StockFetcher Forums · General Discussion · The ABC of Stock Speculation<< 1 2 3 4 5 >>Post Follow-up
nikoschopen
2,824 posts
msg #40943
Ignore nikoschopen
2/3/2006 12:34:25 PM

This excerpt is taken from Marc Friedfertig & George West's "Electronic Day Traders' Secrets" (1999):

"Downside" is just another polite term for losing money. Know where the stock is coming from. That means know where the stock has been. Have some idea where it's traded -- yesterday, today, the hour, or the minute. Anytime I jump into a stock where I just buy or sell based upon movement of that stock, 85 percent of those trades are losers. Moreover, take profit when you can, not when you have to. Remember, you're never better than the market.


TheRumpledOne
6,358 posts
msg #40945
Ignore TheRumpledOne
2/3/2006 1:16:23 PM

"alf44
- Ignore alf44
modified 2/3/2006 10:16:16 AM

niko,

Reading every word !

Those '85 quotes from Magee could've been made yesterday.

They are as relevant now as they were then !


Regards,

alf44 "

allf44:

I think that's your best post ever!




nikoschopen
2,824 posts
msg #40969
Ignore nikoschopen
2/4/2006 2:21:49 AM

METHODS OF READING THE MARKET

The market is not like a balloon plunging hither and thither in the wind. As a whole, it represents a serious and well considered efforts on the part of far-sighted and well-informed persons who adjust prices to such values that are expected to be met in the not too distant future. In reading the market, therefore, the main point is to discover what a stock can be expected to be worth in the foreseeable future. It is often possible to read movements in the market very clearly in this way. Consider the following scenario. There comes a time when a stock with a flurry of activity stays within a narrow range of prices, say 2 points, for an extended period until there has formed a long horizontal band. The formation of such a band sometimes suggests that the stock has been accumulated or distributed and this leads other people to buy or sell at the same time. Records of this kind kept for the last fifteen years seems to support the theory that the manipulation necessary to acquire stock is often detected in this way.

Records also show that in many cases when a stock reaches a new high it will often have a moderate decline followed by another rally towards the previous high. If after such a move, the price again recedes, it is liable to decline even furthere than the previous pullback. The trouble with this system, however, is that the small swings are always part of the larger swings, and while the tendency of events equally liable to happen is always toward the precedents of the past, it is also true that every combination of events will trigger the most unexpected movements in the market. For instance, there comes an extraordinary number of days when either advance or decline seems to fit properly into the theory when regarded on a secular level, and yet they defy all textbook definition when based on the expectation of a series of short swings.

A much more predictable theory is the one based on the law of action and reaction. It seems to be a fact that a primary movement in the market will generally have a secondary movement in the opposite direction of at least 3/8 of the primary movement. If a stock advances 10 points, it is very likely to have a relapse of 4 points or more. The law seems to hold good no matter how far the advance goes. Of course, it is impossible to tell in advance the length of the primary movement, but the further it goes the greater the reaction will be. Hence, more certain will you be able to trade successfully against that reaction if and when it does finally come.

Within limitations, the future can be foreseen. The present is always tending towards the future and there are always in existance conditions that signal imminent dangers for those who read with care. Likewise, a band of smart money usually tests the water before plunging in. In effect, s/he who seeks to advance the market does not buy everything in sight, but puts up two or three leading stocks either by legitimate buying or by manipulation. S/he then watches the effect on the other stocks. If sentiment is bullish, and people are disposed to take hold, those who see this rise in two or three stocks immediately begin to buy other stocks and the market rises to a higher level. This is the public response, and is an indication that the leading stocks will be given another lift and that the general market will follow. If, however, leading stocks are advanced but others do not follow, it is evidence that the public is not disposed to buy.


alf44
2,025 posts
msg #40976
Ignore alf44
modified
2/4/2006 10:56:04 PM

TheRumpledOne,

If...I repeat..."If"...that was supposed to be a compliment...you need to work on your delivery a tad !

Apparently...your "talent" for condescension is so developed...that even when you try to pay someone a compliment...you insult them !


Regards,

alf44



PS. Sorry for the off-topic niko !



nikoschopen
2,824 posts
msg #40988
Ignore nikoschopen
2/5/2006 4:30:53 AM

Marcel Link, in his "High Probability Trading" (2003), makes no bones about the importance of utilizing exits and stops in ure trading arsenal, which I echo for ure benefit.

______________

EXITS & STOPS, PART I

Many traders expend too much effort finding entry signal and patterns and not nearly as much time as they should exiting a position. Anyone can enter a trade, but one of the keys to success is knowing when and how to exit it. I would venture to say that most trades are profitable at some point, even those made randomly; by having good exit strategy one can learn to capture more profits and lose less.

Getting into a position is only one piece of the trading equation. Knowing when to get out on both the losing and winning sides is another and probably the more important aspect of trading. Most losing traders lose because their winners are too small compared with their losers. A lack of good profitable trades can hurt a trader as much as all his losing trades will.

Probably the most quoted rule of trading is "cut your losses and let your profits ride." Surprisingly, many traders do just the opposite. They quickly dispose of the winner while holding on to their losers, praying for a reversal as they watch them sink even lower. Until a trader can learn to get out of a losing trade, place a stop properly, hold on to a good position, and know when to take a profit, s/he will find it hard to be successful.

1) Getting Out Too Soon

There is no feeling worse than missing a great trade because you erred on the side of safety and exited prematurely. Some traders are so concerned about taking profits and having a high winning percentage that they take many small winners because they are scared to lose. Taking too many small profits without letting good trades develop is a bad practice that may keep you from becoming a big trader, as you never allow a potentially powerful trade to get going. Sure, you will have more winning trades and a higher win/loss percentage, but this may come at the expense of total profits in the long run. There are traders who do quite well by repeatedly taking small profits, but what is key for them is that "they take even smaller losses".

2) Letting Profits Ride

Nobody can ever accuse me of getting out of winning trades too soon; I always hold on if something is working. My problem has always been holding losers longer than I should, not letting profits ride.

When a trade is going your way, you want to hold it as long as possible without giving back profits. It takes only 1 or 2 good trades to make up for 10 small losing trades, and so if you are in a good trend, stay with it. Have a trailing stop or retracement level you are willing to let a profit retreat to, and if it doesn't hit it and you see no other reason to exit, hold on for the ride.

One way to hold on longer is to have a plan in advance that keeps you in the market until a certain target or condition is met, unless of course you get stopped out. By having a target or condition you will avoid the temptation of getting out with a quick profit.

There will be time when you feel that it is time to exit a trade with a winner, such as after a big buying climax, where the market makes a big move on increased volatility. This is normally the time to get out with a winner instead of giving it the opportunity to come back. After a big move the odds are strong that the market will retrace a bit, and so it is smart to take some profits. You can always get back in when the market stabilizes.

3) Losses are More Important than Winners

Just as every real estate investor knows that the three most important things are location, location, location, a trader should know that cutting losses, cutting losses, and cutting losses are the three keys to successful trading. Even more important than how much you make on a trade is how little you lose on the losses. When you are considering exit conditions, the first thing you want to know is where you will be getting out with a loss that will not do much damage.

Only after you know what your worst-case scenario risk is should you even bother thinking about how much you can make. Losing positions must be closed as soon as possible. Staying in a bad position because one doesn't want to take a loss is not how a trader makes money. LEARNING HOW TO LOSE PROPERLY IS ONE OF THE MOST IMPORTANT ATTRIBUTES OF A SUCCESSFUL TRADER. Though holding on to a good trade that is working is critical, unless you know how to exit bad positions, you won't get very far as a trader.

One thing you should try to get into your head is that a loss is different from losing. Every trader will have lots of losses; they are part of trading. Losing, in contrast, is the result of letting little losses become large losses. The more quickly you understand that losses are normal and are expected half the time, the sooner you will be able to exit bad trades immediately. A WINNING TRADER IS ONE WHO KNOWS HOW TO LOSE PROPERLY.

There is also a fine line between cutting losses short and taking loser too quickly without giving trades a chance to work. You need to let trades develop, but you also need to be quick to get out when you know you are wrong. A good exit strategy will be a mixture of letting trades work to their best potential and not letting any trades hurt you.


nikoschopen
2,824 posts
msg #41004
Ignore nikoschopen
2/6/2006 2:54:11 AM

______________

EXITS & STOPS, PART II

4) Exit Strategies

The problem many traders face is that they don't know what to do when they have a gain in position. The right choice will ultimately hinge on the market condition, your target goals, and your risk levels, but some of the strategies you may use are outlined below.

● Exiting in Stages

As part of a good exit strategy one should learn how to scale out of a trade in stages. One may do better by scaling out of a trade by taking profits on a portion of the position and hold the rest in case the market continues its move. By doing this, at the worst you should make some money. If the market starts to go back up, you can always take advantage of the strong move by adding to the position you have left. But while the market consolidates and runs a risk of coming off, you are at least cutting your exposure and booking some profits.

You have to be strict with the exits on the losing side as well. If it doesn't work immediately, you want to exit a third of your position quickly; with the other two-thirds you may use your normal stop area or exit when you know the trade is hopeless.

● Getting Out When It's Time (Namely, When You Want to, Not When You Have To)

Everyone has experienced a trade that started off great only to turn out to be a loser or a trade that went from a small loser to a real big loser. Many times you know you should be getting out, but for some reason or another you miss the chance and get stuck in the position. FAILING TO EXIT A TRADE WHEN IT IS TIME TO DO SO WILL BE COSTLY. Once an exit is missed, a trader has two choices: wait for the next opportunity to get out or get out no matter what the price is. Waiting for the next chance or hoping to get bailed out is how a trader can wind up in a deep trouble. Once you know you're wrong, you should exit the trade without looking back.

● Exiting When the Resons Why You Entered Have Changed

Once the reasons you got into a trade have changed, you should get out of the trade. Accepting the fact that you were wrong and exiting the trade is very important. It doesn't matter if you are up or down; once the reason you made the trade is no longer there, you should be thinking about getting out. For example, if you bought a stock because it was strong relative to the market but it no longer seems strong, exit the trade. If you get into a trade because of a support level or some indicator and it fails to do what it should do, don't wait to get stopped out; as soon as you know you are wrong, get out. If you buy because the market is near a trendline and you think it will continue to trend, but once it breaks that line, don't hesitate to get out at a moment's notice.

5) The Goal of the Stop

The first and most important goal of a stop is to control losses. This is what keeps trader in the game for the long run, giving him a chance to succeed. Without stops a trader can let bad trades get really out of hand and could lose track of his game plan. To be a successful trader one needs to know how to preserve capital. This is done with good money management skills, risk contrl, and knowing where to place stops. Knowing where you will get out before trade is made is important so that you can manage risk and determine if the risk/reward ratio makes the trade worthwhile.

Stops should be an important tool in any trader's arsenal of weapons, but many traders don't know how to use or place stops. They may place stops randomly, not basing them on what the market suggests a good place may be. Instead they have a dollar amount they are willing to lose and use that for a stop. In placing stops, it's critical to place them where the market suggests is a good place to put them, instead of basing them on how much a trader can afford to lose. Otherwise, stops can become too close and trades that could have been good may be stopped out as losers because they were never allowed to work. Even worse is the situation where stops are too far away and a trader loses more than he has to.

On the other hand, you never need to wait to get stopped out. If the trade feels wrong, just exit it even if it's barely against you or slightly in your favor. This can save you a lot of money in the long run. Say you got into the market because of a breakout and it fails to follow through as planned; instead it just lingers. There is no need to wait until the market hits your stop level to get out. If it isn't working as it should, odds are that eventually it will hit your stop so why not take the small loss now and try again later?


EWZuber
1,373 posts
msg #41060
Ignore EWZuber
2/7/2006 11:45:49 AM

One problem with using stops is that if they are posted stops you can get stopped out prematurely by a swing below technical support only to have the candlestick close above support. This is why I typically only use mental stops and set an alarm at support to alert me to a test of support.
Todays test of support of the QQQQ is an example.

http://server3.pictiger.com/img/140607/picture-hosting/qqqq-5-min-chart-2-07-06.php


nikoschopen
2,824 posts
msg #41061
Ignore nikoschopen
2/7/2006 11:51:31 AM

EWZuber,

There are more to come, especially the misuse of stops.


nikoschopen
2,824 posts
msg #41085
Ignore nikoschopen
modified
2/8/2006 4:02:24 AM

______________

EXITS & STOPS, PART IV

7) Why Stops Get Hit

The main reason stops get hit so often is that the masses tend to place them all in the same place and the floor brokers and pros know where that is. Besides having the unfair advantage of brokers on the floor actually telling each other where they have stops, they also know that traders are very predictable. People tend to place stops too close to technical barriers that are a stone throw from being elected; it doesn’t take much to get the market close to them and then push it a little more to reach those stops. After a quick burst as they get elected, the momentum dies out, the market snaps back, and the floor traders start liquidating, having gotten into the market at the highs.

Some traders end up having stops that are too tight and don’t give their trades the room they need to develop. This is influenced by the fear of losing too much money on any trade, taking the saying “Cut your losses” too seriously, or not having a clue where to place a stop technically. Hence, poor traders place their stops within the market’s regular movements or inside a trendline and then get frustrated when they are stopped out near the low of the move. They may have been correct in their assessment of the market, but if they entered at a bad level or the market was volatile, they would get stopped out, not having given themselves enough room to take advantage of the pursuing move. After they were stopped out and the market started going the way they thought it would, they might get right back in – usually at the same place where they entered before.

Stops that are too tight are a surefire method of losing money. Yes, losses will be small, but by placing stops within the regular trading range of the market, these stops will be hit and many trades that could have been winners will end up being small losers because they were never allowed to develop.

The flip side of having stops that are too close is having stops that are place farther than they need to be. Having stops that are too far is senseless. If someone is using a set dollar stop, he can end up putting the stop way beyond a safe place. What happens then is that the market goes to where a proper stop should have been and then keeps on going, eventually reaching the stop. A trader may end up losing $500 when he should have lost only $300. There are times, however, when a stop has to be placed at a great distance away from the market, such as when there has been a substantial move. In such a case, a trade should not be taken since the risk far outweighs the reward. It is better to wait for a safer opportunity to come along than to risk too much.

Stops should not be based on how much you can afford to lose; instead, they should be placed where the market tells you a good spot is. To avoid getting stopped out needlessly, never place a stop where you think the market should go; place it a safe distance away from where you gut tells you. Never place stops near technical levels such as trendline, moving averages, previous highs and lows, congestion areas, and round numbers such as 10,000 in the Dow. These are too obvious and are very likely to get hit. When a market has made a triple top, you can be sure that there are loads of stops just above that area, which traders may try to trigger. At least the pros know that that’s where there is easy money to be made. If the market is just drifting around by these levels, it doesn’t take much for a couple of locals to lift it a few points to hit those stops. Since these moves are not based on proper fundamentals, the market tends to come right back to where it was before the push. Remember, don’t place stops at very obvious levels; think twice about where you are placing them and use a little bit of a buffer to give you some breathing room.





nikoschopen
2,824 posts
msg #41050
Ignore nikoschopen
modified
2/8/2006 6:00:07 PM

______________

EXITS & STOPS, PART III

6) Types of Stops

● The Money Management (MM) Stop

This is the kind of stop where you get into a trade and place a stop that allows you to lose only a fixed dollar amount. The goal of these stops is to prevent a trader from losing more than he can afford to lose on any given trade, but in my opinion, these are the most commonly misused stops there are and should not be used the way people use them. The problem rests with the fact that the stops are placed with no regard to what the market is doing. Risk is as much a function of the market as it is of what a trader can afford to lose.

MM stops also can be a problem when one is trading different markets. Some markets are more volatile than others, and what may be a good dollar amount stop in one may not be so good in another. Using an arbitrary dollar amount to risk is a lazy man's stop, and everyone knows the lazy way is never the best way to do anything. Finding a good stop area takes work and is based on technical analysis, not on how much a trader can afford to lose.

The proper way to use a MM stop is in conjunction with a technically placed stop and the size of your position. By this I mean that first one should know how much one feels comfortable risking and is willing to lose on any single trade. A trade should never be made without knowing first how much is at risk and how much one can afford to lose.

● Percentage Move (PM) Stops

As with MM stops, a PM stop will tell you how much it is okay to risk on a trade but should be used only if it is technically feasible. With a PM stop one can use the market itself as a way to figure out the most one is willing to risk per share. For example, one could risk, say, no more than 30 percent of the daily average true range on any given trade. When I'm day trading, I try not to allow myself to lose more than 25 to 30 percent of the average true range of a stock on any single trade. If a stock has a true range of $2 per day and I'm down more than 85 cents, I know I'm doing something wrong.

Always use a higher time frame in figuring out the percentage you are willing to risk. If you are holding trades for the long term, you should get the true range of a weekly or monthly chart to figure out how much is an acceptable loss.

● Time Stops

Stops do not always have to be set by the market or on how much money you can afford to lose; they can also be time stops in which you give the market a limited amount of time in which to work itself out. If it doesn't work, you get out.

One of the important reasons for using time stops is that one sometimes have a habit of holding on to losers for too long. Maybe the stock is down only marginally and is not hurting you, and so you ignore it. As time progresses, it becomes 20, 40, 60 cents, and before you know it you've held a bad trade for over 2 hours and are out almost a dollar. Now you really don't want to get out because you want your money back.

Time stops helps you to liquidate your position before it can do you a great harm. A trader should have an expectation of what he wants the market to do and a time frame for it to do it in. If the market doesn't, he should consider exiting the trade -- win, lose, or draw. Depending on the time frame you use, it can be 1 minute if you're a scalper, 15 minutes if you're a day trader, etc.

I recently started using these stops as a way to get out of dead positions. If I'm day trading and have a position that is not working after 30 minutes, I get out because I know my money and energy are better spent elsewhere. If a trade was good, then it should have started working immediately. Things that start off badly usually end badly.

● Technical Stops

Here is the proper way to place a stop: let the market tell you where it should be placed. Stops that are based on what the market suggests is a good place to let you know you are wrong are the best stops. The advantage of using the market to determine risk is also that the risk becomes clearer and can be kept small. If it appears that the risk on a trade is too large, the trade is not a high probability one and should be avoided. Don't worry about missing trades. The worst thing that can happen is that you won't make any money. Not making money beats losing money every time, and there will be countless more chances to trade.

There are many ways to use technical analysis to place stops. They can be placed outside trendlines, moving averages, channels, support and resistance lines, the low of X bars ago, below a Fibonacci retracement level, or at previous market lows or highs. These are areas the market is likely to come to, and if they are broken, that may indicate a change in the direction of the market.

Chart 9-3¹ includes a couple of trades one can make. The first one (Point A) is a breakout of a previous high. If a trader made this trade and could afford to lose only a dollar per share, he would have to place a stop at N (which stands for "no"). This stop is very likely to get hit as it is above the channel and trendline and in the middle of nowhere. It doesn't get hit, but nevertheless it is a poorly placed stop. The better stops are at Level 1, under the channel line, which coincides with the previous low of the market. If the market breaks that level, the next stop will be at Level 2, which is a better place to have a stop as it is below a major trendline. Finally, one definitely would want to be out if it broke at Level 3, a recent major low. Overall, I don't think this is a great trade as the stop levels are quite a distance away. However, at Point B there is a great trading opportunity as one cold get in and risk to the channel line at Level4, which is pennies away. Levels 5 and 6 are similar to Levels 2 and 3. Needless to say, the stops at Levels 3 and 6 are just too far away at about $7 per share, and so they would be out of the question. The stops at Levels 2 and 5 are more modest but still a little too far away for the day trader and should be used only by a long-term trader. The stop at Level 1 is still a bit too far off, and so that trade could be ignored in this time frame, but since the stop at Level 4 is a technically good stop and is close to the market, it is a great place to take a trade. Tight stops are okay to have when they are technically correct. There is, however, one other possibility a trader could consider. Since the trade at Level A is a breakout, it could be taken, and one can use a move below the break line as a stop.


__________________________________
1. Chart 9-3 is available at:
http://tinyurl.com/adq6g





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