The markets have had everyone confused for many months now with all the bad news and volatility. Just when everyone expects there to be a strong move down because of all the bad news in the financial sector, somehow, the resiliency of the market comes through and proves the majority wrong with a strong move to the upside instead. These moves sometimes end up scaring the weak shorts out of their trades and they end up just getting whipsawed in and out.
These strong moves up, like Friday, could be just bear market rallies but nevertheless, if you are caught short during one of these rallies, you end up losing money on a day when the market goes higher. Nobody likes to lose money but when you lose it when the market is going up, it is the worst possible scenario that could happen.
A Post on our Board from Friday
Here is something I posted to the StockTradersHQ.com message board on Friday about being caught short on a big up day. In case anyone missed it, I think it warrants repeating.
“One thing that I have always hated to do is lose money when the market has a big up day like today. I can accept losing money if I am long and the market goes down but if the market goes up, I can't stand to lose money by having short positions on. This is probably the biggest reason I don't short much. We never know when a short covering rally or a technical bounce in a downtrend will happen and if you get caught short, you lose money on an up day and for me, that is unacceptable”.
Why is that post important?
It is important because I want people to realize why I don’t fight the trend. Whether that trend is only for a day (trend day) it is still a trend albeit small. You will rarely see me post a day trade short position no matter which way the market is trending for the day. If the market is trending up, I go long (Not short). I never fight the trend and I never try and pick a top to short, no matter how much resistance I see on the chart. Why? Because momentum can at times dwarf all resistance levels and blast through them, overshooting on the upside, taking out the stops of the short sellers. When the market is trending down for the day, I will only short stocks that are also moving down. I will not short the stocks that happen to be moving up that day. Instead, I may get long those stocks that are showing relative strength that day when all other stocks and the market are heading lower. My positions in these stocks going up on a down day will be smaller than normal because even though the stocks are moving up with momentum, they are still moving against the market for that day so those trades are of greater risk.
Personal Preference
Obviously, it doesn’t matter whether the market moves up or down as long as you are on the right side of the market so it shouldn’t matter either way but for me, it’s more of a psychological factor. Since it is a statistical fact proven over time throughout market history that the market spends more time going up than it does going down, the logical position to be in when playing the odds is to be long the market rather than short. For this one reason alone, it is a cardinal sin for any good trader to lose money when the market is going up. For me personally, I can accept losing money, when the market goes down if I happened to own stocks. But it is unacceptable for me to lose money on a day the market is going higher.
Please understand that I’m not against shorting stocks, it is just a personal preference of mine to be on the side of momentum. I want to make it clear to members so that there is no confusion; so for my personal day trading activities, I will always be long on days the market is moving higher. I will sometimes be long the stocks of the day that are moving up even if the market itself moves lower for the day. And I will sometimes be short but only short the weak stocks moving down when the overall market is moving lower that day.
David Colletti
Founder
StockTradersHQ.comThe Headquarters for serious traders
Copyright © 2008 StockTradersHQ.com
Saturday, August 23, 2008
Thursday, August 7, 2008
The Dreaded Price Target
One of the most common requests that we receive both in email and on the message board is for us to supply price targets with our trading alerts. This is a reasonable request since most people want an idea what our objective is when entering a trade.
Although price targets may give some piece of mind to a trader when a position is entered, we believe that these target prices actually do more harm than good. Tonight we will explain this philosophy.
Price targets are irrelevant and to back up our stance, we need to look no further than to those brilliant Wall Street Analysts. Analysts price targets are meaningless and if we trade based on these price targets, we are setting ourselves up for not only losing trades but serious time involved and opportunity costs related to waiting for those targets to be reached if ever they are.
Price targets can often result is a false sense of security about a certain stock. They can also cause a pre-mature selling of a position due to the fact that a price target may have been reached. So what if the price target is reached, does it mean the stock can’t go up further? In my early years in the stock market, I would sell stocks after I reached a certain percentage gain on each trade. It was a good conservative plan, but I never made the huge gains because I never let the winners run long enough to get those big gains. I sold too early. In bull markets, it is essential NOT to sell too early. When you are right on a stock in a bull market, your goal should be to be even “righter”. In flat or sideways markets, things will change; you may have to sell at certain price points but not in Bull markets where there is an identifiable uptrend in the overall market. We are not in a bull market right now but there will be one again at some point and we want you to be prepared for it.
Logical Targets in an illogical Market?
Most if not all price targets set by institutional analysts are set based on fundamentals. Rarely are these targets based on technical analysis of the stock chart. If we at STHQ were going to set a price target for a trade, it would be based solely on the chart and the resistance levels and other technical indicators would also come into play. However, we have found that technical price targets are often just as irrelevant as fundamental price targets. While we may often say that a certain stock we are trading or watching may have resistance at a certain price point, we try to not to label that as a price target. Rather, we prefer to think of this area as a level of interest that we should be watching and re-evaluate our trade as the stock approaches that level.
The reason we do this is simple; if resistance was always stubborn and sent stocks reversing in a downward spiral, then stocks could never advance. We know that resistance is penetrateble so we would much rather evaluate our trade as the stock approaches or reaches this resistance level rather than pre-announce that level as the final objective.
Also, as you know by now, the technical picture of a stock changes every day. A strong technical chart can change quickly with one bad new release and large volume selling. Setting price targets ignores this action. The day-to-day fluctuations and changes that occur in the technical picture cannot be ignored.
There are technicians that use what we call “measured moves” to determine price targets. For example, when there is a wedge pattern on a chart, a breakout of the wedge suggests the move will be the same distance from the bottom to the top of where the wedge pattern started. We have used the measured move target to predict where a stock would go before but this doesn’t mean we are setting that level as a price target to get out of the trade. When people use these targets to get out of trades, this suggests orderliness about the market that just doesn't exist. The market is anything but orderly so planning an exit based on what seems to be a logical price target does not make sense in an illogical market.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for serious traders.
Copyright © 2008 StockTradersHQ.com
Although price targets may give some piece of mind to a trader when a position is entered, we believe that these target prices actually do more harm than good. Tonight we will explain this philosophy.
Price targets are irrelevant and to back up our stance, we need to look no further than to those brilliant Wall Street Analysts. Analysts price targets are meaningless and if we trade based on these price targets, we are setting ourselves up for not only losing trades but serious time involved and opportunity costs related to waiting for those targets to be reached if ever they are.
Price targets can often result is a false sense of security about a certain stock. They can also cause a pre-mature selling of a position due to the fact that a price target may have been reached. So what if the price target is reached, does it mean the stock can’t go up further? In my early years in the stock market, I would sell stocks after I reached a certain percentage gain on each trade. It was a good conservative plan, but I never made the huge gains because I never let the winners run long enough to get those big gains. I sold too early. In bull markets, it is essential NOT to sell too early. When you are right on a stock in a bull market, your goal should be to be even “righter”. In flat or sideways markets, things will change; you may have to sell at certain price points but not in Bull markets where there is an identifiable uptrend in the overall market. We are not in a bull market right now but there will be one again at some point and we want you to be prepared for it.
Logical Targets in an illogical Market?
Most if not all price targets set by institutional analysts are set based on fundamentals. Rarely are these targets based on technical analysis of the stock chart. If we at STHQ were going to set a price target for a trade, it would be based solely on the chart and the resistance levels and other technical indicators would also come into play. However, we have found that technical price targets are often just as irrelevant as fundamental price targets. While we may often say that a certain stock we are trading or watching may have resistance at a certain price point, we try to not to label that as a price target. Rather, we prefer to think of this area as a level of interest that we should be watching and re-evaluate our trade as the stock approaches that level.
The reason we do this is simple; if resistance was always stubborn and sent stocks reversing in a downward spiral, then stocks could never advance. We know that resistance is penetrateble so we would much rather evaluate our trade as the stock approaches or reaches this resistance level rather than pre-announce that level as the final objective.
Also, as you know by now, the technical picture of a stock changes every day. A strong technical chart can change quickly with one bad new release and large volume selling. Setting price targets ignores this action. The day-to-day fluctuations and changes that occur in the technical picture cannot be ignored.
There are technicians that use what we call “measured moves” to determine price targets. For example, when there is a wedge pattern on a chart, a breakout of the wedge suggests the move will be the same distance from the bottom to the top of where the wedge pattern started. We have used the measured move target to predict where a stock would go before but this doesn’t mean we are setting that level as a price target to get out of the trade. When people use these targets to get out of trades, this suggests orderliness about the market that just doesn't exist. The market is anything but orderly so planning an exit based on what seems to be a logical price target does not make sense in an illogical market.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for serious traders.
Copyright © 2008 StockTradersHQ.com
Saturday, August 2, 2008
Some Pitfalls of Short Selling
You know bull markets end just when everybody and their brother decide to enter the stock market. Mania brings in any and all people that think there is a quick buck to be made. Bear markets end the same way, when any and all average investors give up and cash out. Or worse, think they can make money by shorting stocks. It is about the end of the bear market when these average investors finally realize there is a way to profit from falling stock prices but by the time they find out, the downtrend is ending. These people will always lead the charge and flood the market in a bull’s final days and be the last to leave the market or start selling short in the bear’s final days. So, now you know that it will be time to go long in a big way when the public finally gets around to selling short.
Short selling can be very profitable if done at the correct time, but can be very frustrating if entries are not perfectly timed. It is never easy to make money in the stock market and selling first, and buying later (short selling) is probably the most difficult way to succeed in trading. In fact, most traders can study a stock chart that is plummeting for hours, and still enter a short sale exactly at the wrong time.
Tonight we will look at some common pitfalls of the short selling trading strategy. After you review this list, you'll understand why short selling can cause so much mental and financial pain and stress.
1. Volatility
A bear market has tremendous overlap in daily price ranges of stocks and indexes. The daily high and low of a stock in a bear market seem to be more volatile in that of a bull market. These wild intra-day trading ranges can make it difficult to trade and set up trades for the next day. Usually, stocks will trade through a portion of the previous day’s range undermining logical stop placement, and makes good entry prices harder to find.
2. Nowhere
Fast Stock prices don’t go anywhere most of the time in bear markets. Though there is intraday volatility, markets will often end flat. Then out of nowhere, prices decline very quickly and in sudden bursts. This means you need to wait around for a while before you get the big sell off that gives you the big gains. Most people are too impatient to hold short positions for a lengthy period of time.
3. Everyone is at the party
Short selling is a terrible group activity. Many stocks have a high short interest and attract latecomers. These latecomers will be scarred out of their shorts as soon as the stock starts to go up. This will result in frequent short squeezes as the weak shorts bail out for a loss, regardless of how technically bad the chart looks. If you short with the crowd, you become most exposed. Don’t short the same stocks as everyone else.
4. Misguided Entries
So you think you're a wizard when it comes to resistance levels? Not so fast. Here’s why: support-resistance is what most traders are looking at and remember, the market always disappoints the majority. This is why price will often go further than you expect, up and down. You could find yourself shorting into bear rallies that keep on going up, and up and up until you give up and cover your position well above resistance. Stocks overshoot resistance and support more times then we’d liked to admit.
5. Too Late Harry
It's often too late to sell short by the time most people realize they should because the sell off is gathering steam. The smart money that shorted from higher levels are already looking to cover by the time most people think it's safe to sell short. The traders that shorted at the top add buying power to the market when they close their positions. That's why the people late to the party short at the bottom and get crushed on a short squeeze.
6.Bill Fleckenstein strikes again
It's the end of the world, stocks should be going down, there is no good news or catalysts to drive stocks higher so you better get short. But, ask yourself “How does the chart look?” You may hate a company and think it's on the verge of collapse and you want to get short to take advantage of the stocks decline. If fact, the whole market should be going down because of the terrible economy. However, none of that matters unless the stock chart is in a down trend. You could be way too early entering your short position based on what you think the stock or market should do. Instead, take a look at the chart. If the stock is still in an up trend, DO NOT take a short position no matter how bad you think you want to.
7. Cat and Mouse
The cheese sure looks appetizing, but there is a spring-loaded mousetrap just waiting for the next short seller. The most obvious selling points on the chart routinely trigger the most violent short squeezes. When it’s too obvious, it will most likely not work.
8. Unbearable Market
Are you sure we are in a bear market? Just because the market looks and feels like a bear market on the daily charts does not mean it is a true bear market. Look at the weekly charts to determine if the trend has changed to down. Many stocks will trade sideways for a long period of time and consolidate in this manner sometimes pulling back from higher levels. This can sometimes look bad on a daily chart but when looking at the weekly charts, this tends to be normal consolidation in a bull market. These charts reveal a balance of buying and selling power, rather than a one-sided rout.
9. Look at the Calendar
Profits from short selling sometimes depends on the time of the month. For example, positions entered around option expiration get burned because of all the put/call unwinding. Also, buying power can surge near month's end, especially during mutual fund window-dressing season. This can make a falling market snap back and look powerful just enough to shake all the weak shorts out. It happens every month around options expiration with uncanny effectiveness.
Conclusion
Please don’t misunderstand this commentary. We are not against shorting stocks, it’s great way to profit from falling stock prices. All we are trying to do here is help you realize and understand the possible pitfalls of such a strategy.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for serious traders.
Copyright © 2008 StockTradersHQ.com
Short selling can be very profitable if done at the correct time, but can be very frustrating if entries are not perfectly timed. It is never easy to make money in the stock market and selling first, and buying later (short selling) is probably the most difficult way to succeed in trading. In fact, most traders can study a stock chart that is plummeting for hours, and still enter a short sale exactly at the wrong time.
Tonight we will look at some common pitfalls of the short selling trading strategy. After you review this list, you'll understand why short selling can cause so much mental and financial pain and stress.
1. Volatility
A bear market has tremendous overlap in daily price ranges of stocks and indexes. The daily high and low of a stock in a bear market seem to be more volatile in that of a bull market. These wild intra-day trading ranges can make it difficult to trade and set up trades for the next day. Usually, stocks will trade through a portion of the previous day’s range undermining logical stop placement, and makes good entry prices harder to find.
2. Nowhere
Fast Stock prices don’t go anywhere most of the time in bear markets. Though there is intraday volatility, markets will often end flat. Then out of nowhere, prices decline very quickly and in sudden bursts. This means you need to wait around for a while before you get the big sell off that gives you the big gains. Most people are too impatient to hold short positions for a lengthy period of time.
3. Everyone is at the party
Short selling is a terrible group activity. Many stocks have a high short interest and attract latecomers. These latecomers will be scarred out of their shorts as soon as the stock starts to go up. This will result in frequent short squeezes as the weak shorts bail out for a loss, regardless of how technically bad the chart looks. If you short with the crowd, you become most exposed. Don’t short the same stocks as everyone else.
4. Misguided Entries
So you think you're a wizard when it comes to resistance levels? Not so fast. Here’s why: support-resistance is what most traders are looking at and remember, the market always disappoints the majority. This is why price will often go further than you expect, up and down. You could find yourself shorting into bear rallies that keep on going up, and up and up until you give up and cover your position well above resistance. Stocks overshoot resistance and support more times then we’d liked to admit.
5. Too Late Harry
It's often too late to sell short by the time most people realize they should because the sell off is gathering steam. The smart money that shorted from higher levels are already looking to cover by the time most people think it's safe to sell short. The traders that shorted at the top add buying power to the market when they close their positions. That's why the people late to the party short at the bottom and get crushed on a short squeeze.
6.Bill Fleckenstein strikes again
It's the end of the world, stocks should be going down, there is no good news or catalysts to drive stocks higher so you better get short. But, ask yourself “How does the chart look?” You may hate a company and think it's on the verge of collapse and you want to get short to take advantage of the stocks decline. If fact, the whole market should be going down because of the terrible economy. However, none of that matters unless the stock chart is in a down trend. You could be way too early entering your short position based on what you think the stock or market should do. Instead, take a look at the chart. If the stock is still in an up trend, DO NOT take a short position no matter how bad you think you want to.
7. Cat and Mouse
The cheese sure looks appetizing, but there is a spring-loaded mousetrap just waiting for the next short seller. The most obvious selling points on the chart routinely trigger the most violent short squeezes. When it’s too obvious, it will most likely not work.
8. Unbearable Market
Are you sure we are in a bear market? Just because the market looks and feels like a bear market on the daily charts does not mean it is a true bear market. Look at the weekly charts to determine if the trend has changed to down. Many stocks will trade sideways for a long period of time and consolidate in this manner sometimes pulling back from higher levels. This can sometimes look bad on a daily chart but when looking at the weekly charts, this tends to be normal consolidation in a bull market. These charts reveal a balance of buying and selling power, rather than a one-sided rout.
9. Look at the Calendar
Profits from short selling sometimes depends on the time of the month. For example, positions entered around option expiration get burned because of all the put/call unwinding. Also, buying power can surge near month's end, especially during mutual fund window-dressing season. This can make a falling market snap back and look powerful just enough to shake all the weak shorts out. It happens every month around options expiration with uncanny effectiveness.
Conclusion
Please don’t misunderstand this commentary. We are not against shorting stocks, it’s great way to profit from falling stock prices. All we are trying to do here is help you realize and understand the possible pitfalls of such a strategy.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for serious traders.
Copyright © 2008 StockTradersHQ.com
Sunday, July 27, 2008
There are some very common mistakes that investors and traders make repeatedly. Unfortunately, these same mistakes have been made since the dawn of modern markets and will likely always be repeated throughout existence of the markets. This is why reading charts are so important. They are a mirror image of investor reaction in the market and reveal the same mistakes over and over again.
You can significantly boost your chances of success in the markets by becoming aware of these typical, repeated errors and taking steps to avoid them. In tonight’s topic we'll explain the most common mistakes and how to avoid them.
1. No Plan If you don't know where you're going, any road you take will get you there. If you have no plan, you can’t get where you want to go.
We recommend having a personal trading plan or policy that addresses the following issues.
Goals and objectives – Have an idea of what you're trying to accomplish using the stock market as your vehicle to get where you want to be. For example, accumulating $200,000 for a child's college education or $2 million for retirement at age 55 are appropriate goals. Just saying you want to outperform the market is not a goal.
Risks - What risks are relevant to you and your portfolio? If you are 25-years old and saving for retirement, the day to day market volatility shouldn't be an issue or meaningful risk. At the same time, a young person 25 years old cannot afford to be too conservative because inflation will erode any long-term portfolio if you do not have enough exposure to growth stocks.
Having a good plan and sticking to it is not nearly as exciting or as much fun as trying to time the markets, but without a plan, you won’t get where you want to be in the end.
2. Time Horizon is Too Short Most investors are too focused on the short term. The stock market is a tool to help you achieve financial freedom but that doesn’t happen over night. It takes time and too many participants want success too fast and get frustrated when they don’t achieve that success. Over time, you will succeed but you have to learn before you earn.
3. Financial Media a Waste of Time Too much attention is given to financial media such as CNBC and FOX Saturday and various shows like that along with newspapers and magazines like Money and Barons. Believe me, I used to read and watch them all when I first started in the markets and not once did they ever help me make any money. In fact, most of the time, I lost money buying stocks they recommended only to have them go down shortly afterward. There is almost nothing on financial news shows and in papers that can help you achieve your financial goals. Instead, we recommend watching the charts on your computer screens. That is where you’ll make the most money.
Conclusion Investors who recognize and avoid these common traps give themselves a great advantage over other market participants who can’t stay away from these common mistakes. The solutions above are not exciting; however, you are likely to have a better chance of profitable trades if you avoid the traps most everyone else falls into.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for serious traders.
Copyright © 2008 StockTradersHQ.com
You can significantly boost your chances of success in the markets by becoming aware of these typical, repeated errors and taking steps to avoid them. In tonight’s topic we'll explain the most common mistakes and how to avoid them.
1. No Plan If you don't know where you're going, any road you take will get you there. If you have no plan, you can’t get where you want to go.
We recommend having a personal trading plan or policy that addresses the following issues.
Goals and objectives – Have an idea of what you're trying to accomplish using the stock market as your vehicle to get where you want to be. For example, accumulating $200,000 for a child's college education or $2 million for retirement at age 55 are appropriate goals. Just saying you want to outperform the market is not a goal.
Risks - What risks are relevant to you and your portfolio? If you are 25-years old and saving for retirement, the day to day market volatility shouldn't be an issue or meaningful risk. At the same time, a young person 25 years old cannot afford to be too conservative because inflation will erode any long-term portfolio if you do not have enough exposure to growth stocks.
Having a good plan and sticking to it is not nearly as exciting or as much fun as trying to time the markets, but without a plan, you won’t get where you want to be in the end.
2. Time Horizon is Too Short Most investors are too focused on the short term. The stock market is a tool to help you achieve financial freedom but that doesn’t happen over night. It takes time and too many participants want success too fast and get frustrated when they don’t achieve that success. Over time, you will succeed but you have to learn before you earn.
3. Financial Media a Waste of Time Too much attention is given to financial media such as CNBC and FOX Saturday and various shows like that along with newspapers and magazines like Money and Barons. Believe me, I used to read and watch them all when I first started in the markets and not once did they ever help me make any money. In fact, most of the time, I lost money buying stocks they recommended only to have them go down shortly afterward. There is almost nothing on financial news shows and in papers that can help you achieve your financial goals. Instead, we recommend watching the charts on your computer screens. That is where you’ll make the most money.
Conclusion Investors who recognize and avoid these common traps give themselves a great advantage over other market participants who can’t stay away from these common mistakes. The solutions above are not exciting; however, you are likely to have a better chance of profitable trades if you avoid the traps most everyone else falls into.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for serious traders.
Copyright © 2008 StockTradersHQ.com
Thursday, July 10, 2008
A Dozen Rules for Trading Fools
1) Lower your position size until you show a track record of good performance. It is better to lose small so your can eventually win big.
2) Always look for favorable conditions to trade from or stay out of the market until they appear. Bad executions will ruin a perfect chart setup.
3) Watch the stock before you enter. Look for evidence to confirm your decision. The volume and trend must support the reversal, breakout or fade you're expecting to happen.
4) Decide how long you want to be in the market before you execute the trade. Don't day trade a stock you want to invest in or invest in a stock that was supposed to be a swing trade. Don’t swing trade a stock that was supposed to be a day trade. You are supposed to be using different accounts for different trading objectives. If you mix these trades up then you’ll just have more than one account doing the same thing. There is no point in this.
5) Take positions on the side of momentum, not against it. It's less dangerous to be on a speeding freight train then to jump out in front of one.
6) Avoid trading at the open. There are too many fades, reversals, gaps, news and other things that will likely dramatically affect stock prices in the first ten minutes. Let the market settle down first after the market makers and specialist have fleeced the amateurs. Only then is it time to trade. Let the market show its hand before you trade it.
7) Avoid pre-market trading unless there is an absolute must own stock that you missed the day before and you found in your scans after the market closed. If I find a stock like this in my scans the night before, I may buy it in pre-market. Other than that situation, Pre-market trading is too difficult due to the spreads, illiquidity and the fact that you are hampered by the dreaded limit order and the inability to execute a stop order.
8) Stay away from the reactions of the crowd. Their emotions often signal opportunity in the opposite direction. Profit rarely follows the masses. Step aside when confusion is in the air and the market or herd lacks direction.
9) It is okay to take overnight positions. Buy at the close and hold until the next day’s trading session. As long as your disciplined enough to maintain a proper positions size. By holding overnight, you can take advantage of selling the gap up for profit at the open. Of course, there is always risk the stock will gap down. Holding over night is risky but there is also the potential for big rewards.
10) Trade with a strategy of entering new trades at support and exiting them at resistance in a range-bound market. Trade with a momentum strategy of buying breakouts at new highs or selling short at new lows in a trending market.
11) The entry is the key to success. An excellent entry on a mediocre chart makes more money than a bad entry on an excellent chart.
12) Follow the STHQ indicator panel. Our BBI and MSL indicators have been on the money during this latest market slide. If you are following them, you should be either 100% cash or shorting the market. If you are in cash as these indicators have advised, you have preserved all your prior gains. If you are short the market based on these indicators, you are making a healthy profit as the market goes down. Do not underestimate the value of the STHQ indicator panel.
2) Always look for favorable conditions to trade from or stay out of the market until they appear. Bad executions will ruin a perfect chart setup.
3) Watch the stock before you enter. Look for evidence to confirm your decision. The volume and trend must support the reversal, breakout or fade you're expecting to happen.
4) Decide how long you want to be in the market before you execute the trade. Don't day trade a stock you want to invest in or invest in a stock that was supposed to be a swing trade. Don’t swing trade a stock that was supposed to be a day trade. You are supposed to be using different accounts for different trading objectives. If you mix these trades up then you’ll just have more than one account doing the same thing. There is no point in this.
5) Take positions on the side of momentum, not against it. It's less dangerous to be on a speeding freight train then to jump out in front of one.
6) Avoid trading at the open. There are too many fades, reversals, gaps, news and other things that will likely dramatically affect stock prices in the first ten minutes. Let the market settle down first after the market makers and specialist have fleeced the amateurs. Only then is it time to trade. Let the market show its hand before you trade it.
7) Avoid pre-market trading unless there is an absolute must own stock that you missed the day before and you found in your scans after the market closed. If I find a stock like this in my scans the night before, I may buy it in pre-market. Other than that situation, Pre-market trading is too difficult due to the spreads, illiquidity and the fact that you are hampered by the dreaded limit order and the inability to execute a stop order.
8) Stay away from the reactions of the crowd. Their emotions often signal opportunity in the opposite direction. Profit rarely follows the masses. Step aside when confusion is in the air and the market or herd lacks direction.
9) It is okay to take overnight positions. Buy at the close and hold until the next day’s trading session. As long as your disciplined enough to maintain a proper positions size. By holding overnight, you can take advantage of selling the gap up for profit at the open. Of course, there is always risk the stock will gap down. Holding over night is risky but there is also the potential for big rewards.
10) Trade with a strategy of entering new trades at support and exiting them at resistance in a range-bound market. Trade with a momentum strategy of buying breakouts at new highs or selling short at new lows in a trending market.
11) The entry is the key to success. An excellent entry on a mediocre chart makes more money than a bad entry on an excellent chart.
12) Follow the STHQ indicator panel. Our BBI and MSL indicators have been on the money during this latest market slide. If you are following them, you should be either 100% cash or shorting the market. If you are in cash as these indicators have advised, you have preserved all your prior gains. If you are short the market based on these indicators, you are making a healthy profit as the market goes down. Do not underestimate the value of the STHQ indicator panel.
Saturday, June 28, 2008
Bear Market Survival
Historically the bull-bear cycle lasts about 4 years, with the bull market lasting for about 3 years while the Bear portion lasts for nearly 1 year. Stocks have trended higher throughout the stock market’s history so the odds are with you over time if you trade long as opposed to short selling. These statistics favor being long most of the time and sitting out some market periods that are not the ideal conditions for being long. Those less than ideal conditions also provide another opportunity besides being in cash to get short the market and try to profit from falling stock prices. Selling short in a bear market can be very profitable but it is a much tougher road than being long a bull market. Tonight we’ll discuss why that is.
Many novice traders and even more experienced traders have trouble surviving bear markets. Most of the time, it is because they have a false sense of security as they simply believe that profits will continue even in a major decline as long as they just flip their long strategies into reverse. It’s not that easy folks. Bear markets are much tougher to trade through than bull markets. This is due to the emotional roller coaster of fear and greed that routinely accelerates when stocks are in downtrends. Trend-following tactics are more difficult in downtrends simply because of the sudden bear market rallies that can be quite violent at times. These spikes will often create short squeezes that will induce heavy losses for those who take new short positions at the wrong time.
Bear markets make it much harder to turn short-term profits than typical bull markets. We will actively short stocks in bear markets but understand that during these periods, it is more difficult to turn consistent profits so it is not our desired way to trade. We think it is much more important to prepare for the bear market and the ensuing bull phase that follows so we can survive and profit while waiting for better conditions. Please don’t underestimate the importance of preparing to survive the next bear market so that you are ready for the next bull market.
One reason bear markets are harder to trade is because volume drops sharply through most phases of a broad bear market recession. This induces liquidity issues and dangerous trading conditions. Spreads will widen and slippage will increase for both the entries and exits. Short sale opportunities will vanish as inventories for stocks to borrow dry up at many brokerage firms. The best stocks to short will not have any shares available to borrow. This will be particularly frustrating as the stock you wanted to short continues to fall in a downward spiral and you can’t get in position to profit from it. Volume dries up as fund managers increase cash allocations to satisfy redemption requests and will not put new money to work from any inflows of cash due to fear of stocks dropping further. And many novice traders close up shop due to a lack of interest in the markets during these bear market periods.
Another reason why trading during bear markets can be very difficult is because during these times, actual price declines often take up only a small percentage of the time that the downtrend conditions exist. Just like individual stocks, the indices fall faster than they rise and the selling panic periods tend to be sharp and end quickly. The rest of the time the market meanders back and forth on low volume while trying to heal. Also, the typical bear market doesn't end in the high volume capitulation that most people believe will happen. These capitulation selloffs do happen in bull market corrections but rarely end bear markets. Instead, bear markets end slowly as value investors start to accumulated positions while a market bottom forms. Most other participants will have little interest in stocks because the long basing period doesn’t excite them into entering the market again.
Our strategy for trading a bear market will be one of mostly cash with a combination of short selling and taking some long positions during countertrend rallies. We will act defensively through cyclical bear market conditions unless the intraday charts signal opportunities. Rallies and sell offs do offer excellent short-term setups for trading profits. One thing that we will have to do is tighten our holding time because the market environment will change drastically. We will try to anticipate where short covering rallies will take place and try to get long just before the short squeezes erupt. We will use the short seller's panic to turn a profit, and then attempt to find resistance levels where natural reversals may take place. At this time, we can flip back to the short side for resumption of the downtrend.
As a bear market evolves, follow the daily charts for key turning points and act defensively at all times. Wait for favorable risk/reward opportunities and avoid being whipsawed by the frequent swings of investor/trader’s hopes and fears. All the while we are on defense, we will be looking for accumulation and renewed interest while the market is in the long healing process of forming a base. These basing periods offer excellent long-term potential for those with precise market timing. But remember, entry at these times will require execution against market sentiment. In other words, you will be buying when nobody else wants anything to do with stocks. That is always tough to do but the potential reward if you time it right can be astronomical.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for Serious Traders.
Copyright © 2008 StockTradersHQ.com
Many novice traders and even more experienced traders have trouble surviving bear markets. Most of the time, it is because they have a false sense of security as they simply believe that profits will continue even in a major decline as long as they just flip their long strategies into reverse. It’s not that easy folks. Bear markets are much tougher to trade through than bull markets. This is due to the emotional roller coaster of fear and greed that routinely accelerates when stocks are in downtrends. Trend-following tactics are more difficult in downtrends simply because of the sudden bear market rallies that can be quite violent at times. These spikes will often create short squeezes that will induce heavy losses for those who take new short positions at the wrong time.
Bear markets make it much harder to turn short-term profits than typical bull markets. We will actively short stocks in bear markets but understand that during these periods, it is more difficult to turn consistent profits so it is not our desired way to trade. We think it is much more important to prepare for the bear market and the ensuing bull phase that follows so we can survive and profit while waiting for better conditions. Please don’t underestimate the importance of preparing to survive the next bear market so that you are ready for the next bull market.
One reason bear markets are harder to trade is because volume drops sharply through most phases of a broad bear market recession. This induces liquidity issues and dangerous trading conditions. Spreads will widen and slippage will increase for both the entries and exits. Short sale opportunities will vanish as inventories for stocks to borrow dry up at many brokerage firms. The best stocks to short will not have any shares available to borrow. This will be particularly frustrating as the stock you wanted to short continues to fall in a downward spiral and you can’t get in position to profit from it. Volume dries up as fund managers increase cash allocations to satisfy redemption requests and will not put new money to work from any inflows of cash due to fear of stocks dropping further. And many novice traders close up shop due to a lack of interest in the markets during these bear market periods.
Another reason why trading during bear markets can be very difficult is because during these times, actual price declines often take up only a small percentage of the time that the downtrend conditions exist. Just like individual stocks, the indices fall faster than they rise and the selling panic periods tend to be sharp and end quickly. The rest of the time the market meanders back and forth on low volume while trying to heal. Also, the typical bear market doesn't end in the high volume capitulation that most people believe will happen. These capitulation selloffs do happen in bull market corrections but rarely end bear markets. Instead, bear markets end slowly as value investors start to accumulated positions while a market bottom forms. Most other participants will have little interest in stocks because the long basing period doesn’t excite them into entering the market again.
Our strategy for trading a bear market will be one of mostly cash with a combination of short selling and taking some long positions during countertrend rallies. We will act defensively through cyclical bear market conditions unless the intraday charts signal opportunities. Rallies and sell offs do offer excellent short-term setups for trading profits. One thing that we will have to do is tighten our holding time because the market environment will change drastically. We will try to anticipate where short covering rallies will take place and try to get long just before the short squeezes erupt. We will use the short seller's panic to turn a profit, and then attempt to find resistance levels where natural reversals may take place. At this time, we can flip back to the short side for resumption of the downtrend.
As a bear market evolves, follow the daily charts for key turning points and act defensively at all times. Wait for favorable risk/reward opportunities and avoid being whipsawed by the frequent swings of investor/trader’s hopes and fears. All the while we are on defense, we will be looking for accumulation and renewed interest while the market is in the long healing process of forming a base. These basing periods offer excellent long-term potential for those with precise market timing. But remember, entry at these times will require execution against market sentiment. In other words, you will be buying when nobody else wants anything to do with stocks. That is always tough to do but the potential reward if you time it right can be astronomical.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for Serious Traders.
Copyright © 2008 StockTradersHQ.com
Friday, June 20, 2008
Maximize Your Day Trading Capital for Optimal Returns
How much capital will I need to start day trading for a living?” This is a very common question that we often receive and it is somewhat difficult to answer. That is because each individual is different and has a different set of goals. Each person’s standard of living could be different and what one individual makes with day trading for a living may not be enough for another. The more money you want or need to make will depend on the amount of capital that you have at risk.
Swing Trade for Percentage, Day Trade for Dollars
The answer is that it is different for each person and it is something you must consider for yourself before you start. We can only give some practical guidelines. I personally feel that you should have enough trading capital to purchase between 500 to 1000 shares of any given stock without having to use margin. When we take a swing trade position at StockTradersHQ, we look for gains in terms of percentage points. However, when I day trade, I am looking for dollars to take out of the market that day. I need a dollar figure because this is my salary for my work. It’s how I make my living so I want to make a certain amount of dollars when I day trade.
The price of the stock I am day trading is critical because I normally buy either 500 or 1000 shares, depending on the price of the stock. Ideally, my target when I take a day trade position is a $1.00 move on the stock. I will let the stock run much more than that if I see the momentum is going to carry it up further. I have had stocks move up 2, 3, 4 dollars or more in a single day trade. If I get the move, I will run a trailing stop behind the price to lock in the profit should the stock reverse and fall back. I use the trailing stop because I want to take advantage of any more upside movement the stock might have the rest of the session. If I were to just sell at the $1.00 target, I am really robbing myself of possible further upside in the stock and limiting my potential profit. Remember, when you are trading 1000 shares at a time, you only need a small move in the stock for a worthwhile profit.
Keep Expectations Realistic
If you trade stocks in the $30 to $60 range, this could mean that you need a minimum of $30,000 to start. 1000 shares of a $30 stock or 500 shares of a $60 stock and so on. This of course would be 100% of your capital in any one position, which is very dangerous. If you want to trade 2 or 3 positions at a time, you would need $60K to $90K to start, assuming that you trade the 500 to 1000 share blocks in this $30 - $60 price range and you do not use your margin.
If you are using margin, then you could buy more shares or pick higher priced stocks. If your day trading account balance was say $120,000, you could buy 2000 shares of a $20 stock and still have $80,000 left to put to work in 2 or 3 more trades. For example, if you had bought 2000 shares of SOLF on Friday (May 16th) at the opening price of $19.00 and sold at the close, you would have had a one day profit of $7,680. It closed at $22.84 for a $3.84 gain on your trade. $3.84 X 2000 = $7,680. This is just one example and it is not that far fetched to think that you can’t catch these moves because every day there are stocks moving up and there is always a big mover in the market somewhere. We just happened to have had SOLF on our trade Bulletin and in the pre-market update as a stock to watch for a possible day trade.
In this example, we used 2000 shares but you do not need to trade that many shares. Trade what you feel is in your comfort level. Keep in mind, with lesser shares traded, you will need bigger daily moves in the stocks to make a decent living and there are times when stocks just do not move more than $1.00 in a day, especially when the market is suffering from a flat day. Just remember, if you are starting small, keep your expectations realistic. Certainly, someone trading with $30,000 to $50,000 is going to have a much more difficult time generating $1,000 per day than someone using $100,000 or more. Know your limitations with respect to your capital. Keep things in perspective and try not to expect miracles.
In the Big Leagues
When you get into the bigger leagues of day trading, you can then take on (purchase or short) a block or two of a stock, generally defined as 10,000 shares. You can trade 10K shares of a $5.00 stock for only a 10 cent move and you will have profited $1,000 in that trade. Examples of these types of stocks are CPST ($3.48) had a .15 range on Friday and FINL ($6.77) had a .30 range on Friday. You won’t capture the whole move but you can see the potential if you get a decent entry. Remember; never put all your capital in one trade. Only use 25% to 33% of your available day trading capital in each trade.
This is going to require $150,000 to $200,000 or more of trading capital plus some use of margin in limited situations and for a limited time. When you reach this level, it is easy to see how day trading can become quite profitable but also quite risky. A move of a few pennies across 10,000 shares can return quite a bit of money, quite rapidly if you scalp 3 or 4 trades a day in the stock. Just remember it goes both ways; you can quickly lose quite a bit as well. There is no right or wrong answer with regard to how much you need to start. Simply keep your objectives in perspective and be realistic based on the capital in play.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for Serious Stock Traders
Swing Trade for Percentage, Day Trade for Dollars
The answer is that it is different for each person and it is something you must consider for yourself before you start. We can only give some practical guidelines. I personally feel that you should have enough trading capital to purchase between 500 to 1000 shares of any given stock without having to use margin. When we take a swing trade position at StockTradersHQ, we look for gains in terms of percentage points. However, when I day trade, I am looking for dollars to take out of the market that day. I need a dollar figure because this is my salary for my work. It’s how I make my living so I want to make a certain amount of dollars when I day trade.
The price of the stock I am day trading is critical because I normally buy either 500 or 1000 shares, depending on the price of the stock. Ideally, my target when I take a day trade position is a $1.00 move on the stock. I will let the stock run much more than that if I see the momentum is going to carry it up further. I have had stocks move up 2, 3, 4 dollars or more in a single day trade. If I get the move, I will run a trailing stop behind the price to lock in the profit should the stock reverse and fall back. I use the trailing stop because I want to take advantage of any more upside movement the stock might have the rest of the session. If I were to just sell at the $1.00 target, I am really robbing myself of possible further upside in the stock and limiting my potential profit. Remember, when you are trading 1000 shares at a time, you only need a small move in the stock for a worthwhile profit.
Keep Expectations Realistic
If you trade stocks in the $30 to $60 range, this could mean that you need a minimum of $30,000 to start. 1000 shares of a $30 stock or 500 shares of a $60 stock and so on. This of course would be 100% of your capital in any one position, which is very dangerous. If you want to trade 2 or 3 positions at a time, you would need $60K to $90K to start, assuming that you trade the 500 to 1000 share blocks in this $30 - $60 price range and you do not use your margin.
If you are using margin, then you could buy more shares or pick higher priced stocks. If your day trading account balance was say $120,000, you could buy 2000 shares of a $20 stock and still have $80,000 left to put to work in 2 or 3 more trades. For example, if you had bought 2000 shares of SOLF on Friday (May 16th) at the opening price of $19.00 and sold at the close, you would have had a one day profit of $7,680. It closed at $22.84 for a $3.84 gain on your trade. $3.84 X 2000 = $7,680. This is just one example and it is not that far fetched to think that you can’t catch these moves because every day there are stocks moving up and there is always a big mover in the market somewhere. We just happened to have had SOLF on our trade Bulletin and in the pre-market update as a stock to watch for a possible day trade.
In this example, we used 2000 shares but you do not need to trade that many shares. Trade what you feel is in your comfort level. Keep in mind, with lesser shares traded, you will need bigger daily moves in the stocks to make a decent living and there are times when stocks just do not move more than $1.00 in a day, especially when the market is suffering from a flat day. Just remember, if you are starting small, keep your expectations realistic. Certainly, someone trading with $30,000 to $50,000 is going to have a much more difficult time generating $1,000 per day than someone using $100,000 or more. Know your limitations with respect to your capital. Keep things in perspective and try not to expect miracles.
In the Big Leagues
When you get into the bigger leagues of day trading, you can then take on (purchase or short) a block or two of a stock, generally defined as 10,000 shares. You can trade 10K shares of a $5.00 stock for only a 10 cent move and you will have profited $1,000 in that trade. Examples of these types of stocks are CPST ($3.48) had a .15 range on Friday and FINL ($6.77) had a .30 range on Friday. You won’t capture the whole move but you can see the potential if you get a decent entry. Remember; never put all your capital in one trade. Only use 25% to 33% of your available day trading capital in each trade.
This is going to require $150,000 to $200,000 or more of trading capital plus some use of margin in limited situations and for a limited time. When you reach this level, it is easy to see how day trading can become quite profitable but also quite risky. A move of a few pennies across 10,000 shares can return quite a bit of money, quite rapidly if you scalp 3 or 4 trades a day in the stock. Just remember it goes both ways; you can quickly lose quite a bit as well. There is no right or wrong answer with regard to how much you need to start. Simply keep your objectives in perspective and be realistic based on the capital in play.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for Serious Stock Traders
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