Archive for the ‘Trading Method’ Category
What trips up the vast majority of traders so they never quite make the transition from new trader to good trader?
Not being able to deal with the stress of trading: this is caused primarily from a lack of faith in themselves and or their method.
They lack the ability to pull the trigger when it is time to enter a trade or cut a loss.
Some people just can’t overcome the fear of losing money both in the entry and exit.
Many traders just do not have the discipline or work ethic to create a trading plan through proper homework.
Most traders have no trouble over analyzing the markets to death with enough indicators to make someone go cross-eyed. Many traders read enough books to know how to trade, many follow enough different people online that they get so confused they do not know what to do. Most traders spend far to much time in front of the computer all day watching the prices tick. The majority of traders would really quit trading if they added up the amount of time they spent for the privilege of losing money.
What is the key to over coming the barriers to success in trading. A GOOD TRADING PLAN, not a few rules I mean a complete plan. A plan that you 100% believe in based on your own studies and back testing. Your own personal plan that YOU created, not someone’s opinions.
What needs to be in there?
The Trading Plan comes first and should account for the following parameters:
1. Entering a trade. Quantified approved entries.
2. Exiting a trade. Predetermined Exit point BEFORE you enter a trade.
3. Stop Placement. How will you know you were wrong about a trade? A stop loss, trailing stop, chart signal, volatility stop, time stop, or target price.
4. Money Management. How much capital will you risk on any one trade? This is the key to position sizing.
5. Position Sizing. How much capital will you put on any one trade? Do you have rules that tell you to trade bigger or smaller based on the odds?
6. What to Trade. What qualifies stocks to be on your watch list?
7. Trading Time Frames. Are you going to day trade or position trade and hold for a week or more? or will you be a short term or long term trend follower?
8. Back Testing. You need back testing either with a computer, by reviewing charts, or others research to show that your system is a winner.
9. Performance Review. You must keep a detailed log of your trades and watch your performance to understand the wins and losses and their causes.
10. Risk vs. Reward. Each trade must begin with the potential of winning more money than you are risking.
This is a very basic outline, I suggest expanding this to include 30 rules minimum; 10 each covering the areas of risk management, psychology, and method. If you can write this, believe it, and follow it, you will win in trading the only question that remains is when?
The biggest question I have received today from everyone, new traders, friends, family, even my wife is “What will happen to the stock market if Obama wins?’ or “If Romney wins will the market rally?”
How should we trade the election results? …..Don’t.
Do not let the results color your trading, trade price action, trade the chart, trade your system. Continue to manage risk and stay disciplined. Take your entries and exits just like you have always done inside a winning methodology.
If Obama wins and the market gaps under support tomorrow and begins a downtrend for multiple days then it may be time to go short. If Romney wins and we gap up tomorrow and the market starts to trend upwards then it may be time to go long. If the election is too close to call then…trade the chart, trade what is actually happening not your own opinion of what should happen. The answers to how to trade the price action should be based on your methodology and the time frame you trade on not who wins the election.
Everybody wants a prediction but no one has a crystal ball, the best traders I know trade the price action not their own predictions.
Let’s get some perspective here before we believe Apple is going out of business or that the stock is going to $300 or a 6 P/E ratio.
The indexes are holding up very well, the $QQQ is at the 200 day support, The $SPY is holding up at $140 like a champ, and the $DIA is supported at $130. We are in a base not a downtrend in the short term time frame. The market is not currently making lower lows.
The sentiment has become very bearish for Apple on social media this is one sign that most have sold out.
As with all its products since the iPod the doomsayers say that the iPad Mini is weak and just a knock off of the iPad and the iPhone 5 is not innovative enough, I hear the exact opposite from everyone who has purchased either of them, just like with all the other products.
While there is a lot of nervousness around the election and another 4 years for Obama that does not change Apples absurd earnings power and ridiculously low fundamental valuations.
If Apple was trading at a 100 or 50 P/E then I would be fearful of a plunge, but not at a 13 P/E with another block buster Christmas earnings ahead of it.
Apple is not just another tech stock it is a monster stock, the best buy points for monster stocks tend to be at a bounce off the 200 day or a break back above it.
Apple is absurdly oversold at this level by every indicator, the downside risk is minimal compared to the upside gain potential. The $560 price area is a key near term support level, $550 is a support level at the 50 week simple moving average that goes back to April of 2009.
It is very dangerous to short at these levels due to the possibility of snap back rallies at any time they can be quick and vicious as sellers stop selling for lower prices and buyers rush in and bid up the stock.
How many people wanted Apple at the 200 day so bad during the early year run but now when presented with the opportunity are scared irrationally of it being over as a valid growth stock. If this is not the end of the story for Apple then this is the buying opportunity everyone has been waiting for. The odds are that this is not the end, just a rest period before it returns to all time highs just for fundamental valuation reasons.
Of course trade this stock with a plan, have a high probability entry like the $550 or $560 areas after a bounce or a break back above the 200 day moving average.
I look for the 200 day sma to act as a first level of resistance and a place to take profits on a day trade or where this may be a short entry point for a day trade. The $600 price level will likely act as the second level of resistance, the century marks are places where traders like to take profits and put on new short plays.
Apple is THE best stock to play options on due to their liquidity, plentiful price strikes, and weekly options
I am not letting this opportunity pass me by, investors, option traders, growth stock investors, and day traders should all have this on their watch list and trade or invest with it based on their own methodology with out being blinded by FEAR.
Another interesting possibility if the bears really roar is the very long term 50 week moving average in the $550 area on the weekly chart, this level has not been breached since April 2009 around the bottom of that bear market.
In trading, activity alone does not make money, the right activity at the right time is what makes money. Many times the right thing is to do nothing. Over trading is one thing that causes traders to lose money. You can not make money every day in every trade. Every trade is an exposure to losses, your capital should only be exposed to risk when you have an edge. Sometimes their are set ups and sometimes there are none. Trend Followers should only be trading trends. CAN SLIM investors should only be taking break outs from cup with handle patterns or bounces off the 50 day moving averages. Chart Pattern traders should only take entries off pattern set ups. Traders have to follow the entries that are in their trading plan. Even discretionary traders should only be entering based on their rules when their experience tells them the odds are in their favor. Your entry should be putting 1% of your capital at risk with the odds being you will return $3 for every $1 you have risked.
In your trading you have to do four things very well to make money.
You have to know when to get in.
Only enter trades that have the highest probability of success and the best risk/reward ratio. Buy the best monster stocks during up trends. Short the fallen leaders when the game changes and they are under the 50 day. Buy the monster stocks at the gift of the 200 day moving average at the first few tests. Short down trending junk stocks. Go where the trends are. Only take your best entry signals. Trading is not like baseball you do not get strikes, you can wait for the pitch you want.
You have to know when to get out.
When your trade reverses through a key support get out. When the market up trend reverses get out of your long positions. When your stop loss is hit, get out. When the stock reverses and hits your trailing stop, get out. When you have lost 1% of your trading capital, get out. Money is made on exits not entries and trading accounts are ruined by not taking stop losses when they are hit.
You have to know when to stay in.
If you enter a trade with the potential to trend let it run as far as it will go. Set a soft target, trail your winning trade with a stop. Let the trend tell you when it is done running. Do not cut your winners short, the only way to win in trading is if your winning trades are more than your losing trades.
And most importantly you have to know when to stay out.
If you do not know what to do, do nothing. If the charts confuse you, stay out. If the volatility is escalating and you are losing in every trade, stay out. If you are a trend trader and you see no potential trends, stay out. If you want to go long but all the stocks you want are going down, stay out. Wait until you see patterns, trends, and good entries emerge from the randomness and chaos, until then, do nothing. The one entry that has saved me the most money is going into cash and waiting for a storm to pass.
I love trading liquid weekly options, they are amazing tools if used correctly. Weekly options give a trader leverage, risk management, asymmetric trades, and the ability to make triple digit returns with capital at risk. I know of no other tools that have such upside and limited downside. And many of the weekly options in SPY, AAPL, and GOOG are very liquid to get in and out of so you do not lose money in the bid/ask spread like you do with so many farther out dated options that have so much less open interest. I use weekly options as surrogates for stock, I trade in-the-money weeklies to capture directional trades. Weekly in-the-money-options can be used like synthetic stock option plays to create the same dynamics of owning the stock without the downside risk of the short option leg of the trade. Of course long weekly options are a net debit instead of a selling a short option to buy a long one and create the synthetic stock option play that acts just like owning the stock. That is how I use weekly options, to own the movement of a stock in the cheapest way possible.
I get a lot of bang for my buck. There are many times on Thursday and Friday that I can control 100 shares of Apple or Google for $500-$700 .
With weekly options I get the full upside potential of a trade moving in my favor but the downside is capped by the price of my option contract.
It is easier to manage risk, if $700 is 1% of your trading capital you can buy a $700 weekly option contract so it will be impossible to lose more than 1% of your capital no matter how it moves.
On Thursday and Friday in-the-money options have a .95 delta and capture 95% of a move, you just have to be right about the direction not the price like you do with out-of-the-money monthly options.
Weekly options are versatile, you can roll them over for trend trades or just trade them for day trades.
Apple and Google weekly options can be traded with the commission costs of just one contract to control $60,000 worth of stock.
Weekly options are very liquid in weekly Apple and Google options so the bid/ask spread does not cost a lot of money to get in and out of the options.
While trading weekly options you do not need a margin account just an option account.
You can get 100%-300% return on capital at risk in one day while trading weekly options. That is an amazing asymmetric one day trade, what stock can do this.?
I can use weekly options the exact same way I trade the stock. I can trade for Delta only with no need for fancy option strategies.
You can trade weekly in-the-money-options for pure intrinsic value with almost no time value that you have to over come.
Trading weekly options turns down the emotional volume of a trader by only having a few thousand at risk instead of tens of thousands at risk in a trade.