
Also, if the stock is under performing, the board of directors can have you removed as CEO. Imagine how this must feel. You started the company, but are later forced to give up your baby. This actually happened to Steve Jobs at Apple, before the company brought him back on in the late 90s.
As part of employee compensation, stock is often issued as part of the total pay package. If the company does well, then the value of the stock increases, which means employees are wealthier. This makes the company more attractive to top talent.
The company can use the value of the stock against future deals. Meaning if another company hopes to buy your yogurt shop, you can say that our 10 million shares are now with $100, so in order to buy this company you need to offer $100 million dollars at a minimum.
As we discussed previously, if the company wants to have future offerings of its stock, the more money the stock is worth the more cash paid out to the company.
You may be asking yourself, what do mutual funds have to do with an individual stock? Well if a stock performs extremely well and is added to such coveted indicies as the S&P 500 or the Nasdaq 100 or the Dow 30, then mutual funds will begin to purchase these shares as the stock is viewed as more valuable.
See how the belief in a stock can turn into real dollars?
You know how Mommy and Daddy want you to do a good job in school so you can go to college and get a great job or start your own business. Well how do Mommy and Daddy know if you are doing a good job? That’s right, from your grades.
Remember how Daddy gave Coca-Cola money to make more soda for other children in the world? Well, Coca-Cola needs to get good grades as well, by showing Daddy that they are making the best soda in the world. This way Daddy knows our money is still safe and sound.
Shareholders Meeting
As a shareholder you have the right to vote on major company decisions such as electing the board members that provide the strategic direction for the company. Generally there is an annual shareholder meeting where you can come to voice your concerns about the company’s performance and also vote on resolutions.
The number of shares you own dictates the weight of your vote. Most people have little say, but if you are a whale investor like billionaire Carl Icahn, you could be a deciding factor.
You know how you and your little brothers voted with Mommy and Daddy to decide if we were going to Disneyland or Disneyworld? But remember how Mommy and Daddy still had to plan all the details like what plane to take, our hotel and where we would eat.
Well Coca-Cola does the same thing. Daddy can vote on what Coca-Cola should do to sell more soda, but it’s the decision of the leaders at Coca-Cola on the details of how they will sell more soda.
People buy stock because they don’t believe they will lose their money. Investors believe that a company will be worth more tomorrow than it is today. This is where the “belief” system comes into the play with the market.
The free market is the representation of the beliefs of thousands of people. If more people believe a stock is valuable then the stock goes up. If more people believe the stock is overpriced, then the stock will lost its value.
From an investor’s point of view, buying stock just makes since. For example, investors only have a limited number of places to invest their money. There are money market funds, savings accounts, CDs, bonds, housing, etc.
While these are all considered investments, when an investor wants to make an above average return they turn to stocks. So, while the other investments may average 2 or 4% per year, investing in your local yogurt shop could yield a return of 10%, 20% or even 100%.
To the investor, the lack of a guarantee is okay, because they are willing to accept the risk because the potential return is great.
In order for the investor to make money they have to sell the stock at some point. Most people forget this part of the equation. While paper profits are great, the internet boom of the late 90s saw a lot of paper millionaires watch their fortunes evaporate overnight.
In addition to the appreciation of the stock, some larger corporations will provide a stock dividend, where the corporation will share the company’s profits with the shareholders. So, for each share of stock you own, you will receive “x” dollars in the return without having to sell any of your shares.
Since Daddy sees Coca-Cola machines at your gymnasium in your school, at the movie theatre and at Red Robin, I believe Coca-Cola is here to stay.
The Government can’t let us have all this fun without getting involved. So, just how you are taxed at your job for the earnings you make, your investments are taxed as well. In the US, if you hold your stock for longer than 1-year, then decide to sell, your profits are taxed as a long-term investment at a rate of 20%.
If you buy and sell a stock in the same 12-month period, then the profits are taxed as ordinary income at your respective tax bracket (28%, 35%, etc.).
Daddy has to pay a portion of the money he makes from selling Coca-Cola stock to the Government. This money is used to pay for your school, the roads and Army. This way we make sure we keep America safe and strong.
Learning how the stock market works is not a game and should be something you discuss with your children at an early age. This may seem a bit awkward to explain how the stock market works to a kid, but believe it or not, your kids will understand these key principles. My kids are saying stocks at the age of 3 and can look at a chart and tell if you if the stock is making or losing money (a.k.a if it’s going up or down). May not sound like much, but you would be surprised at how many adults have no idea how stock trading works, yet are investing their hard earned money in the market.
If you are looking to see how to invest your money without taking any risk, please go over to our Tradingsim homepage to see our offerings. This offer is especially important if you are trying to understand how penny stocks work as these securities have increased volatility and risk.
Lastly, if you are looking for information on how stock options work, please visit this article – Understanding Options with Technical Analysis.
Photos
Stock Market Street Sign by 401(k)2012
1st Grade Book by Spencer Fornaciari
Cash by Simon Cunningham
For Sale Sign by Ben Satterlee
Shareholders Meeting by Walmart
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Letting your winners run is a topic which polarizes traders. There are those that swing for consistency and trade with strict profit targets. These are the traders who likely view letting your winners run as a sure fire way to lose your focus and open yourself up for more risks.
Then there are those traders that think in terms of not worrying to much about any one trade, but has an understanding that over a longer period of time, you only need a few winning trades to make you profitable each year.
Before you move read any further in this article, you need to honestly answer the question of which trader are you?
If you are the trader that likes to trade based on strict profit targets (i.e. up 8%) then letting your winners run will never work for you. The pain of allowing a winning trade to reverse on you will be too traumatizing and will result in you constantly breaking your rules or worst, analysis paralysis.
Now if you are the other trader, that only reacts to what the market presents you, I am going to clearly articulate how you can let your winners run.
You will see there is no magic formula or silver bullet, but it’s more about looking at the market through a slightly different lens. This view of the market will require you to incorporate a number of key concepts, some of which are subjective in nature, in order to make the big gains.
A winning attitude is a must in life if you plan on having any sort of success. If you don’t believe in yourself, then who else will?
For some reason, traders have fooled themselves into thinking that successful trading only boils down to the latest algorithm or technical indicator. This couldn’t be the furthest thing from the truth. When you are trading, you may forget that there are human beings on the other end of the buy or sell transaction. This is a head-to-head competition to see who is right – the bulls or the bears.
Part of the game of trading is not revealing your hand. The smart money will constantly force sharp moves up or down in order to throw off the little guy before the big move.
You are probably asking yourself, “What does a positive attitude have to do with any of this”.
While everyone may have stop loss orders, technical indicators, charts, access to news, etc. there are some traders who are able to translate all of this information into successful trading, a.k.a money.
This success factor my friend begins and ends with a winning attitude. Think about it, when you see your stock have a short hiccup in a current uptrend, is your first reaction to sell to lock in your profits? Or do you move your stop up so quickly that you are basically begging the market maker to trigger your order?
The winning trader will see the same price movement as you; however, he or she will not interpret this information negatively. They will see a slight pullback in an uptrend as healthy price action and will comfortably watch the chart move without a negative emotion in their body.
Their ability to sit through these corrections does not mean they have a lack of money management principles, it just means they believe the market will go in their favor as long as the correction or counter moves do not damage the overall trend.
Do you have a winning attitude when trading or are you thinking the market is out to get you?
If you feel in your heart you lack a winning attitude, I’m telling you right now that you will not be able to let your winners run. You will find some reason to sabotage the trade before you are able to reap the rewards of a well-planned trading strategy.
Earlier in my trading career I would constantly read about how you must reverse the concept of how your brain processes winning and losing trades in order to become a successful trader.
I remember trying such techniques as looking at my winning trades and saying to myself, stay calm. Or I would say things like, “don’t focus on the money, focus on the chart”.
I of course would end up checking my account balance obsessively and the weight of the profits would force me to close out the position. Early on I had such a hard time making money in the market, that the idea of giving back a decent gain was unfathomable.
Conversely, when I was down on a position, it would not only affect my bank account, but also my mood. I felt like I was being water tortured as I watched what appeared to be a good setup deteriorate right before my eyes.
These negative emotions of being in a position will wear on you the more you watch the position drift away from your entry price in the wrong direction. You have to grow accustomed to thinking in terms of probability. The first thing you need to do is identify your average number of winners and losers. If you don’t know that number, this is probably part of your issue.
Let’s say on average you win 50% of the time. If you have this figured fixed in your head, you will go into each trade knowing you have a 50/50 shot. Now while you always aim to improve your win ratio, this will be your baseline.
How do you think knowing you have a 50/50 shot of putting on a winning trade will impact your view when a trade goes against you?
Right, it will make the fact the trade is not working out feel insignificant. You will no longer be shocked that your trade wasn’t an instant success.
Let me caveat this section of the article, before I move on. Thinking in terms of probabilities helps you realize that every trade will not be a homerun and that you must have realistic expectations in terms of win ratios and potential profit gain. Thinking in this mindset will help prevent you from constantly looking for the next hot indicator which will magically make you profitable on every trade.
What you should not do is go into each trade with a losing attitude. Meaning you say to yourself, “well here goes another trade where I only have a 50% chance of winning. Let me just put this trade on and close my eyes”.
Wrong! You place the trade without any fear or reservation and over time you will improve as you learn what makes you tick. As you are tracking your performance, you will notice that this win ratio will continue to improve and what was once 50% probability will start to improve over time.
In the spirit of thinking of probabilities, you have to realize that the market is completely unique in every since of the word. How the market or stock reacted to a news event last week will change this week. The key thing is getting into the position with no real expectation of how far things can run.
You have to let go of the idea that you will outsmart the market and begin to predict her every move. Trading is about reacting to the opportunities the market presents to you on a daily basis and not trying to dictate how she should perform.
This is a difficult concept to grasp, because there are so many studies out there like P&F or Elliott Wave which have predictive modeling tools. These tools like most indicators want to give you an indication of when a market is oversold or overbought.
You have to remember that these are just signs. The same way you approach a red light, this is an indication to you to stop your car. Well with the market, it will see the red light but it will decide whether it will stop or not on its own.
You have to realize you are not dealing with a logical entity. The market will go and do as she pleases. You have to be prepared that while you may see a red light ahead for the market, she may decide she wants to press on and reach new heights. Just remember it’s not your job to take the lead, but rather you should focus on being a passenger in the car.
What is your exit strategy for closing a winning position? As you answer this question, think about if your exit strategy permits a stock to run wildly in your favor.
In the past I have used the price closing above or below a simple moving average (<10 periods) as a basis for exiting my position. I would say to myself, I am going to let the stock run as far as it wants to as long as it stays above the 10-period SMA. Well, sure enough every once in a while this would happen. The problem was the stock would get so far away from the average, I would become obsessed with the idea of giving back too much profit, so I would talk myself into selling on the first correction.
If you are honest with yourself, this sort of thinking is probably going on in your trading right now. You must learn to let go, think in terms of probability and stick to your exit strategy.
Reason being, while the stock may erase some of your gains on a sharp correction, you only need 2 or 3 swing trades a year to go in your favor to reap significant gains for the years.
It’s great to have a winning attitude as we mentioned earlier, but it is also just as important to be up in your account.
If you are day trading, this could mean being up for the day or month. If you are swing trading, this could mean you are up for the quarter or year.
Whatever timeframe you are using it doesn’t matter. The point is you should feel a sense that the wind is to your back. Being in this position will make you relax as the stock goes through the wild back and forth swings towards your end target.
If you are up in your account, you will not feel the need to take profits on the first retracement. That need to be right or just get a win on the books will not burn at you.
Feeling like you are up and having that winning attitude will allow you to reap larger rewards.
Over the last 14 years of trading, one concept has remained constant no matter what timeframe or strategy I use.
If I was never down on a position, not even for a second, I am likely in a homerun. This doesn’t mean it’s a guaranteed win, but these types of trades are exceptional. It means that you were able to interpret the exact time in which the market was ready to start a move.
In these types of scenarios, the money will literally fall into your account as the stock heads in your desired direction.
Go back and look at your trades. Where there any that you were never down on? How far did those stocks run? How much of the move were you able to capture?
When trading, do you think about how much you are wagering on each position? Have you begun to recognize how the amount of money you are using affects your trading?
Most traders are in what I call the growth phase. You have a small account, probably less than $100,000 and are looking to make big money. The idea of steady growth over a 5-7 year span in order to get to the big money $500k+ seems too long.
Instead of taking calculated risks, where you look to make consistent gains and let time work in your favor. You are likely to take riskier bets and wager large portions of your account on a single trade.
This sort of approach may work in the short-term, but over time the market has a way of weeding out risky traders.
On the other end of the transaction is the professional who never risks too much of their account and continuously takes money out of the market.
Take a minute to think through your money management principles. Do you ever risk more than 50% of your account in one stock? Do you find yourself hoping that one trade can erase all of your losses for the year?
Having heavily concentrated positions will not allow you to let your winners run, because you will likely be a nervous wreck. Since stocks rarely go in our favor immediately, you may experience a significant drawdown in your account, especially if you are using margin.
How do you think you will react the second the stock goes in your favor? That’s right, you will look to close the position. Not because you are wrong, but because you did not manage the risk properly, so you were never comfortable in the trade to begin with.
Without a certain level of confidence, the smart money will be able to shake you out of your position with any minor intraday correction and prevent you from riding the large wave.
Now that we have covered these topics in the abstract, let me give you my formula for letting winners run.
A few weeks ago I was in 2 losing positions, FIVE and NTRI. Both of these stocks were down close to 10% during the sharp market correction that took place from late January through early February.
Just a few years ago, this sort of draw down would have rattled my cage, because I would have probably been using 150% margin and would have been sick to my stomach.
However, for these trades I was only using cash and while it doesn’t feel great to be down on any position, I knew a market bounce was coming at which point I could evaluate these positions. So, here is a clear example where my money management principles allowed me to stay calm in the eye of a storm.
Instead of focusing on the fact I was down on FIVE or NTRI, I noticed that RMTI was setting up nicely. Over the years I have grown to learn that each trade is unique, so at the end of the day there is nothing to fear but fear itself.
So, I took a long position in RMTI at $10.17 on 2/5/2014.
Immediately the stock went in my favor. Not by much, but she just continued to act in a positive fashion.
Then the magic happened. On 2/12/2014, RMTI started to rally and the stock finished up on the day approximately 9 percent.
In the past I had a rule that if a stock gave me 10% I would just take the profits.
For new traders, I do advise you to get in the habit of taking money out of the market, because this is essential to becoming a profitable trader.
However, as your skills increase you must learn to let the winners run in order to make big gains by years end.
Back to RMTI, on 2/13/2014 the stock rallied again another 8%.
To sit through two consecutive days of almost double digit gains was unthinkable to me when I first started out trading. I would have said to myself, the stock just hit $12 dollars which is another big whole number, so things are likely to turn here. Or I would have seen the last swing high of $12.35 and used that as another reason to sell.
On hold, things continue to get better. On Valentine’s Day, 2/14/2014, RMTI hit a high of $13.96. I closed my position out at an average price of 13.30 which represented an approximate 30% gain in less than two weeks.
Can the stock go higher, of course. The difference is I don’t care because I followed my strategy and I was able to take money out of the market.
How did I know to let RMTI Run?
That second one has a lot in there, so let me illustrate.
Below is the 30-minute P&F chart of RMTI courtesy of stockcharts.
You may be asking yourself, well couldn’t the stock go higher? RMTI is still above its 15-period moving average and looks healthy.
Of course! But for me a windfall profit is anything between 30% – 50% gain in a few days.
What is your definition of a windfall profit?
Only you can answer this question. But based on how volatile the stocks are that you trade, you know when you are leaving money or the table or if you are getting the lion share of a move.
Only you can define what letting your winners run means to you. The key thing is that over time you should see your average gain per trade increase. There are too many factors that drive how far one individual trade may go in your favor; however, over the aggregate your average gain per trade should increase.
The same way you gain strength and endurance from working out, these same rules apply to trading. As you gain confidence and learn to realize that you have a winner, you will learn to let go and take a ride in the passenger seat.
So for now 30% – 50% on one trade feels right for me; however, in a year or two I may have to update this article to say 60% – 100% for every homerun play as I learn more and more to accept what the market is offering to me in the moment.
Photo Credits
Winning Attitude Photo by Live Life Happy
Learn to Let go Photo by BK
Money Photo by Tax Credits
The post How to Let Your Winners Run – 7 Tips for Success appeared first on - Tradingsim.
This answer to this question is based on the strategy and investing style of the participant. I can tell you without a doubt that trading in the markets is not like gambling at all.
Gambling has a fixed odds system for all major games, while trading in the markets is truly unpredictable. The “house” or market does not have any unfair advantage as with casino style games.
If you are able to exercise extreme discipline and laser focus on your trading strategy, you can profit in the market. However, if you approach the market with random abandonment, then the market can and will cause you serious pain.
In this article I will cover 8 areas that can help you recognize if you are displaying characteristics of a gambler and not an investor.
Depending on your account type and the market you are trading, brokerage firms will extend you what’s known as margin to trade above the cash equity you have in your account. If you are day trading in the US, that value is 4-to-1 to cash on hand.
Now, if you are day trading, you should be determining your risk-to-reward ratio for every trade and applying sound money management principles for each transaction.
If you find yourself going all-in on positions, this is a sign that you are taking unnecessary risks for the hopes of a windfall profit. Examples of this would be if you have 100k cash with 400k margin and you are using all 400k for one day trade.
Earlier in my career I couldn’t handle the fact it was going to take me years to build up my trading account, so I would take these ridiculous positions going all-in on margin with penny stocks. Before I would take my position, I would have a sound trading plan, but in reality this plan was a cover up for my own need to hit it big.
If I am owning it now over a decade later, I was just swinging for the fences because I wanted to break free of corporate America in order to trade for a living. It got so bad at one point that I started to take on large options positions in the hopes of making 5x or 10x my money. Such a scary thought now that I’m looking back on my trading behavior.
Do you find yourself occasionally or worst frequently going all-in on a sure bet? If so, this is a clear sign that you are crossing the line from a savvy investor and characteristics of a gambler.
Gamblers will often try to bet themselves out of a hole, which most times leads them further into financial ruin. You can display similar behavior with the market if you go on a bad run.
No matter how good you are as a trader, you will encounter dry spells. It will feel like the market is against you and you are unable to pick a winner. Smart traders will either stop trading for a period of time or will start to take smaller positions until they are able to sort through their slump.
If you find yourself trading more heavily during a downturn or worst using more money to dig yourself out of a whole, you have now crossed the fine line between gambling and investing.
I remember a time where I was day trading and the market had given me a few lumps by 11am. Instead of trading smaller or stopping altogether for the day, I decided to “beat” the market. I began taking on position after position, so much so that by the end of the day I felt like I had been through a meat grinder.
I think I may have been up or down a few hundred bucks after all that work. I remember saying to myself, “What are you doing?”
I may have had a few days of overtrading on that level afterwards, but if you are becoming somewhat of a gambler, you will notice that the majority of the time you are overtrading.
This need to overtrade is the same thing a gambler feels when they need to place more bets to “fix” the problem.
Under no circumstances should you be using credit cards or taking out loans to place money in the market. Think about it, the market already provides you margin which allows you to trade above the available cash on hand. Why would you need to then take out more money?
The simple answer is greed and a little bit of stupidity to boot.
Please answer the following questions:
If you have answered yes to any of the above questions, stop whatever you are doing and replace these funds, because you don’t actually have the money!
It is one thing to lose your own money, but you should never allow the market to place you in a position where you are going in debt due to your trading. If you can’t turn a profit with your own cash, what makes you think you will turn a profit with borrowed money? It’s not about trading larger in order to make money; it’s about trading smarter with what you have on hand.
A major sign that someone is a gambler is when their mood swings start to fly all over the place. The person can be high as a kite one day and then completely depressed the next. This sort of behavior comes from the highs of placing winning bets, only to be replaced by depression from big losers.
Trading if not treated as a business can have the same effects on your relationships. You will find yourself avoiding your loved ones, because you don’t want to face the music if they ask you how your trading is going.
You will start to find time with your family as a distraction from your very important task of performing more and more market analysis.
Your family will not know which guy they will encounter after each trading day. Some days you are completely normal, while on other days they would rather have dinner with a sociopath versus dealing with you.
Trading should have no impact on your emotions. This is always the first sign of a good trader, the ability to stay completely flat in an environment that is filled with raw human emotions such as fear and greed.
Have you begun to notice your family maybe walking on egg shells around you after 4pm?
Trading effectively boils down to a number of fixed rules that govern how you conduct your business. This concept of rules applies to the market, because the market is a living and breathing entity, where no one can predict her next move.
This level of chaos can drive a man insane if he does not equip himself with clear boundaries of how to engage with the market.
Over time, if you are finding yourself abandoning rules in order to place random bets in the market, you are in trouble. This is a clear sign that you are no longer concerned with establishing a rationale for your trades and have instead opted for the ability to just place trades whenever and wherever you want.
This sort of behavior is similar to the gambler who is not concerned with calculating odds, but would rather just stay in the game and place bets.
How do you think this hope for the best mentality will play out in the markets?
Let me qualify this a bit, because I would say I am one of the most passionate people when it comes to trading, so I get it if you dream about charts at night.
When I ask the question, is the market your entire universe, it’s more about has the market replaced all of your relationships?
Do you find yourself only talking about the market with everyone you encounter? You go to subway to order a meatball sub and you somehow make the correlation with the bread to the current trend of the S&P 500.
If you find yourself no longer having any desire to enjoy the smaller things in life, you could be heading down the path of losing yourself by focusing on the market so much.
This is very similar to the behavior of a gambler who completely shuts out the entire world to focus on their game of choice. Simple tasks like putting your kids to bed or even eating will be too laborious.
If you are trading poorly, odds are there is at least one person that will know this fact. If you are married it’s likely your spouse. Either because you share this bit of information because of your loving relationship and great communication between each other, or they will know because of the shrinking joint account balance.
At some point your spouse or close friend will confront you about your losses. This confrontation will likely be awkward as they will not have a firm understanding of how the market works, but on a common sense level will know that whatever you are doing is not working.
When confronted a trader that is gambling will deny everything no matter what. The gambler will likely take it a step further and begin attributing their market losses to some inefficiency in the market. Never will it be about his or her trading, it will always be someone else’s fault as to why they can’t turn a profit.
If really pressed, the gambler will likely act out in such a fashion that the close friend will probably avoid discussing trading or money with them ever again to avoid future conflicts.
Does this sound like something that has happened to you before? Do you find that the market or some insiders are always out to get you which is why you can’t win?
Think about the gambler that sits in front of the television yelling at the fact the weather isn’t right, or the coach keeps making bonehead calls. Are you any different from this fellow?
Before you enter each trade, have you determined where you will exit a position if you are wrong? Not to be a stickler, when I say a stop, it doesn’t mean you have to enter a live order. You should at a minimum have a mental stop where you will exit a position if it goes against you too far.
Having a stop is critical in every trader’s career; because it is your way of saying I am wrong in this particular situation. You are no longer fighting the market or making the newbie mistake of letting your losers run way against you.
The other method for using stops is when you are up on a trade and you want to make sure you don’t walk away a loser. Stops will often be the one thing that separates a winning trade turning into a loser due to some unforeseen even in the market.
Stops are the same method that good gamblers use when betting in casinos. They come into the casino with a set amount of money they are willing to lose. Then once up for the day or on a particular game, they have a set amount of money that if they begin to give back money to the casino they walk away.
This ability to walk away a winner is the actions of an investor. If you find yourself giving back healthy gains for losses because you are not willing to put in stops, you are just gambling. Hoping for some larger target or profit zone.
To trade without stops opens you up to tremendous risk for potential loss.
So, let me ask, do you use stops?
Most people that trade do so sloppily. Where the line begins to cross between sloppy investing and outright gambling is the frequency of the violations of the questions mentioned throughout this article.
You have to be honest with yourself. If you are day trading and violate any of the questions listed above, you will fail at trading. I know that sounds harsh, but it is the grim reality of the market. She has a crazy way of separating people from their money when they act erratically.
To see how we can help you regain your trading discipline, please head over to our homepage and checkout our trading simulator.
All the Best,
Al
Photo Credit
Dice Photo by Claire
Credit Card Photo by Demosphere
Universe Photo by Vangelis
The post Is Day Trading Like Gambling – 8 Signs You have Lost Your Way appeared first on - Tradingsim.
Trading with margin is simply using borrowed money to buy or sell stocks short. Brokerage firms will allow you to use your cash on hand as equity in determining the amount of margin you are allocated in your trading account.
This leverage is different for the types of markets you are trading (i.e. forex, futures), but for the purpose of this article our examples will focus on a standard margin account.
For a standard margin account your brokerage firm will offer you twice the value of your cash on hand. So, if you have $100k cash, your brokerage firm will allow you to use up to $200k.
Now in terms of day trading, you will need a minimum of $25,000 cash in your account (thanks to the SEC) and your brokerage firm will extend you four times your cash. So, if you have a $100k cash, your brokerage firm will allow you to use up to $400k for your day trading activities.
Now that we have covered the definition and basics of margin, let’s dig into how you can use margin when trading.
The first question you have to ask yourself is how much margin do you want to use? Please do not make the rookie mistake of using the full amount extended to you by your brokerage firm. This is a clear sign that you are coming from a place of greed and not effective money management.
Let me help you out on this one if you are unsure. For my trading account I can use up to 150% of my cash on hand. 150% feels just right to me for a number of reasons:
As you think through how much money to use, don’t go too granular. What you really want to focus on is managing the risk and less about money.
If you trade biotechnology companies with extreme volatility, you will likely want to use your cash. If you are trading large cap stocks like MSFT or IBM, you can use more margin as sharp price moves are less likely.
Only you can answer this question, but over time you will find the right amount of exposure that feels right for to you for your trading account.
People think that using margin only comes down to your skill level. Meaning that if you are a good trader you can just run out there and trade up to your available margin.
This on the surface makes sense, but if you are a successful trader, why not use more money? Doesn’t this mean you will just make more money per trade since you have already proven yourself to be a winner?
Well, yes and no.
Using margin is one of the quickest ways you can “blow” up your account. When I say blow up, I mean that you can take a perfectly good account with a solid trading performance and due to overleverage have a massive drawdown of your equity.
Remember, it only takes one bad trade to ruin months’ worth of work.
Using margin comes down to your ability to manage risk and has very little to do with how good you are as a trader.
The short answer is that you use margin in the form of a pyramid. This means that you have to build a solid foundation of winning trades and then add on to these trades up to the margin limit that you have defined.
Let’s look at how I manage my trades as a real-life example. I can use up to 150% of my trading equity. So, if I have $100k cash this means that I can trade up to $150k.
Next I divide that $150k into fifths. This breaks down to $30k per trade.
In terms of my pyramid, I can only put on 3 trades to start. This means I will only be using $90k, which protects me by only using my cash. At this point, in order to add another position, one of my existing positions must have a stop that is above my entry point. This basically means that the risk in my existing trade has been greatly reduced. Now that the risk has been removed from my existing position, I can add another position if I see fit.
I will repeat this process until I am carrying a total of 5 positions with 150% of my equity in float. This allows me to trade larger without placing myself in a situation where I could potentially blow up my account.
If you are a day trader, please visit the article How to day trade with margin, which goes deeper into the topic of intraday trading and managing the increased leverage.
Most people would respond to this question with, “If you are on a losing streak”. This is pretty obvious, but let’s take this a step further. Let’s say you are not using the pyramid method I described in the previous paragraph to manage your account and you are just out there swinging for the fences. Below are a few questions that if you say yes to, you are one bad trade away from blowing up your account:
From the end of January through February 6th, the market experienced a pretty severe correction. Stocks were falling like bricks. I was able to avoid the bulk of the blood bath, but I did enter the market a few days early, so I had to sit through a bit of the noise before the market began rallying.
Sticking to my pyramid structure for using margin, I was only long cash in early February.
Imagine though if I had gone in 200% long. Would I have had the same perspective? Would I have panicked because every tick against me would have moved me closer to the edge?
Trading with margin while shorting is a different game altogether. Unlike going long where the gains are unlimited, when you short, the risks are now unlimited.
This is why when it comes to shorting, I do not use more than my available cash on hand. I take the total cash value in my account and divide that by three.
I am probably leaving money on the table by not using the additional leverage; however, I know myself and I know I don’t like situations that can get out of hand.
Another way to look at this is that bear corrections are often short lived but very profitable, so it’s not about using a lot of leverage, as the market will provide more than enough to the astute investor.
If you find yourself “jammed” up and a margin call is unavoidable, don’t beat yourself up over it. First, look to liquidate the position that is causing you the greatest amount of risk.
Your money management is all that matters at this point. It’s not about you being right. So, don’t let anything get in the way of protecting your capital.
Contrary to popular belief, trading with margin is not some overly risky endeavor. If used with the proper money management principles, the use of margin can allow the skilled investor to grow their account value exponentially.
The tough question you have to ask yourself is if you are at a point in your trading career where you can do so successfully?
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Fear is one of the emotions that can hold you back from reaching your full trading potential. Trading is primarily a mental game and those that exercise clear judgment have the greatest odds of success. So, before we can delve into why you are having trouble pulling the trigger, we first need to understand the basis of your fears.
Throughout this article we will cover a number of topics that address the types of trading fears that develop through poor habits. As you are reading each of these scenarios, try to identify which one of these is the trigger behind your fears.
If you are able to pinpoint your shortcomings, you will be able to release the powerful trader within.
Hesitation is one of the most painful fears that are expressed when trading. You are certain that you need to make a trading decision.
You have performed extensive research, identified your entry position and stop levels, yet you find yourself staring at your screen.
Unlike the other forms of trading sins, hesitating on pulling the trigger is hard to pinpoint the exact fear that is holding you back. You just feel incapable of making a move.
Depending on the trading methodology, hesitating for a few minutes can be the difference between profitability and walking away a loser.
The most painful result of hesitating is not the financial implications, but rather psychological. You will find yourself watching winning trades play out right before your eyes, but your lack of conviction prevented you from jumping on-board.
To combat this type of fear, once your entry point has been hit, simply execute the trade. Don’t think anything, just enter the order. If you don’t trust yourself to follow through on the trade, place a limit order and walk away from your monitor.
This sounds simple enough, but you may experience light headiness and a fast heart rate once you have made up your mind you need to take action and not be on the sidelines. The most important thing for you to remember is that this sort of physiological response is normal. You are literally willing yourself to take action and this my friend requires mental, physical and spiritual strength.
Another fear that could be holding you back is the fear of being wrong. This is one I am currently wrestling with on a daily basis. As a child I was a big sore loser. For me, it wasn’t just about playing a game, it was about being right. I needed the satisfaction of looking back on an event to know that I had made the right call.
This need to be right was one of the things holding me back from profitability early on in my trading career.
A way to quickly notice if you suffer from this issue is if you constantly obsess about breaking even on a trade. You may almost find yourself completely forgetting about the bigger picture of the setup and just focusing on if you are positive or negative on the position.
This constant obsession of winning and losing on every single trade will ultimately bleed over into your thoughts about a stock prior to opening the position. Instead of embracing that trading is an odds game where you hope to establish an edge, you will find yourself so worried about being wrong, that it’s less painful to not put on the trade at all, versus risk the very real possibility of being wrong.
If you follow the Tradingsim blog, I have highlighted a few trades that were so traumatic, that I remember them like it was yesterday. These trades can be both positive and negative experiences. What you will notice is that you carry traumatic losing trades with you the rest of your life. This trade, if painful enough will literally cause you to freeze in your tracks days, months or even years down the line.
To combat these negative emotions, you first need to accept the losing trade. Once you have assumed 100% responsibility for the trade, begin the process of realizing that each trade is unique and no two experiences in the market are exactly the same.
This will not be overnight, but overtime by simply taking the trades as they come, you will begin to diminish the importance of that traumatic trade as you will realize that this is a game of odds and your past transgressions have no bearings on your future earning potential.
Do your trading screens look like your intestines? If you don’t know what I mean here, do you have charts on top of charts with indicators flying all over the place?
Still don’t get what I’m saying, please have a look at the below chart:
Let me first ask do you feel like the more analysis you perform makes you a more effective trader? The harsh truth is that when you place so many variables in your path of success, you will likely find contradictory signals. These contradictory signals will make it virtually impossible for you to take a hard position, thus you will likely find yourself again staring at the screen unable to take on a trade.
The numerous indicators, news reports and any other edge you are trying to use becomes a curse instead of a gift.
Try using 50% less of whatever it is you are doing to see how it affects your trading. Then after you have found some success, try cutting the number of tools you use by another significant percentage. The goal here is to get things to a point where you are able to trade more on judgment and experience and not in such a mechanical method. This process can take years, so don’t throw away the baby and the bath water, but keep it in the back of your mind that you need to let go of these crutches over time.
This scenario covers when you have spoken to a family member, friend, spouse, or placed the details of your trade on the internet.
At this point whether you want to admit it or not, the fact that people know you are in the stock, will impact your trading decisions. Trust me, there is no greater need to be right than in the eyes of others.
Now instead of realizing that you may have just placed a bad trade and you need to let it go, you are having a tough time pulling the trigger because you don’t want to appear that you are not in control.
So, instead of going out on StockTwits and admitting that things did not go as planned, you instead hold on just a little bit longer in hopes that things will work themselves out.
This scenario is why I do not post trading recommendations on the Tradingsim. I know that I am extremely competitive and need to be right practically in every facet of my life. My wife constantly reminds me of this on a daily basis.
So, I know the minute I post Al has taken ‘x’ position, it would only place me in a position where I need the trade to work out no matter what. Just so I could come back later and tell you guess what, it worked out just as planned.
Who needs that level of pressure? For me I like to quietly take my lumps in private, but I will talk freely about my year in review, but when I’m actively in a trade, that my friend is between myself, the market and GOD.
This example is one close to my heart, because this was holding me back in 2013, so it’s fresh on my mind.
Essentially you are eyeing a stock and you know the stock is a great setup, but instead of pulling the trigger you are so worried that the broad market is going to experience a correction, that you don’t pull the trigger.
To make this real, in 2013, the market pretty much went up all year long and I was able to rack up a 53% return for the year, but it could have been so much more. What was holding me back was I would see a potential broad market sell-off in the works around every corner.
This fear of the pending doom held me back from taking a number of positions, because I didn’t want to be the guy holding the bag.
The way to handle this fear is to remember that yes, the broad market can make a nasty move in the opposite direction, so you need to keep an eye on the Nasdaq, NYSE, etc., but you cannot let the potential doom and gloom of a market pullback stop you in your tracks.
You must accept the risk and place the trade.
This is a tough one to accept, but maybe you just don’t believe in yourself. Maybe you have over time come to a point in your life where you are no longer a fan of your trading abilities. You find fault in practically anything you do.
This sort of negative attitude will get you creamed in the market.
More than anything we have covered in this article, you must have a winning attitude in order to be successful at trading. Without a winning gratitude you will find a reason to hesitate on pulling the trigger every chance you get.
So, we have covered a number of fears that hold traders back from profitability. Depending on where you are in your career, you can potentially see yourself in any one of the above scenarios. The fix for all of these symptoms is the same.
You must learn to accept the fact that you are trading. This means fully accepting the fact that trading boils down to a matter of odds and all you need is an edge in your favor. Once you have determined you have some sort of edge, you place the trades and not worry about if things will work out perfectly or not on each trade, because over the long haul you will come out a winner.
Once you are able to make that leap to a point when you begin to look at the market in terms of odds, you will no longer feel the burdens of the scenarios listed above, because you will realize that these variables are just that, variables. There is no way you can know how each one will affect your stock, so to worry or try to predict each permeation is a waste of time.
Stop worrying! Trading is meant to be a fun challenge which forces you to look into your soul to figure out what makes you tick. If you find yourself unable to pull the trigger for any of the reasons listed above, take a breather. You can try our trading simulator to see if you can’t figure out what is going on before investing more money in the market.
Remember, fear is a mind killer, it disintegrates from within. You must first learn to face it then control it.
Good Luck Trading
- Al
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Selling Short requires more skill than going long. That statement alone may trigger a response from my readers, but I believe that is an accurate statement for a number of reasons.
First, the market has a bias to the upside, as most market participants buy and hold stocks. Secondly, depending on how you hedge your trade, you in theory have unlimited risk of loss when shorting. This concept of unlimited loss presents more complexity in terms of money management and how that is incorporated into your trading methodology.
In this article I will cover 8 reasons of why a trader should avoid shorting a stock. These reasons have been grouped into the following three categories: (1) technical, (2) money management and (3) psychological. At the end of this article you will be able to identify any red flags when it comes to shorting and your trading approach.
In the first section of this article I will be covering the technical signals of when you should avoid taking a short position. Most of these signals will center on moving averages as these are great trend following tools.
I actively use the 30-week moving average as an integral component of my swing trading strategy. I would love to take full credit for coming up with the 30-week moving average as a trend following tool; however, that accomplishment solely belongs to the great Stan Weinstein. To read more on Stan and the 30-week moving average, please check out his book titled ‘Stan Weinstein’s Secrets for Profiting in Bull and Bear Markets‘.
The 30-week moving average provides the line in the sand for long-term investors that use weekly charts. Essentially the 30-week moving average provides the same information in terms of bull or bear markets as the 200-day moving average for traders that use daily charts.
Below are a few examples of weekly charts and their 30-week moving averages. Please take a minute and go through each chart and identify which stock is in a bull or bear market.
Is Tesla in a bull or bear market?
Is XOMA in a bull or bear market?
Is IWM in a bull or bear market?
One thing I realized early on is that while the 30-week moving average is critical to my trading strategy, other traders could potentially care less. This means that a stock may not turn on a dime at the 30-week moving average. There are times that a stock will penetrate the 30-week moving average, only to shake out weak longs and will then quickly rally.
Again, this is not an exact science, but more of a guidepost for trading on a weekly basis.
The 200-day moving average provides the same sort of line in the sand for bulls and bears as the 30-week moving average. The difference with the 200-day moving average is the indicator is far more popular than the 30-week moving average.
Generally speaking, the 200-day moving average will lag the 30-week as the 200 day represents 50 more trading days.
However, the same rules as identified for the 30-week moving average are applicable for the 200-day moving average.
Again, I must reiterate that the stock may not turn on a dime when crossing the 200-day moving average, but you will want to avoid scenarios of going short when the stock is significantly below the 200-day moving average.
Using the below images, can you tell which stocks are in a bear or bull market based on the 200-day moving average?
Are the bulls or bears in control of Apple?
Is Yahoo in a bull or bear market?
Do I even have to ask whether EXTR is in a bull or bear market?
My definition of a clear uptrend is when the stock has higher highs and higher lows for the last three consecutive swing points. While you can technically make money trading any type of trend, it will be tougher to profit shorting a stock in a clear uptrend.
I know you are probably thinking, well if the stock is hitting the resistance line, then why not sell the stock short to profit on the pullback. This is a valid argument, but there is always an undefined risk of shorting a stock in an uptrend.
A general trading rule is that whenever the market presents surprises, they are likely in the direction of the primary trend. So, if the market decides to gap through resistance or go off script, odds are this anomaly will be in the direction of the primary trend.
As you can see from the above chart of E*TRADE Financial, if you would have attempted to short the stock while in this uptrend channel, you likely would have been wrong far more times than right. It would have felt like pulling teeth to turn a profit. The grinding action higher in E*TRADE over the last 18 months is a reflection of the shorts entering and exiting the market after each failed attempt.
Trading highly volatile stocks is the key to making fast money in the market, assuming you know what you are doing.
In today’s market, the high flyers are the biotechnology stocks. These stocks will rally or fall on earnings reports or results from clinical trials quicker than any of us can blink.
Below are a few charts of biotechnology stocks that rallied hard after pullbacks. For me, it’s not necessary to introduce this level of risk into my swing trading strategy. There are just far too many other ways to make a buck in the market.
So, to avoid the potential for huge losses, if you must trade volatile stocks, only trade them on the long side.
If you see the market is in a strong uptrend, do not go out there guns blazing shorting everything in sight. I know calling a major market top is like the unicorn for technicians, but why not just ride the wave higher so you can make money with the wind at your back.
Stepping in front of a strong bull market is a sure recipe to losing your hard earned money.
Below is a chart of the iShares Russell 2000 Index Fund ETF (IWM) from late 2012 through March of 2014. Can you please explain to me why you would fight this level of bullishness?
Trading is not only about being right, but being right at the right time and having enough capital on-hand to weather any storms. While the next few sections aren’t as glamorous as shiny stock charts, please do not discount their importance.
After the previous section on highly volatile stocks, it’s a great segue to strict margin requirements. While you may feel like you are ready to take on the world, your brokerage firm may think otherwise. These firms will provide strict margin requirements for trading volatile stocks based on the level of risk exposure they are willing to accept.
So, when you decide to short an extremely volatile stock, the margin requirements are often so strict that you are practically forced to only use your available cash. If you see that a stock has ridiculous margin requirements, it’s probably best to avoid trading the security since it will greatly reduce your ability to trade with margin.
Beyond just trading with margin, if you were to encounter any of the sharp rallies like we just reviewed with the biotechnology stocks, you will likely get a margin call. This will force you to either add more cash to your account or you will need to close out the losing position. Traders will say, well if the stock rises from $2 to $6 dollars, I will just wait for the pullback. This is true if you have enough cash on hand. Most traders are either over leveraged, which is why these volatile stocks rally so quickly, because shorts are forced to liquidate their positions by their brokerage firms to meet the margin requirement
Even if you are shorting blue chip stocks and the margin requirements are relaxed (less than 35% cash required), you still can get in over your head if you were to use 150% or the full 200% of your marginable equity for shorting. Unlike long trades, without a hedge, you essentially have unlimited risk when shorting. If you read this last sentence and are still thinking to yourself, “What’s the big deal with using so much margin?” You are likely suffering from market greed and at some point will completely blow up your account.
If you are using all of your available cash for trading, do you think it’s wise to then use margin to place more money at risk when shorting?
At the end of the day, if we strip away all of the news, charts, opinions, etc. we are left with our belief system as an individual trader. If you do not have a winning attitude, don’t bother getting involved in this game. Below is the key psychological question you need to challenge yourself on as it relates to shorting.
When shorting, you in theory have opened yourself up to unlimited risk unless you have hedged the trade. Now if you are ok with that fact, shorting will feel the same to you as going long in a stock. However, if you as a trader have not embraced the fact the market could continuously run against you, any rally will create an enormous amount of anxiety.
If you feel that you are unable to muster up the intestinal fortitude for shorting, it’s in your own best interest to stay on the long side of trading.
Shorting can be an extremely profitable means for trading the market. I myself have and will continue to short the market when opportunities present themselves. You just have to look at the market through a different lens.
If you read a few of the above 8 explanations for why not to sell a stock short and it gave you reason to pause, then head over to our homepage. You can try shorting using our trading simulator to see if there is any merit behind your hesitation.
Good luck trading!
Al
Photo Credit
Stock Images courtesy of Freestockcharts.com
The post 8 Reasons Why Not to Sell a Stock Short appeared first on - Tradingsim.
Let me first start off by saying that this article will not cover the nuances of how the Summation Index was created, all the detailed math behind the equation or even exactly how it works. The purpose of this article is to dive into how to use the indicator as a trading guidepost for assessing the broad market.
If you would like to dig into the math and or history of the indicator, please visit any one of the following links:
http://en.wikipedia.org/wiki/McClellan_oscillator
http://stockcharts.com/help/doku.php?id=chart_school:technical_indicators:mcclellan_summation
http://www.mcoscillator.com/learning_center/kb/mcclellan_oscillator/the_mcclellan_oscillator_summation_index/
Now that we have the disclaimer out of the way, let me contradict myself and briefly touch on the calculation.
The summation index at a high-level is the calculation of advances minus decliners (net advances) for a 19-day exponential moving average period minus a 39-day exponential moving average period. The summation index is the running daily tally of this equation, hence summation index.
According to the NYSE Euronext site, there are approximately 2,800 companies listed on the NYSE Composite. The number of advances minus decliners across these 2,800 stocks is the input for the 19 and 39 exponential moving averages (EMAs) of the NYSE Summation Index.
On really good day, the NYSE may have net advances of 2,000 and conversely on bad day the NYSE may have net decliners of 2,000.
While this article covers the NYSE Summation Index, you can have a summation index for any exchange.
The reason I and many other traders use the NYSE Summation Index is because of the breadth of the NYSE. There are literally thousands of stocks across many industries. The NYSE Summation Index can be used to monitor the health of major bull and bear markets.
So, while I get it that your charts, moon signs, or whatever edge you use keeps you whole the majority of the time, you still need indicators like the NYSE Summation Index in your trading toolkit to identify when market shifting events are on the verge of occurring.
Remember, broad market moves have very little to do with technical analysis or fundamentals. People are looking to buy or sell based on the raw market emotions of fear and greed. Once those two elements are prominent in any market, it’s no longer about what makes logical or technical sense.
Bottom line, you need to understand and keep an eye on what the NYSE Summation Index is telling you.
There are two ranges you need to remember when it comes to the NYSE Summation Index: +1,000 to +1,250 and -500 to -1,000.
Don’t believe me?
Take a look at the below chart of the NYSE Summation Index going back to 1999 (that’s 15 years if you are counting).
When you look at the NYSE Summation Index, to me it’s much easier to identify the peaks versus the bottoms. You can see time and time again how the NYSE approaches the 1,000 to 1,250 range and then gets slapped in the face. However, the pullbacks appear to stop anywhere from -500 to -1,000. Which is double the range of where things can start to shift relative to the range for market tops.
The index may tip over these thresholds slightly to the +/- 1500 range during extreme market activity, but this is very rare.
So, now that we know the Summation Index is not a magic bullet, we now need to determine a means to validate trading signals.
What better way to do this then using trend lines?
The reason I am going to use trend lines to illustrate how to validate the summation index signals is because trend lines are probably the one indicator every technician uses in their trading toolkit. Some traders use oscillators, others Elliott Wave, but at some point or another we all draw some sort of trend line on our charts.
Let’s start picking apart why the above peaks in the NYSE Summation Index were areas where longs should have begun taking a more defensive posture with their trading.
Below is a chart of the NYSE Composite from the lows of 2012 to the most recent highs in 2014. Notice where the NYSE Composite was hitting its supply line or resistance line at the same time the NYSE Summation Index was in the +1,000 to +1,250 zone.
It may be a little hard to see the exact touch points, but for the first and second peak, you can see the NYSE Composite clearly touches the resistance line while the NYSE Summation Index is touching +1,200.
What makes the third touch point unique is that the NYSE did not touch the resistance line. This is not a 100% requirement for the NYSE to pullback as the market can do any and everything, but the fact the resistance line was not touched and the NYSE Summation Index did not approach the +1,200 mark was one of the reasons I have believe the market will continue to make higher highs.
Based on the slope of the resistance line and the current value of the Summation Index at 747.71 as of 5/23/2014, the NYSE Composite could make a run over 11,000 before another top of any significance is in place.
The NYSE Summation Index is a running total of the NYSE McClellan Oscillator over a period of time. So, since this is a market breadth indicator, as a trend continues in a primary direction it’s harder to determine the turning points for counter trends.
Now in plain English, as the market has continued to rally over the last two years (2012 – 2014), the troughs of the NYSE Summation Index have continued to rise as the market extends the bull market. So, where the market would rally as they NYSE Summation Index crosses -400, 6 months later the market could very well rally at -200 on the NYSE Summation Index.
Now let’s take a look at the NYSE Composite chart during each of these lows on the NYSE Summation Index.
You have no trend line as confirmation for these bounces, because the market is trending so strongly. Now, for all you folks that draw a million lines on a chart, good luck with that. I use the Wyckoff method for drawing trend lines which prescribes that you only draw parallel or horizontal channels. So, I you will not see lines within lines on any of my charts.
So, to quickly recap, when the market is trending strongly, you will want to look for a confirmation of the NYSE Composite hitting a resistance line and the NYSE Summation Index peaking in the 1,000 to 1,250 range. In terms of buying the dips, the summation index may give you little indication of when things are oversold, because the negative readings may not hit the necessary extremes as the bias is to the bullish side.
Because the bull run from 2012 to 2014 has been so parabolic there hasn’t been many cases where the bears were able to test the support line of the up channel. So, I had to look back quite a few years to find another bull market that covered several years, where we could assess how the market reacted when touching a support line and the NYSE Summation Index was pushed to the -500 to -1,000 range.
There are 3 points in this chart where the NYSE Summation Index crossed the -500 territory which is the range we typically see lows occur in the market. Remember the -500 to -1,000 range we discussed earlier in this article.
I know there are 3 additional points where -500 on the NYSE Summation Index was crossed in late ’07 and early ’08; we will cover these in the next section of this article.
So, the lows in the NYSE Summation Index occurred in October ’05, July ’06 and July ’07. Below is the chart of the NYSE Composite, so you can see how these lows on the Summation Index aligned with the lows on the NYSE Composite.
The first low in October, never touched the support or demand line. The market never makes it easy, so don’t expect things to always fit perfectly within your analysis framework. This is where you as a trader need to make a call as to whether things need to align perfectly, or close enough based on your risk profile.
The next low comes in the June ’06/July ’06 timeframe. This low also coincided with a negative -500 reading on the NYSE Summation Index and the market rallied.
A similar situation occurred when the market rallied in August ’07 as the NYSE Summation Index breached -500 and nearly touched -1,000. Shortly after hitting this low point, the market rallied to an historic high before the mortgage crisis crash.
Going back to the previous section, there was a clear indication that the market was in trouble in late ’07. After the NYSE Summation Index experienced a pullback below -750, the summation index then made a series of failed attempts to get over +500 only to quickly retreat back under the -500 territory. When the Summation index is unable to clear +500 before retreating, this is a clear sign that stocks are having weak bounces only to be slammed back down again.
Looking back at the NYSE Summation Index chart you will again see a number of runs at the -500 area without the market being able to successfully test and push through the +500.
There are no hard line rules for judging the transition to a bear market, so don’t overdo it. Just remember to use your common sense. As you can see, the Summation index did not clear 500 convincingly. In addition, notice the distance between each push to -500 territory previously, versus the shorter duration for each push to -500 starting in late ’07.
Just by looking at the NYSE Summation Index you would have known the market had shifted from a bull market to a cyclical bear market.
Again folks, this isn’t rocket science, you just have to believe it isn’t.
After the blood bath in the market, who would have known just as quickly as we shifted into a bear market, we were shifting back into a bull market? Let’s look at the chart of the NYSE Summation Index for clues.
Notice how after the market reclaimed the +500 territory convincingly and the market never turned back below -500 on the NYSE Summation Index before rallying back above +1,000. This is a clear indicator that the bears are unable to push the market down with any significance before another rally ensues.
Now take a look at the NYSE Composite chart for this same period of time.
The bulls had a significant rally in terms of price, but by also monitoring the action of the NYSE, you would have known that now was not the time to take on large bear positions.
Below are some key bullet points to highlight from this article:
The post How to use the NYSE Summation Index as a Trading Guidepost appeared first on - Tradingsim.
I totally get your motivation of day trading while at work. Odds are you are a logical person and fully understand the risk you are taking by even considering trading as a means of income.
Naturally you say to yourself, “I have a job and are able to pay my bills, so why place my family’s well being at risk to day trade? I can just day trade at work, keep my income and make money from the market.”
Sounds simple enough right? In this article I will lay out 7 reasons why day trading from work is a bad idea and while on the surface makes sense, over the long haul it’s not a highly effective way of mastering the markets.
This is going to sound completely corny, but your job is paying you to perform a specific function. They are not paying you to chase your dreams. You could be saying to yourself, “I don’t take smoke breaks or lunch breaks, so technically I should be able to use this hour and half any way I choose.”
Wrong! Day trading is not like swing trading or investing where you may glance at the ticker on your smart phone every few hours during the work day. Day trading requires enormous levels of focus.
Your employer is paying you for 8 hours of work, yet you and I both know you will spend time throughout the entire day focusing on the market. This means your productivity levels could easily drop below 50%. Should you really be compensated for 8 hours of work? For you sophisticated traders that say, “I will only trade for a maximum of 2 hours per day. I will make up the rest of the work hours later on.” My response to that is if your job allows you to essentially checkout from 9:30am to 11:30am, what about everyone else?
Bob wants to watch his favorite soap operas from 1pm to 3pm every day. Susie prefers to take a 10k walk from 12pm to 3pm, so she can get a great tan and better manage her health. See where I’m going with this? Whether you try to day trade under the table or officially with your boss’ approval, it just gets messy from the employers point of view. Let’s try to hit this point home from a different perspective. If you were the employer paying someone to perform a function and they were dreaming about or doing something else during the work day would you be pleased?
Trading requires enormous focus. Anyone that tells you otherwise has no idea what they are doing. No matter how well you think you can manage your day, your job will place demands on you that will distract you from the activity of trading. Below are just a few events that occur during a normal work day, which you may not be able to avoid:
The list goes on and on and on. Let me be honest, my list could be the result of how hard I work on a daily basis, but one or more of these things are likely occurrences for most office jobs. On the surface these events could only take 15 minutes or 2 hours. So, you may say, “What’s the big deal? I have my smart phone and or tablet at work, so I can manage through the distractions.” Wrong!
Remember you only need to turn away from your desk for 15 minutes for your account to suffer a significant loss. You could be thinking, “Well I will use stops to protect myself from losses.”
Right, you could, but what about the times as you are watching the tape and you realize that market conditions have changed and you should raise your stop by .1%. However, since you were busy discussing this month’s TPS Reports, you missed the signal and instead of ripping down a 3% gain, you end up losing .1%. This my friend will be a constant occurrence as you try to serve two masters.
Since you are unwilling to leave your job, odds are on some level you still value your job. So, you will feel the constant stress, fear and pressure of living a double life at work. Let me paint a picture for you. Let’s assume you sit in an office or cube, but you are unable to angle your computer screen in such a way that you are the only person that can view the contents on your monitor.
As you hear each footstep walk behind you, you will not know if it’s the office janitor or one of the senior executives from your department. So, do you minimize your screen every time someone walks by, or do you try to take a quick glance to see who is behind your desk? Depending on how lively your place of employment, you could have people walking behind you constantly.
How do you think this will impact your ability to make sound and clear trading decisions?
Your job is likely monitoring everything you do on their network. When you are day trading, your bandwidth usage will likely be much higher than your co-worker next door that is just using the company’s corporate assets. Depending on the level of IT monitoring and security, your account could be flagged for inappropriate use. Let’s assume monitoring is not an issue, then the firewall maybe another one. Many companies will block standalone trading applications from brokerage firms from either being installed on your corporate issued machine or from you accessing these brokerage firms based on internet protocols.
If you are still on the journey of becoming a master trader, bad days will feel like the love of your life has just broken your heart into a million pieces. This feeling of hopelessness and anger will only be magnified when at your job. Odds are you will blame your bad trading day on one of the events from work that forced you to take your eye off the ball.
Now that you have this painful experienced ingrained in your mind, you may still have 4 or 6 hours of the normal work day ahead of you. Do you think you will feel up to battling it out with that jerk in accounting? How do you think you will react to an urgent request from your boss? Assuming there are 20 to 22 trading days a month, of which you have 3 bad trading days, are you prepared to have 36 workable days or approximately 2 months a year that you are just utterly depressed at work? The beauty of trading full-time is you can go have a run or go visit a friend for lunch to get your mind off of things. Work does not afford you this luxury. You will have to quickly pick yourself up and get on with your day, which means you will likely take your bad day home to your family.
Successful trading comes down to figuring out what makes you tick. This is a long process of placing good and bad trades which over time will help you identify your trading edge. How will you sharpen your edge if you are not trading the market properly? Having these distractions from work will force you to adapt your trading style to an ever changing environment. You will begin to develop trading responses for events like needing to leave your desk for a meeting. Are these really habits that you should be practicing? Let’s say you are able to finally breakaway from your job to day trade full-time, how much of your day trading while at work methodology is transferable? Think about it, 20%, 30% or even 50% of your trading methodology could be centered on you managing these random work events. How do you replicate the work environment when you are trading full-time? You will likely spend a lot of time unlearning bad habits from when you were trading at work.
I decided to save the best for last. Let me walk you through the psychological aspects of this setup. You want to day trade for a living, but you are unable to for a host of reasons. While you are able to day trade, you are forced to day trade out of the very place you are seeking to escape. So, not only do you have a constant mental reminder, you also have a physical reminder of how limiting (in your mind) your life has become. Naturally, the way out of this dire situation is to trade your way out. Whether you come to this conclusion on a conscious or subconscious level, all roads ultimately lead to you overtrading. The very real desire to free yourself will lead you to placing trade after trade in hopes changing the course of your life. This sort of make it or break it perspective will lead to you potentially blowing up your account.
You are kidding yourself if you think day trading at work will prove beneficial towards your ultimate goal of becoming a successful day trader. 90% of day traders fail. Take a minute to digest that statement. Now layer on top of this data point the fact you will be day trading while at work. Think about how that increases the level of complexity.
I liken it to driving at speeds in excess of 80 miles per hour on a heavily trafficked highway and deciding that carrying on a long text message conversation is a good idea.
The post 6 Reasons Day Trading While at Work is a Bad Idea appeared first on - Tradingsim.
Flags and pennants are foundational chart patterns of technical analysis. What I mean by this is most technical traders have heard of the patterns, as these are easy to recognize. Most of the trading strategies documented for flags and pennants are straightforward and somewhat boring to be honest.
In this article, I plan to challenge the norm and coming up with some creative ways you can start to trade these patterns.
Let’s first ground ourselves on the definitions of flags and pennants.
So, when you think of a flag, it is literally talking about the shape of a flag. This is why when you search for flag patterns on the web, you will often see in the search results flags of countries for sale.
US Flag
As you can see in the above picture of the American flag, a flag blows in the wind. It’s not like a note card, with a perfect rectangle. The flag is in motion and will drift towards the direction the wind is blowing, which essentially is the same as trading in the direction of the primary trend.
Pennants again are another common shape that we see not only in the trading world, but also in the real world. It’s a triangle that is converging tightly on both sides to a point. As a kid, I remember my Dad buying me pennants at the Orioles game so I could cheer on the hometown team.
Pennant Flag
If you can understand these two images, you will be able to recognize these patterns on a price chart.
Now that we all have the same base understanding of the pattern, let’s dive into the three strategies for trading the flag and pennant patterns.
If you are not familiar with Fibonacci, 23.6% is part of the Fibonacci series and is in the default series for most trading platforms including Tradingsim.
The point of looking for patterns with less than 23.6% retracements is a way to only identify the flags and pennants, which are trending strongly.
Let’s take it to the charts to really drive home this concept.
Flag Pattern
In the above example, we have a flag pattern, which had an impulsive move higher. Then the stock began to trend sideways for a few hours on the 5-minute chart. As you can see, RUSS never broke the 23.6% retracement line, before screaming higher.
For the trade setup, you could place a buy order on a break of the high, with a stop below the low of the range. Again, the stock cannot retrace more than 23.6%.
In the next example, we will be covering the same setup, but on the bearish side.
Pennant Charts
After the pennant developed on the chart, ARWR experienced a breakdown right after lunch.
The key thing to remember in both the flag and pennant formations is that there was an impulsive move with little to no retracement. Jumping on this bandwagon reduces the likelihood of the trade going against you.
In the above example, you would want to short the break of the pennant trend line, with a stop above the middle of the upper trend line. The reason you should use the middle of the trend line, is due to the possibility of a quick fake out before resuming the direction of the breakout.
In full disclosure, I do not trade during the first 20 minutes; however, this doesn’t mean there aren’t opportunities for other traders. A formation that I have noticed over the years is one that blends both day trading and swing trading.
The setup consists of an impulsive move in a stock that lasts over 2 or 3 days. The stock will run all day and then towards the end of the day, form a flag or pennant pattern. The next day, the stock will gap through the resistance or support levels and then repeat the same trading pattern.
To illustrate this point, have a look at the below chart:
Multiple Day Breakout
Notice how the stock was stair stepping higher and higher throughout the week. Finally, a flag pattern developed and on the open of 6/11, EGN gapped higher through the previous day flag pattern.
Identify a stock that has been trending over a number of days. Look for the trend line to help define the trend to ensure there is continuity over multiple days. Once you can see the larger formation, look to buy the open of the stock once it gaps through the previous day’s flag or pennant.
Because flags and pennants are such common patterns, you need to have a method for weeding out the noise. One method you can use to filter out the possible trading opportunities is to use an on-chart indicator like the Ichimoku Cloud.
The definition of the Ichimoku Cloud is out of the scope of this article, but to quickly summarize, above the cloud is bullish and below the cloud is bearish.
Therefore, when reviewing flag and pennant patterns you can look to see how the price action is trending relative to the Ichimoku Cloud.
To further illustrate this point, let’s take it to the charts.
Flag below the Cloud
If you are not familiar with the Ichimoku cloud, the chart is going to look really busy. The only thing you need to focus on in the above example is that the break down through the flag occurred while price action was below the flag. As a trader, this gives you additional confirmation that the bearish trend will continue and you are less likely to be caught in a bear trap.
Pennant Ichimoku Cloud Breakout
Just to level set your expectations, it’s extremely difficult to find charts that converge into a pennant and then break through the cloud with such momentum as the above example. However, if you are able to identify the setup, you will be able to recognize you may have a real winner on your hands.
Identify a stock that has developed a flag or pennant. If the stock is breaking out of the pattern and is going in the direction of the cloud, then you have confirmation the trend will likely continue.
If you are looking to trade a trend reversal, wait for the flag or pennant to line up directly below or within the cloud. Then wait for the market to send the stock screaming higher through the cloud. At this point, you are essentially entering the position right as the trend changed, which will leave a number of traders trapped and covering their positions.
Trading flags and pennants isn’t anything new to most traders. However, if you are able to identify another perspective on the formation, you essentially can develop an edge over other market participants.
To quickly recap, in this article we covered three strategies for trading flags and pennants:
Much Success,
Al
Photo Credit
American Flag by Mike Mozart
Pennant Flag by Toronto History
The post 3 Strategies for Trading Flags and Pennants appeared first on - Tradingsim.
When you review your historical trades, you will notice that given a better entry price, your loser could have actually been a winner. It’s like anything in life timing is the key.
When day trading, you will have the natural inclination to go back and tweak your system, or look to pull in additional indicators to gain an edge, when in reality your timing and or execution are off.
In this article, we are going to explore three methods for how to improve your trade entry and execution. Simply addressing these three items can improve your trading performance, without having to completely alter your system.
Let’s ground ourselves a little before we get into the details of the article. For starters, this article is targeted for day traders that buy the dips and sell the highs.
For breakout traders, you will use the same methodology; however, you will need to track how far and for how long the stock goes against you before continuing in the direction of the primary trend.
For swing traders, the same rules also apply; however, your numbers will be larger on all fronts due to the fact you are likely trading using 60-minute or daily charts.
Depending on your trading performance, this could potentially be a painful process, but one that is necessary. What we are trying to do is establish a baseline of when a stock truly hits its bottom or its peak after you entered the position. We of course will want to assess the bottoms for long entries and peaks for short entries.
For your long entries, I would expect your analysis to look like the following:
Trading Low
In the above example, you would have bought at $21.80, but the low didn’t come in until $21.61. This would give you a delta of ~.87%.
Let’s take a look at an example on the short side.
Trading High
Notice that the short entry was a bit premature, which resulted in a 4.5% loss, prior to the start of the down move.
Now, I’m not suggesting that you mock up every trade on a chart, but you do need to document your entry price against the actual price when things started to go your way.
The more trades you include in your analysis the better. You should come up with a list similar to the following:
| 0.02 |
| 4.5 |
| 3.8 |
| 1.2 |
| 0.7 |
| 0.45 |
| 0.33 |
| 0.87 |
| 0.23 |
| 0.08 |
| 0.22 |
These values represent how close your entry was to the actually start of the move you were looking for.
Now that we have the list of values, which if you are a day trader, should consist at a minimum of 250 traders or more, we need to do some basis statistical analysis.
We need to find the median of the trading results in order to sift through all the data.
Do not go with the averages, because the outliers are going to distort the final numbers. In the above example, after ordering the numbers from least to greatest, our list now looks like this:
| 0.02 |
| 0.08 |
| 0.22 |
| 0.23 |
| 0.33 |
| 0.45 |
| 0.7 |
| 0.87 |
| 1.2 |
| 3.8 |
| 4.5 |
As you can see, .45% is the number in the middle of our data set and would represent our median value. If we had an even number of trades, we would take the average of the two numbers in the middle to identify our median. For more on how to calculate median values, please take a look at this video from Virtual Nerd.
To see how to calculate the median using excel, please take a look at this video from Statistics How To.
Again, your data set needs to be 250 trades or more; I am just showing a short list to quickly illustrate the point.
So, what is this data showing you? If you are .45% off on your entry price, then what are you to do? Should you go out and immediately adjust your system to account for .45% on every trade?
No! The purpose of this analysis is to show you that you are generally off by .45%, which means you are pulling the trigger too quickly.
Again, do not make any changes to your trading system. In this example, what the trader should do is recognize that once their buy or sell triggers are reached, don’t take the trade. At this point, the trader should begin to closely monitor the trade to identify the potential turning point, knowing that at .45% the change in trend they are looking for is likely to start.
This is an imperfect trading approach, as it’s more art than science, but determining the median will develop patience in your trading approach. Having a certain level of patience is critical to learning to control your emotions when engaging with the market.
The second element you need to account for is time. What I mean by this is how long did it take for the trade to either bottom out or peak after you entered the position.
You should be able to assess this based on your entry time stamp and the time stamp of when the stock peaked.
Your analysis on the chart should look something like the following:
Time Delta
In the above example, we are using the 1-minute chart, but if you have access to tick charts, then great. Whatever the lowest time frame available on your platform is what you should use to calculate the time of the low or high. Your entry of course is time stamped, so no need to figure that one out.
Okay, now that we have all of the time deltas between your entry and the final high or low, you should get a range like the following:
| 1:24 |
| 2:05 |
| 2:17 |
| 2:34 |
| 3:10 |
| 4:34 |
| 6:45 |
| 8:54 |
| 10:11 |
| 11:30 |
Since we are using an even data set, we will take the two numbers in the middle (3:10 and 4:34) and divide by 2, which gives us a median value of 3 minutes and 52 seconds.
This means that on average you are 3 minutes and 52 seconds early to the party. As you can see in day trading, minutes can literally mean the difference between large gains, small profits or a loss.
Similar to price, timing should also give you an indication of the level of patience required of you to improve your trade entry.
Trade execution is actually the easiest part to cover in this article. In any business, you have to know exactly what you are paying for in terms of goods or services, in order to determine your margins. Why should trading be any different?
To this point, I only use limit orders for placing trade entries. If you use market orders, then you are in the dark with how close you will be to your target entry point. Based on the example we have covered today, where the trader is only off by .45%, a market order on a stock with a large bid/ask spread could make or break our entry.
Where does this leave us? In this example, we know that on average we jump the gun by .45% and are 3 minutes and 52 seconds early. These are now your guideposts for future trades.
Again, you should not adjust your system in any way, because this baseline would no longer be applicable. Therefore, on a go-forward basis, once your trade trigger is hit, you need to take a deep breath and let the trade develop as you know that both price and time still have a bit of work to do.
Remember, if you can improve your entry price, you will reduce the number of times your stop loss orders are triggered. So, this is more than analysis, you can keep more money in your pocket.
The Tradingsim platform can allow you to quickly place hundreds of trades in a matter of a few days using real tick data. To see how we can help improve your trade entry and execution, please visit our home page.
Much Success,
Al
The post How to Improve your Trade Entry and Execution appeared first on - Tradingsim.
