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
Sunday, June 8, 2008
The Zero Sum Game
If you have read the book “Trading for a Living”, one of the books we recommend (see recommended books in resource section), then you already know about the Zero Sum Game. But for those of you who have not read that book yet, we are going to talk about it tonight. Dr. Elder discusses this in the first chapter of his book. Why? Because it is so important for you to understand this concept. The Zero Sum Game? What is it? Most people on Wall Street would like you to believe trading stocks is a Zero Sum Game, meaning that the winners will win as much as the losers will lose. For every trade made, there is a winner and a loser and the money simply flows between the two traders to equal a Zero sum. This is false. What people fail to realize is that the winners receive LESS than the losers lose because the industry drains the money in the form of commissions and spreads. Trading stocks is a LESS than a Zero Sum Game, meaning money flows out of the market daily and has to be replaced in order for the financial world to survive.
Every day millions of dollars are sucked out of the market and into your broker’s pockets by commissions. Millions of trades are made each day in the stock market. For every stock you buy, someone is selling it to you. The broker not only makes a commission off of you, but he also makes a commission from the seller. So in the same trade, he gets two commissions for one transaction. If you pay an average commission of $10.00 to buy a stock, then that is $20.00 to the broker because the seller just paid the same commission. This is 20 million dollars for every 1 million transactions. Folks, there are more than a million transactions a day in the financial markets.
These are conservative numbers we are talking about. An example of this less than Zero Sum Game is as follows: if you and I were to make a trade, and I buy $1,000 worth of stock from you, I would pay $1010 for the stock and you would only receive $990 in return. $20.00 in commission goes to the brokers. This happens on every trade everywhere. The point here is, without us little people trading stocks, there would be no Wall Street. They are always looking at inflows of cash into the market. This number is important to them because this inflow of money provides their next meal; it puts food on their tables and feeds their families. They need us to survive, and they love it when new online trading accounts are opened. This is fresh money coming into the market, replacing the millions of dollars that they just sucked out of the market the day before in commissions.
The markets live off of losing traders. Markets will always need a fresh supply of losing traders; these losing traders bring fresh money into the markets, which is needed so the trading industry can survive. The commercials you see on TV every day that want you to open an online brokerage account are not because they want you to get wealthy. Believe me they could care less about you; what they need is the commission they’ll get when you trade, whether you win or lose, all they really want is your money. These new trading accounts are most likely a fresh batch of inexperienced novices being fed to the wolves, many of these new accounts will be sucked dry with commissions and losing trades. They will fail and move on without ever learning the game and be replaced by a new batch of novice trader’s right behind them. This is how the financial markets have survived since their inception.
Markets are set up for you to lose. Being an average trader is not good enough to overcome the commissions that you lose on every trade. You must be better than average; you must be very good to beat the market. There are a very limited number of good traders compared to the masses. Our goal here at STHQ is to help you become one of those limited very good traders.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for serious traders.
Copyright © 2008 StockTradersHQ.com
Every day millions of dollars are sucked out of the market and into your broker’s pockets by commissions. Millions of trades are made each day in the stock market. For every stock you buy, someone is selling it to you. The broker not only makes a commission off of you, but he also makes a commission from the seller. So in the same trade, he gets two commissions for one transaction. If you pay an average commission of $10.00 to buy a stock, then that is $20.00 to the broker because the seller just paid the same commission. This is 20 million dollars for every 1 million transactions. Folks, there are more than a million transactions a day in the financial markets.
These are conservative numbers we are talking about. An example of this less than Zero Sum Game is as follows: if you and I were to make a trade, and I buy $1,000 worth of stock from you, I would pay $1010 for the stock and you would only receive $990 in return. $20.00 in commission goes to the brokers. This happens on every trade everywhere. The point here is, without us little people trading stocks, there would be no Wall Street. They are always looking at inflows of cash into the market. This number is important to them because this inflow of money provides their next meal; it puts food on their tables and feeds their families. They need us to survive, and they love it when new online trading accounts are opened. This is fresh money coming into the market, replacing the millions of dollars that they just sucked out of the market the day before in commissions.
The markets live off of losing traders. Markets will always need a fresh supply of losing traders; these losing traders bring fresh money into the markets, which is needed so the trading industry can survive. The commercials you see on TV every day that want you to open an online brokerage account are not because they want you to get wealthy. Believe me they could care less about you; what they need is the commission they’ll get when you trade, whether you win or lose, all they really want is your money. These new trading accounts are most likely a fresh batch of inexperienced novices being fed to the wolves, many of these new accounts will be sucked dry with commissions and losing trades. They will fail and move on without ever learning the game and be replaced by a new batch of novice trader’s right behind them. This is how the financial markets have survived since their inception.
Markets are set up for you to lose. Being an average trader is not good enough to overcome the commissions that you lose on every trade. You must be better than average; you must be very good to beat the market. There are a very limited number of good traders compared to the masses. Our goal here at STHQ is to help you become one of those limited very good traders.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for serious traders.
Copyright © 2008 StockTradersHQ.com
Monday, May 26, 2008
The Gold Mine
There is a gold mine in this country and it is available to anyone who wants to go in and help themselves to it. This gold mine is located in Manhattan NY. The gold mine I speak of is on Wall Street and it is called the U.S. Stock Market. It opens its doors every day and invites us all in and we can leave each day with as much cash as we want to take from it, if we can. That is it; we can literally go inside the stock market everyday and walk away with a fortune, if we want to. So why don't we? It sounds so easy to do and “they”, the stock market, are so willing to let us do it, and yet so few market participants can do it consistently each day. It is much easier said than done. Trading stocks is probably the hardest way to make a living and probably one of the most stressful. It takes time, patience and persistence. With hard work, anyone can do it.
The “Big” Money
A doctor goes to school for 8 years before he can treat patients and make the “big” money. A lawyer goes to school for 8 years before he can defend O. J. Simpson, an alleged murderer, and make the “big” money. A professional baseball player has played baseball all his life and practiced many years before he gets to the big show and makes the “big” money. Why do so many people think that they can just walk into the stock market and make the “big” money without first paying their dues and learning the profession?
Just like the casino’s in Vegas, sometimes the odds are stacked against those naive investor’s that choose to be in the stock market without learning first. Somebody who has never been to a casino before will probably lose their money, as does the new investor or trader. A professional gambler makes money because he has taken to time to learn the business. He can beat the casino at will and the professionals on Wall Street can do the same, they beat the market at will. It took many years for the professional gambler and the professional stock trader to get to the point where they can beat their opponents at will.
A doctor, lawyer or baseball player may be good at what they do and have money to invest but it does not mean that they will be successful in the stock market. The best thing about the stock market is, when you do finally get good enough to make a living, you know you will be a trader for the rest of your life. The other professions that I mentioned do not carry with them this security. A doctor can be sued for malpractice even if they did nothing wrong. A professional athlete gets too old to perform; the professional gambler gets kicked out of the casino and banned for life, if he gets too good. You are never too old to trade stocks, you will never be sued for winning a trade, and no trader has ever gotten kicked out of the stock market for being too good.
Learn to trade stocks like a pro
http://www.stocktradershq.com/
The Headquarters for serious traders.
Copyright © 2008 StockTradersHQ.com
The “Big” Money
A doctor goes to school for 8 years before he can treat patients and make the “big” money. A lawyer goes to school for 8 years before he can defend O. J. Simpson, an alleged murderer, and make the “big” money. A professional baseball player has played baseball all his life and practiced many years before he gets to the big show and makes the “big” money. Why do so many people think that they can just walk into the stock market and make the “big” money without first paying their dues and learning the profession?
Just like the casino’s in Vegas, sometimes the odds are stacked against those naive investor’s that choose to be in the stock market without learning first. Somebody who has never been to a casino before will probably lose their money, as does the new investor or trader. A professional gambler makes money because he has taken to time to learn the business. He can beat the casino at will and the professionals on Wall Street can do the same, they beat the market at will. It took many years for the professional gambler and the professional stock trader to get to the point where they can beat their opponents at will.
A doctor, lawyer or baseball player may be good at what they do and have money to invest but it does not mean that they will be successful in the stock market. The best thing about the stock market is, when you do finally get good enough to make a living, you know you will be a trader for the rest of your life. The other professions that I mentioned do not carry with them this security. A doctor can be sued for malpractice even if they did nothing wrong. A professional athlete gets too old to perform; the professional gambler gets kicked out of the casino and banned for life, if he gets too good. You are never too old to trade stocks, you will never be sued for winning a trade, and no trader has ever gotten kicked out of the stock market for being too good.
Learn to trade stocks like a pro
http://www.stocktradershq.com/
The Headquarters for serious traders.
Copyright © 2008 StockTradersHQ.com
Sunday, May 11, 2008
The 3% Risk Trading System
Last week I mentioned the 3% Risk Trading System which is much more aggressive than the 10% Rule used with the StockTradersHQ (STHQ) portfolio. Just a reminder before we proceed, the 10% Rule = 10% of the portfolio value is placed in each trade. As the portfolio value increases, the dollar value placed in each trade also increases, compounding gains while minimizing risk.
I have used the 3% Risk Trading System in the past with great returns; I have not used it recently though. Fair warning: it is for aggressive traders only. You will need tough skin and nerves of steal to use it. If you have a heart condition, you may want to consult your physician before entering any trades using this system.
The 3% Risk Trading System requires more capital to be allocated in each trading position compared to the 10% Rule. Please do not get this system mixed up with the 10% Rule. The STHQ trade record is based on 10% allocation in each trade, and it will stay that way. I am disclosing the 3% Risk Trading System as an alternative approach some members may find attractive. If you decide to use this system, please set up a separate account and do not blend this system in with your STHQ trading account.
In the 3% Risk Trading System, the money allocated to each trade will vary based on your buy point and your stop price (more on that later). What is important is to limit losses to a maximum of 3% of your portfolio. This means that in a $100,000 portfolio our maximum loss of 3% will be $3,000 in our first trade. If we are starting with a $25,000 portfolio then our maximum loss of 3% will be $750 in our first trade.
Here is how it works:
Let's say you want to enter stock XYZ as it breaks above a resistance of $25.00. You set a buy stop order at $25.10. Once you are filled you MUST IMMEDIATELY set a stop loss order. This stop loss is not an automatic 3%. Instead, the stop loss is based on previous support. Let's say the support for XYZ is at $20.00. Our stop would then be just under support at $19.90.
To calculate the number of shares to purchase:
1. Take the difference between the buy price and the stop price you have determined: $25.10 - $19.90 = $5.20.
2. Divide the difference into your risk level of $3,000 (3% of $100,000) $3000 / $5.20 = 576 shares
To calculate the value of your trade:
Multiply the 576 shares by the buy price of $25.10 to get a total of $14,458 (14.5% of your 100K).
Let's look at this example more clearly below along with two others.
Example 1
Buy Price = $25.10
Stop price = $19.10
Risk per share = $25.10 - $19.10 = $5.20
Max loss of 3% = $3,000
$3,000 / $5.20 = 576 shares
576 X $25.10 = $14,458
$14,458 = 14.5% of $100,000 portfolio balance
In Example 1, you have to use 14.5% of your trading capital and you risk 3%.
Example 2
In this example we will use the same buy price but a different stop price for XYZ. The different stop price will depend on the chart and where you see the support levels. Again, you will risk 3% or $3,000 of your $100,000 portfolio.
Buy Price = $25.10
Stop price = $22.10
Risk per share = $25.10 - $22.10 = $2.20
Max loss of 3% = $3,000
$3,000 / 2.20 = 1,363 shares
1,363 X $25.10 = $34,211
$34.211 = 34.2% of $100,000 portfolio balance
As you can see in Example 2, you will use 34% of you portfolio balance because of the tighter stop you have placed on the trade. You risk the same amount ($3,000) but you must use more cash in the trade.
Example 3
In this example we will use the same buy and sell points as Example 2, but the risk will be narrowed to 2% instead of 3%. This system can be adjusted to risk any percent of your portfolio you wish. You can bump it up to 5% risk if you wish. It is the same formula; you will just be adjusting the dollars you want to have at risk.
Buy Price = $25.10
Stop price = $22.10
Risk per share = $25.10 - $22.10 = $2.20
Max loss of 2% = $2,000
$2,000 / $2.20 = 909 shares
909 X $25.10 = $22,815
$22,815 = 22.8% of $100,000 portfolio balance
As you can see, it does not matter what you pay for the stock or how much of your portfolio goes into each trade as long as you risk only 3% (or whatever % you are comfortable with) of your total portfolio. Some trades will cost more or less based on where you determine the stop price to be on the chart to insure a maximum loss of 3%.
This is obviously a much more aggressive approach then our 10% position size rule. Let's take Example 1 again using our normal 10% position size rule. We will assume we will be stopped out of the trade with a 10% loss according to the STHQ trading rules.
Buy $25.10
10% of $100,000 = $10,000
$10,000 / $25.10 = 400 shares
Stop $2.50 (10% below buy price) = $22.60
Sell at $22.60 = $9,050
$10,000 - $9,050 = $950
$100,000 - $950 = $99,050
The loss of $950 = 10% of your 10% position but only 1% of your total $100,000
As you can see, the 10% Rule is more conservative compared to the 3% Risk Trading System. The 3% Risk Trading System is ideal in Bull markets, but performs poorly in flat markets. It is too easy to get whipsawed out of you position in a flat market, and those losses will add up quickly. However, in a Bull market, the 3% Risk Trading System should out perform the 10% rule. Using the 3% Risk Trading System, only four or five positions are open at any one time.
Example 4
If you bought JRCC when we first recommended it on March 26th (see chart) http://stockcharts.com/h-sc/ui?s=JRCC&p=D&yr=0&mn=4&dy=0&id=p29039817531&a=132229947&listNum=19
at $17.50, you would have done very well when it closed Friday 31.10. Let's use the 3% Risk Trading System with this real example. Keep in mind, JRCC is still running and should move higher next week.
Buy Price = $17.50
Stop price = $13.90 (based on $14.00 support on chart)
Risk per share = $17.50 - $13.90 = $3.60
Max loss of 3% = $3,000
$3,000 / $3.60 = 833 shares
833 x $17.50 = $14,578
$14,578 = 14.58% of 100K portfolio balance
Sell at $31.10 x 833 = $25,906
$25,906 - $14,578= $11,328
$100,000 + $11,328 = $111,328
The gain is $11,328 and your risk was only $3,000. This one trade could balance out almost four losing trades with a 3% risk level. This shows that you can lose 3 out of 4 trades and still break even if you keep your losses to a minimum. Remember to risk 3% of the new balance. This means, if the GENC trade was your first trade you now would risk 3% of $111,328 instead of $100,000. This is how you compound your gains very quickly.
To Reiterate
I can not stress this enough, it is imperative with this system to PLACE YOUR STOPS IMEDIATELY AFTER YOUR BUY ORDER IS FILLED. You are risking substantial loss if you fail to place stops with 34% of your capital at risk as with Example 2.
I hope you have enjoyed tonight's Commentary and the introduction of the 3% Risk Trading System. If at some point in the future we decide to open an aggressive portfolio, this is the system we will be using. We currently have two portfolios we trade, a long term portfolio (Dynamic Dozen) in which we buy and try to hold for a year or two and our short term swing trading portfolio which we trade in and out of positions frequently. I have described the 3% Risk Trading System in advance so you will be familiar with the system if we do decide to open an aggressive portfolio at some point in the future.
David Colletti
Founder
StockTradersHQ.com
I have used the 3% Risk Trading System in the past with great returns; I have not used it recently though. Fair warning: it is for aggressive traders only. You will need tough skin and nerves of steal to use it. If you have a heart condition, you may want to consult your physician before entering any trades using this system.
The 3% Risk Trading System requires more capital to be allocated in each trading position compared to the 10% Rule. Please do not get this system mixed up with the 10% Rule. The STHQ trade record is based on 10% allocation in each trade, and it will stay that way. I am disclosing the 3% Risk Trading System as an alternative approach some members may find attractive. If you decide to use this system, please set up a separate account and do not blend this system in with your STHQ trading account.
In the 3% Risk Trading System, the money allocated to each trade will vary based on your buy point and your stop price (more on that later). What is important is to limit losses to a maximum of 3% of your portfolio. This means that in a $100,000 portfolio our maximum loss of 3% will be $3,000 in our first trade. If we are starting with a $25,000 portfolio then our maximum loss of 3% will be $750 in our first trade.
Here is how it works:
Let's say you want to enter stock XYZ as it breaks above a resistance of $25.00. You set a buy stop order at $25.10. Once you are filled you MUST IMMEDIATELY set a stop loss order. This stop loss is not an automatic 3%. Instead, the stop loss is based on previous support. Let's say the support for XYZ is at $20.00. Our stop would then be just under support at $19.90.
To calculate the number of shares to purchase:
1. Take the difference between the buy price and the stop price you have determined: $25.10 - $19.90 = $5.20.
2. Divide the difference into your risk level of $3,000 (3% of $100,000) $3000 / $5.20 = 576 shares
To calculate the value of your trade:
Multiply the 576 shares by the buy price of $25.10 to get a total of $14,458 (14.5% of your 100K).
Let's look at this example more clearly below along with two others.
Example 1
Buy Price = $25.10
Stop price = $19.10
Risk per share = $25.10 - $19.10 = $5.20
Max loss of 3% = $3,000
$3,000 / $5.20 = 576 shares
576 X $25.10 = $14,458
$14,458 = 14.5% of $100,000 portfolio balance
In Example 1, you have to use 14.5% of your trading capital and you risk 3%.
Example 2
In this example we will use the same buy price but a different stop price for XYZ. The different stop price will depend on the chart and where you see the support levels. Again, you will risk 3% or $3,000 of your $100,000 portfolio.
Buy Price = $25.10
Stop price = $22.10
Risk per share = $25.10 - $22.10 = $2.20
Max loss of 3% = $3,000
$3,000 / 2.20 = 1,363 shares
1,363 X $25.10 = $34,211
$34.211 = 34.2% of $100,000 portfolio balance
As you can see in Example 2, you will use 34% of you portfolio balance because of the tighter stop you have placed on the trade. You risk the same amount ($3,000) but you must use more cash in the trade.
Example 3
In this example we will use the same buy and sell points as Example 2, but the risk will be narrowed to 2% instead of 3%. This system can be adjusted to risk any percent of your portfolio you wish. You can bump it up to 5% risk if you wish. It is the same formula; you will just be adjusting the dollars you want to have at risk.
Buy Price = $25.10
Stop price = $22.10
Risk per share = $25.10 - $22.10 = $2.20
Max loss of 2% = $2,000
$2,000 / $2.20 = 909 shares
909 X $25.10 = $22,815
$22,815 = 22.8% of $100,000 portfolio balance
As you can see, it does not matter what you pay for the stock or how much of your portfolio goes into each trade as long as you risk only 3% (or whatever % you are comfortable with) of your total portfolio. Some trades will cost more or less based on where you determine the stop price to be on the chart to insure a maximum loss of 3%.
This is obviously a much more aggressive approach then our 10% position size rule. Let's take Example 1 again using our normal 10% position size rule. We will assume we will be stopped out of the trade with a 10% loss according to the STHQ trading rules.
Buy $25.10
10% of $100,000 = $10,000
$10,000 / $25.10 = 400 shares
Stop $2.50 (10% below buy price) = $22.60
Sell at $22.60 = $9,050
$10,000 - $9,050 = $950
$100,000 - $950 = $99,050
The loss of $950 = 10% of your 10% position but only 1% of your total $100,000
As you can see, the 10% Rule is more conservative compared to the 3% Risk Trading System. The 3% Risk Trading System is ideal in Bull markets, but performs poorly in flat markets. It is too easy to get whipsawed out of you position in a flat market, and those losses will add up quickly. However, in a Bull market, the 3% Risk Trading System should out perform the 10% rule. Using the 3% Risk Trading System, only four or five positions are open at any one time.
Example 4
If you bought JRCC when we first recommended it on March 26th (see chart) http://stockcharts.com/h-sc/ui?s=JRCC&p=D&yr=0&mn=4&dy=0&id=p29039817531&a=132229947&listNum=19
at $17.50, you would have done very well when it closed Friday 31.10. Let's use the 3% Risk Trading System with this real example. Keep in mind, JRCC is still running and should move higher next week.
Buy Price = $17.50
Stop price = $13.90 (based on $14.00 support on chart)
Risk per share = $17.50 - $13.90 = $3.60
Max loss of 3% = $3,000
$3,000 / $3.60 = 833 shares
833 x $17.50 = $14,578
$14,578 = 14.58% of 100K portfolio balance
Sell at $31.10 x 833 = $25,906
$25,906 - $14,578= $11,328
$100,000 + $11,328 = $111,328
The gain is $11,328 and your risk was only $3,000. This one trade could balance out almost four losing trades with a 3% risk level. This shows that you can lose 3 out of 4 trades and still break even if you keep your losses to a minimum. Remember to risk 3% of the new balance. This means, if the GENC trade was your first trade you now would risk 3% of $111,328 instead of $100,000. This is how you compound your gains very quickly.
To Reiterate
I can not stress this enough, it is imperative with this system to PLACE YOUR STOPS IMEDIATELY AFTER YOUR BUY ORDER IS FILLED. You are risking substantial loss if you fail to place stops with 34% of your capital at risk as with Example 2.
I hope you have enjoyed tonight's Commentary and the introduction of the 3% Risk Trading System. If at some point in the future we decide to open an aggressive portfolio, this is the system we will be using. We currently have two portfolios we trade, a long term portfolio (Dynamic Dozen) in which we buy and try to hold for a year or two and our short term swing trading portfolio which we trade in and out of positions frequently. I have described the 3% Risk Trading System in advance so you will be familiar with the system if we do decide to open an aggressive portfolio at some point in the future.
David Colletti
Founder
StockTradersHQ.com
Thursday, May 8, 2008
Building a Winning Trading Plan
There is an old saying in business: "If you fail to plan, you plan to fail. Ask any trader who makes money on a consistent basis and they will tell you, "You have two choices: you can either follow a plan, or you can fail." That's it in a nutshell. Have a plan or fail. If you have a written trading plan already, congratulations! While it's still no guarantee for success, a plan is better than none at all. If your plan is flawed, at least you have something that can be adjusted. Your success won't come immediately, but at least you are in a position to chart and modify your trading activity. By documenting the process, you learn what works and how to avoid repeating costly mistakes. If you have a plan, super, keep modifying it. If you do not, I have listed some idea's that can help you get started.
Assess Your Skills
Ask yourself, "Am I ready to trade?" "Have I tested my system on paper, before using my real money?" "Do I have confidence that my system is going to work?" Can I follow my signals without hesitation?" If you can answer these questions with an honest "yes", then you are ready to take that first step and begin trading for a living. The stock market is set up to separate you from your money and transfer wealth to the professional trader. Trading is a battle of give and take. The real pros are prepared and they take their profits from the rest of the crowd who seem content to hand their cash over. These novice traders, lacking a plan, give their money away through costly mistakes. This may sound brutal but I got to tell it like it is. It's your job to take the crowds money from them and make them pay dearly for their mistakes. The market does not tolerate people who lack respect for it. The crowd lacks respect for the market and for this, they will pay. Always respect the market and never become complacent. Always look for the edge, look for the advantage. Your cash is on the line, you can't let them take it from you.
Mental Preparation
How do you feel? Do you feel up to the challenge ahead? If you are not emotionally and psychologically ready to do battle in the market, it is better to take the day off; otherwise, you risk unnecessary losses. Trading is financial war. It's you against everyone else. When you enter your trading room, there are millions of people trying to take your cash by getting the better of you in a trade. For every trade you make, there is somebody on the other side of the trade who thinks you're wrong and they're right. Only one of you can be right and they have no mercy. I remember what my martial arts instructor told me years ago while I was training for a big tournament. He said " For every hour you are not training, your opponent is in the gym training with one purpose in mind and that is to beat you" Trading is the same way, it's a constant learning process and when you are not doing all you can do to better your trading, your opponent is. Without mental preparation, you will lose. If you are angry, hung-over, preoccupied or otherwise distracted from the task at hand, you can't consistently make money. Many traders have a routine before each market day that prepares them for the day ahead. You must do this also. Create one that puts you in the trading zone.
Set Some Goals
Before you enter a trade, make sure the risk/reward ratio makes sense. Many traders will not take a trade unless the potential profit is at least three times greater than the risk. For example, if your stop loss is $1.00 below your entry point, then your goal should be at least $3.00 to the upside. If resistance is $3.00 above your entry, then the trade makes good sense. If resistance is just $1.00 above your entry, then this trade has a very high risk verses reward and should not be taken in my opinion.
Preparing for the Trade
Whatever trading system or program you use, identify major and minor support and resistance levels, set alerts for entry and exit signals and make sure you can easily see and detect all signals your system generates. Your trading area should be free from distractions. No small children running around and needing attention. No trying to listen or watch that movie you rented last night and didn't finish. No trying to catch an afternoon baseball game on TV while trying to trade. I love baseball, but I do not watch any games during market hours if one should be on. I reserve that for the evenings only. Remember, you are trading for a living and distractions can be costly.
Exit Rules
Most traders make the mistake of concentrating only on their buy signals and entry points and pay little attention to when and where to exit the trade. Many beginners won't sell if they are down because they don't want to take a loss. They say "It's not a loss until I sell" . I got news for these people. At the end of the day, if their account value has dropped significantly, they have lost money, whether or not they sold the stock. If your stop gets filled, get over it or you will not make it as a trader. If your stop gets hit, it means you were wrong, don't take it personally, its part of the business. I lose more trades then I win when I day trade because of my tight stop loss rules but I'm still able to trade for a living and make plenty of profit by managing money properly and limiting losses. I don't care if I'm wrong 4 out of 5 times. I never risk more than a set percentage of my portfolio on any trade and all trades are equally distributed. If I lose 1% on the 4 trades and make 10 or 15% on the one winner, I'm going to have a substantial overall gain at the end of the year.
Record Keeping
After each trading day, adding up the profit or loss is secondary to knowing the why and how you did it. Write down your conclusions in your trading journal so that you can reference them again later. All good traders keep good records. If they win a trade, they want to know exactly why and how. More importantly, they want to know the same when they lose, so they don't repeat the same mistakes again. Record comments about why you made the trade and lessons learned. Also, you should save your trading records so that you can go back and analyze the profit/loss for a particular system. Record the average time per trade, this is necessary to calculate the efficiency of your system. The longer the stock takes to move after you are in the trade diminishes the efficiency of the trade. It may be a winner, but if it takes too long to get there, funds are tied up and opportunities are missed elsewhere.
Final Thoughts
There is no way to guarantee that a trade will make money. Your chances are based on mathematical probabilities and your skill and system used. There is no such thing as winning without losing. Professional traders lose many trades, it is the excellent management of there capital that keeps them in the game. By letting your profits ride and cutting losses short, you may lose some battles, but you will win the overall war. Most traders and investors do the opposite; they cut their winners short by taking the small gains while refusing to part with the losers which is why they never make money. The goal of any trader should be to gain enough skill to use their system so that they are able to make trades without second guessing or doubting their decisions.
Assess Your Skills
Ask yourself, "Am I ready to trade?" "Have I tested my system on paper, before using my real money?" "Do I have confidence that my system is going to work?" Can I follow my signals without hesitation?" If you can answer these questions with an honest "yes", then you are ready to take that first step and begin trading for a living. The stock market is set up to separate you from your money and transfer wealth to the professional trader. Trading is a battle of give and take. The real pros are prepared and they take their profits from the rest of the crowd who seem content to hand their cash over. These novice traders, lacking a plan, give their money away through costly mistakes. This may sound brutal but I got to tell it like it is. It's your job to take the crowds money from them and make them pay dearly for their mistakes. The market does not tolerate people who lack respect for it. The crowd lacks respect for the market and for this, they will pay. Always respect the market and never become complacent. Always look for the edge, look for the advantage. Your cash is on the line, you can't let them take it from you.
Mental Preparation
How do you feel? Do you feel up to the challenge ahead? If you are not emotionally and psychologically ready to do battle in the market, it is better to take the day off; otherwise, you risk unnecessary losses. Trading is financial war. It's you against everyone else. When you enter your trading room, there are millions of people trying to take your cash by getting the better of you in a trade. For every trade you make, there is somebody on the other side of the trade who thinks you're wrong and they're right. Only one of you can be right and they have no mercy. I remember what my martial arts instructor told me years ago while I was training for a big tournament. He said " For every hour you are not training, your opponent is in the gym training with one purpose in mind and that is to beat you" Trading is the same way, it's a constant learning process and when you are not doing all you can do to better your trading, your opponent is. Without mental preparation, you will lose. If you are angry, hung-over, preoccupied or otherwise distracted from the task at hand, you can't consistently make money. Many traders have a routine before each market day that prepares them for the day ahead. You must do this also. Create one that puts you in the trading zone.
Set Some Goals
Before you enter a trade, make sure the risk/reward ratio makes sense. Many traders will not take a trade unless the potential profit is at least three times greater than the risk. For example, if your stop loss is $1.00 below your entry point, then your goal should be at least $3.00 to the upside. If resistance is $3.00 above your entry, then the trade makes good sense. If resistance is just $1.00 above your entry, then this trade has a very high risk verses reward and should not be taken in my opinion.
Preparing for the Trade
Whatever trading system or program you use, identify major and minor support and resistance levels, set alerts for entry and exit signals and make sure you can easily see and detect all signals your system generates. Your trading area should be free from distractions. No small children running around and needing attention. No trying to listen or watch that movie you rented last night and didn't finish. No trying to catch an afternoon baseball game on TV while trying to trade. I love baseball, but I do not watch any games during market hours if one should be on. I reserve that for the evenings only. Remember, you are trading for a living and distractions can be costly.
Exit Rules
Most traders make the mistake of concentrating only on their buy signals and entry points and pay little attention to when and where to exit the trade. Many beginners won't sell if they are down because they don't want to take a loss. They say "It's not a loss until I sell" . I got news for these people. At the end of the day, if their account value has dropped significantly, they have lost money, whether or not they sold the stock. If your stop gets filled, get over it or you will not make it as a trader. If your stop gets hit, it means you were wrong, don't take it personally, its part of the business. I lose more trades then I win when I day trade because of my tight stop loss rules but I'm still able to trade for a living and make plenty of profit by managing money properly and limiting losses. I don't care if I'm wrong 4 out of 5 times. I never risk more than a set percentage of my portfolio on any trade and all trades are equally distributed. If I lose 1% on the 4 trades and make 10 or 15% on the one winner, I'm going to have a substantial overall gain at the end of the year.
Record Keeping
After each trading day, adding up the profit or loss is secondary to knowing the why and how you did it. Write down your conclusions in your trading journal so that you can reference them again later. All good traders keep good records. If they win a trade, they want to know exactly why and how. More importantly, they want to know the same when they lose, so they don't repeat the same mistakes again. Record comments about why you made the trade and lessons learned. Also, you should save your trading records so that you can go back and analyze the profit/loss for a particular system. Record the average time per trade, this is necessary to calculate the efficiency of your system. The longer the stock takes to move after you are in the trade diminishes the efficiency of the trade. It may be a winner, but if it takes too long to get there, funds are tied up and opportunities are missed elsewhere.
Final Thoughts
There is no way to guarantee that a trade will make money. Your chances are based on mathematical probabilities and your skill and system used. There is no such thing as winning without losing. Professional traders lose many trades, it is the excellent management of there capital that keeps them in the game. By letting your profits ride and cutting losses short, you may lose some battles, but you will win the overall war. Most traders and investors do the opposite; they cut their winners short by taking the small gains while refusing to part with the losers which is why they never make money. The goal of any trader should be to gain enough skill to use their system so that they are able to make trades without second guessing or doubting their decisions.
Wednesday, May 7, 2008
Self Discipline
Trading success is all about discipline. The discipline to take the trade in the first place and even more importantly to take the loss when necessary. If you possess the necessary discipline to follow a profitable methodology it can lead you to financial freedom. The freedom to make as much money as you need trading for a living and work at a profession you love. You can do it all with the right amount of discipline.
Let’s break discipline down into a two part process:
1. Preparation
2. Execution
Preparation covers several aspects, such as mental preparation; thinking through the risks of each trade and most importantly, knowing when and how to get out of the trade. These aspects are crucial. Getting in most of the time is much easier than getting out. I’ve always said that I would rather be out of a trade wishing I was in it, than in a trade and wishing I was out of it.
When the market is closed, we should be preparing ourselves mentally for the next trading day. One of the most important things NOT to do is making compulsive trading decisions while the market is moving. Your preparation prior to the market open should consist of your trading plan for that trading day and you should not deviate from the plan. If you do, you are not maintaining your discipline. If you did not plan to trade a particular stock that suddenly spikes up on news, then our advice is, do not trade it, despite the overwhelming urge to get in on the action. You make get lucky and make a fast buck, but at the same time, you are proving to be a very undisciplined trader.
The execution part of discipline involves preparation for the actual trade entries. Doing the technical analysis and fundamental work needed to enter a trade with a reasonable chance at profitability. We at STHQ are technical traders, trading on pattern recognition and technical indicators. Each pattern or indicator we trade has its own probability of success and each pattern has its own measurement of risk control. We have a plan for executing every trade we make and we must follow that plan. If we deviate from the plan, then we are not disciplined.
Combining the execution process is risk control and profit protection. Finely tuned execution skills are going to account for a great percentage of your success in trading.
For the most part, risk is the only thing we can control in the trading process. Sometimes, we can’t even control risk when there is news released on a stock we own and it gaps down, but that is rare, so other than that type of thing, we can certainly control the risk of our trade most of the time.
Profit protection requires monitoring the price action in order to reduce risk as soon as possible. Once a trade begins to work, it is good money management to take steps to reduce risk in the trade. If we control our risk the probability of getting a winning streak is increased. If we don’t control our risk, the probability of financial ruin is certain.
Let’s break discipline down into a two part process:
1. Preparation
2. Execution
Preparation covers several aspects, such as mental preparation; thinking through the risks of each trade and most importantly, knowing when and how to get out of the trade. These aspects are crucial. Getting in most of the time is much easier than getting out. I’ve always said that I would rather be out of a trade wishing I was in it, than in a trade and wishing I was out of it.
When the market is closed, we should be preparing ourselves mentally for the next trading day. One of the most important things NOT to do is making compulsive trading decisions while the market is moving. Your preparation prior to the market open should consist of your trading plan for that trading day and you should not deviate from the plan. If you do, you are not maintaining your discipline. If you did not plan to trade a particular stock that suddenly spikes up on news, then our advice is, do not trade it, despite the overwhelming urge to get in on the action. You make get lucky and make a fast buck, but at the same time, you are proving to be a very undisciplined trader.
The execution part of discipline involves preparation for the actual trade entries. Doing the technical analysis and fundamental work needed to enter a trade with a reasonable chance at profitability. We at STHQ are technical traders, trading on pattern recognition and technical indicators. Each pattern or indicator we trade has its own probability of success and each pattern has its own measurement of risk control. We have a plan for executing every trade we make and we must follow that plan. If we deviate from the plan, then we are not disciplined.
Combining the execution process is risk control and profit protection. Finely tuned execution skills are going to account for a great percentage of your success in trading.
For the most part, risk is the only thing we can control in the trading process. Sometimes, we can’t even control risk when there is news released on a stock we own and it gaps down, but that is rare, so other than that type of thing, we can certainly control the risk of our trade most of the time.
Profit protection requires monitoring the price action in order to reduce risk as soon as possible. Once a trade begins to work, it is good money management to take steps to reduce risk in the trade. If we control our risk the probability of getting a winning streak is increased. If we don’t control our risk, the probability of financial ruin is certain.
Tuesday, May 6, 2008
Sell in May and go away? Really?
With the major indices near their respective 200 SMA lines after a big 3 month run up in the markets, it seems like a good time to cut and run. According to the old Wall Street adage "Sell in May and go away," one who invests in stocks during the colder months and then sits it out during the summer months has done quite nicely overall.
Over the history of the stock market dating back over 100 years, stock gains in November through April have historically been stronger than May through October. The Stock Trader's Almanac has demonstrated this fact by tracking what would happen to a $10,000 investment in the 30 Dow stocks. Money invested in the Dow stocks in the "best six months" and then switched to fixed income in the "worst six months" over 56 years grew to $544,323. But money invested in the Dow in the "worst six" and then switched to fixed income in the "best six" compounded to a loss of $272. These results are startling but it doesn’t mean that you will lose money if you don’t sell in May. All it means is, the chances are good that you will under perform the normal average market returns for all 12 months combined.
Why Does This Happen?
May itself is not really that bad historically, it’s the Memorial Day to Labor Day period that's the worst historically and that tends to give the whole six months a bum rap. The second quarter, which starts in April, tends to be weaker, as the effects of holiday bonuses and the holiday retail sales period fade out. By late May, tax refunds are over, so the flow of fresh funds into stocks slows down. Then it's summer, with people spending more time on the beach than at their trading desks or on the trading floor. Lower trading volume tends to limit stock gains and causes a more rangebound market. Volatility tends to lightens up as well. By the time fall kicks in, the psychology has switched to a back-to-school, back-to-work mentality. In addition, big mutual funds are preparing for the end of their fiscal year in October. Historically, September is the worst month of the year for the Dow, NASDAQ and S&P and this falls in that six month range of the “sell in May and go away theory”
Here is the Real Deal
So what are we supposed to glean from this information? Should you sell all your stocks now because it’s the beginning of May? Not so fast. We have to take a logical approach to this dilemma and really look into the numbers first. There certainly have been years where the market did well in the "bad" six month period. There is no doubt that this six month period has been historically a rather lackluster one. However, history, as we all know, does not always repeat. After all we are talking about averaging numbers from a 50 to 100 year period. Neither you and I are going to be in the stock market for that long a period so this average number is irrelevant. If this happens to be a year when the market does well in the summer (and there have been years it has) you will run the risk of missing out on some terrific gains if you sell.
Lets look at the numbers closer using the S&P 500 instead of the Dow because that is a broader range of stocks. If you sold your stocks on the first trading day in May and returned to the market on October 1st each year from 1969 to 2007. (Yahoo Finance provided data to 1969).
Here are the Results.
26 of the 38 years the markets had a positive return during those supposedly six historically bad months from May through Sep. There were only 12 years in which you would have successfully avoided a loss during that six month period.
Also interesting to point out is that during the grand bull market of the 80s and 90s, the average return during May through September was 3.68%. A positive return, albeit not overwhelming. The average return from 1969-1979 was -2.22%, and from 2000-2007 the return was -1.59%. Outside of the big bull market of 1980-1999, this strategy would have worked. But the point is, it’s just averages. Year to year returns are very different and you don’t know which years will be good or bad. Over a long period of time, which is what these studies are based on, it is true that the market has underperformed in those months but it does not mean that you will lose money. And if you do lose some money, the statistics prove that it will only be a very small percentage.
The Bottom line
We just wanted to put these numbers into perspective before you jump the gun and sell because there is no doubt this “sell in May and go away” adage will be played out by the media. It’s all you are going to hear about for the next couple of weeks. But just look at the numbers and you’ll find that it’s not as bad as they make it out to be.
Our strategy at StockTradersHQ will be as it always is. We will just look at the chart patterns and the technical indicators to make our buy and sell decisions. The seasonality factor is way overblown. Technical Analysis is not.
Over the history of the stock market dating back over 100 years, stock gains in November through April have historically been stronger than May through October. The Stock Trader's Almanac has demonstrated this fact by tracking what would happen to a $10,000 investment in the 30 Dow stocks. Money invested in the Dow stocks in the "best six months" and then switched to fixed income in the "worst six months" over 56 years grew to $544,323. But money invested in the Dow in the "worst six" and then switched to fixed income in the "best six" compounded to a loss of $272. These results are startling but it doesn’t mean that you will lose money if you don’t sell in May. All it means is, the chances are good that you will under perform the normal average market returns for all 12 months combined.
Why Does This Happen?
May itself is not really that bad historically, it’s the Memorial Day to Labor Day period that's the worst historically and that tends to give the whole six months a bum rap. The second quarter, which starts in April, tends to be weaker, as the effects of holiday bonuses and the holiday retail sales period fade out. By late May, tax refunds are over, so the flow of fresh funds into stocks slows down. Then it's summer, with people spending more time on the beach than at their trading desks or on the trading floor. Lower trading volume tends to limit stock gains and causes a more rangebound market. Volatility tends to lightens up as well. By the time fall kicks in, the psychology has switched to a back-to-school, back-to-work mentality. In addition, big mutual funds are preparing for the end of their fiscal year in October. Historically, September is the worst month of the year for the Dow, NASDAQ and S&P and this falls in that six month range of the “sell in May and go away theory”
Here is the Real Deal
So what are we supposed to glean from this information? Should you sell all your stocks now because it’s the beginning of May? Not so fast. We have to take a logical approach to this dilemma and really look into the numbers first. There certainly have been years where the market did well in the "bad" six month period. There is no doubt that this six month period has been historically a rather lackluster one. However, history, as we all know, does not always repeat. After all we are talking about averaging numbers from a 50 to 100 year period. Neither you and I are going to be in the stock market for that long a period so this average number is irrelevant. If this happens to be a year when the market does well in the summer (and there have been years it has) you will run the risk of missing out on some terrific gains if you sell.
Lets look at the numbers closer using the S&P 500 instead of the Dow because that is a broader range of stocks. If you sold your stocks on the first trading day in May and returned to the market on October 1st each year from 1969 to 2007. (Yahoo Finance provided data to 1969).
Here are the Results.
26 of the 38 years the markets had a positive return during those supposedly six historically bad months from May through Sep. There were only 12 years in which you would have successfully avoided a loss during that six month period.
Also interesting to point out is that during the grand bull market of the 80s and 90s, the average return during May through September was 3.68%. A positive return, albeit not overwhelming. The average return from 1969-1979 was -2.22%, and from 2000-2007 the return was -1.59%. Outside of the big bull market of 1980-1999, this strategy would have worked. But the point is, it’s just averages. Year to year returns are very different and you don’t know which years will be good or bad. Over a long period of time, which is what these studies are based on, it is true that the market has underperformed in those months but it does not mean that you will lose money. And if you do lose some money, the statistics prove that it will only be a very small percentage.
The Bottom line
We just wanted to put these numbers into perspective before you jump the gun and sell because there is no doubt this “sell in May and go away” adage will be played out by the media. It’s all you are going to hear about for the next couple of weeks. But just look at the numbers and you’ll find that it’s not as bad as they make it out to be.
Our strategy at StockTradersHQ will be as it always is. We will just look at the chart patterns and the technical indicators to make our buy and sell decisions. The seasonality factor is way overblown. Technical Analysis is not.
Friday, May 2, 2008
The Rule of 72
If you are new to the stock market and investing, you may not be aware of “The rule of 72”. Most investors are aware of this rule. Using this rule we can project how long it will take to compound our cash based on the rate of return we are striving to receive from our investments. Here’s how it works. We simply take the projected return and divide into the number 72. By doing this simply math, we can project how long it will take us to double our money. If we were to earn a 6% return on our money in our trading and investment accounts, it would take us 12 years to double our money (72/6 = 12). On a 10% rate of return, our money doubles in 7.2 years. These are relatively conservative rates of returns that can be achieved in the stock market over time as a long term investor. But we always want to do better than the markets average and we don’t want to settle for just outperforming the market, we want to substantially out perform the market. Let’s use a 25% gain as our goal per year. At this rate of return, it would only take 2.88 years to double our money.
Why are we mentioning this rule of 72 tonight? We just want to put in perspective the returns of our STHQ trading system. You will see on the home page that our returns have averaged 94% per year for the last 5 years. Using this average, we would double our money in only 7.7 months. There is no service or system out there that can match this performance using only 5% to 10% of available capital in each trading position as our system calls for. We did it and all these trades were sent as alerts in real time and are available for all to see for the record on our site in our trade history.
2003, only a Dream?
Our 350% return in 2003 was exceptional and we admit that when averaged into the 5 years it greatly increases our average return. But let’s take out that return just for the heck of it and make believe it was only a dream. Let’s just use only the last 4 years of returns to get our average return. 19%, 23%, 81% and 26% would average out to a 37% return per year. Now if we use the rule of 72 with an average return of 37% per year, we would double our money in just under two years.
It’s hard to believe you will find any system or service including professionally managed mutual and hedge funds that will double your investment in less than two years. If you can find one anywhere in the universe let us know. We are not talking about buying an option with all of your available capital and hoping you hit a home run. That would be pure speculation and nothing more than a gamble. What we are talking about here is a system that limits risk by using no more than 5 to 10% in any one trade. The returns our system has made are amazing in of itself but when you take into consideration that we did it using only 5 to 10% of our capital in each trade, it makes the returns just that much more remarkable.
It’s Not as Easy as it May Seem
Although we are proud of our system and accomplishments, we are not writing this commentary as a means to boast. We are simply explaining the rule of 72 and putting into perspective how hard it is to achieve the types of returns STHQ has achieved since our inception. What we do is not easy and we hope that our new members will realize that high returns in the stock market are not easy to accomplish. It’s not rocket science, but on the same token, it’s not as easy as it may look initially.
Remember the rule of 72 when you are searching for a way to put your investment dollars to work for you. It’s a good way to figure out the rate of return you need each year to accomplish your financial goals.
Why are we mentioning this rule of 72 tonight? We just want to put in perspective the returns of our STHQ trading system. You will see on the home page that our returns have averaged 94% per year for the last 5 years. Using this average, we would double our money in only 7.7 months. There is no service or system out there that can match this performance using only 5% to 10% of available capital in each trading position as our system calls for. We did it and all these trades were sent as alerts in real time and are available for all to see for the record on our site in our trade history.
2003, only a Dream?
Our 350% return in 2003 was exceptional and we admit that when averaged into the 5 years it greatly increases our average return. But let’s take out that return just for the heck of it and make believe it was only a dream. Let’s just use only the last 4 years of returns to get our average return. 19%, 23%, 81% and 26% would average out to a 37% return per year. Now if we use the rule of 72 with an average return of 37% per year, we would double our money in just under two years.
It’s hard to believe you will find any system or service including professionally managed mutual and hedge funds that will double your investment in less than two years. If you can find one anywhere in the universe let us know. We are not talking about buying an option with all of your available capital and hoping you hit a home run. That would be pure speculation and nothing more than a gamble. What we are talking about here is a system that limits risk by using no more than 5 to 10% in any one trade. The returns our system has made are amazing in of itself but when you take into consideration that we did it using only 5 to 10% of our capital in each trade, it makes the returns just that much more remarkable.
It’s Not as Easy as it May Seem
Although we are proud of our system and accomplishments, we are not writing this commentary as a means to boast. We are simply explaining the rule of 72 and putting into perspective how hard it is to achieve the types of returns STHQ has achieved since our inception. What we do is not easy and we hope that our new members will realize that high returns in the stock market are not easy to accomplish. It’s not rocket science, but on the same token, it’s not as easy as it may look initially.
Remember the rule of 72 when you are searching for a way to put your investment dollars to work for you. It’s a good way to figure out the rate of return you need each year to accomplish your financial goals.
The StockTradersHQ Library
Knowledge is the key to be successful in the stock market, but which books should you read? There are thousands books available on every aspect of stock trading - and not all are created equal. The following recommended readings are what we feel are the truly great books available on the each subject. We hope you will find them as useful as we have.
REMINISCENCES OF A STOCK OPERATOR By Edwin Lefevre
Recommended by Dave Colletti:
"A story based on the life of legendary trader Jesse Livermore who was famous for being short the market just before the 1927 crash and made over 100 Million dollars while 99% of all investors lost their life savings. A truly fascinating story and after reading it, I was a believer that timing the market and individual stock moves can be done with great success. My journey into the world of TA began after reading this book."
THE MASTER SWING TRADER by Farley
Recommended by Alan Maxfield:
"The Master Swing Trader is not for beginners, and is a difficult read from cover to cover. But I constantly refer to mine, and I have it highlighted throughout with the margins all marked up. It is very technical but also very thorough. More than any other book this one is responsible for my quest for perfection in my trading systems."
HOW TECHNICAL ANNALYSIS WORKS by Bruce M. Kamich
Recommended by Dave Colletti
SECRECTS FOR PROFITING IN BULL AND BEAR MARKETS by Stan Weinstein
Recommended by Dave Colletti
STICKY STOCK CHARTS : Learn How to Manage Your Stocks -- In an Hour or Lessby Laurence Holt
TOOLS AND TACTICS FOR THE MASTER DAY TRADER by Velez & Capra
Recommended by Alan Maxfield:
"They have written the perfect book for the beginning trader or the trader who is struggling and needs to get back to the basics. They cover trading psychology thoroughly and offer an excellent introduction to basic trading systems."
TRADING FOR A LIVING: by Alexander Elder
Recommended by Alan Maxfield:
"I think he’s the best author I’ve read as far as being able to put a master trader’s mind to pen and paper. He’s a brilliant man who will help you to sharpen your trading instincts and develop an effective trading plan. Trading For a Living is easy to read yet very thorough in its instruction."
TECHNICAL ANALYSIS OF THE FINANCIAL MARKETS: By John Murphy
Recommended by Dave Colletti:
"A must read. Technical Analysis is the heart and sole of my trading style, it doesn’t always work but it sure works enough of the time to make very profitable trades. If you trade on T/A, this book is a must."
TECHNICAL ANALYSIS OF STOCK TRENDS: By Robert Edwards & John Magee
Recommended by Dave Colletti:
"For 50 years, this classic has remained the bible on technical analysis. It explains every aspect of charting from basic principles to advanced trading techniques. I love this book."
ELLIOT WAVE PRINCIPLE: By A.J Frost and Robert Pretcher
Recommended by Dave Colletti:
"A clear and easy to understand discussion of the Elliot wave theory. Readers are shown how they can apply the theory to forecast market and stock direction. If you want to study 'the wave', surf through this book."
MARKET WIZARDS: By Jack Schwager
Recommended by Dave Colletti:
"Interviews with some of the world's top traders. A very enjoyable read. It’s like talking to the best traders in the world right in your own living room."
THE AMAZING LIFE OF JESSE LIVERMORE By Richard Smitten
Recommended by Dave Colletti:
"Jesse Livermore is considered by many on Wall Street to be one of the greatest stock market traders who ever lived. This book is about Jesse Livermore's life. It was written after interviews with Livermore survivors and witnesses to the events which took place during his life. A Wall Street classic."
THE BATTLE FOR INVESTMENT SURVIVAL: By Gerald M. Loeb
Recommended by Dave Colletti:
"A timeless classic first published in 1935, this book remains one of the most popular handbooks on investing. It covers such essential topics as market timing, portfolio selection, hedging one's losses, switching stocks, investing in new products and much more."
HOW THE ECONOMY WORKS: By Edmund Mennis
Recommended by Dave Colletti:
"This book covers a vast amount of subjects concerning the economy. Every investor should know how our economy relates to the stock market and our investing and trading."
THE ALL SEASON INVESTOR: By Martin Pring
Recommended by Dave Colletti:
"This book explains a variety of successful strategies for every stage of the business cycle. The business cycle is a very important part of timing the moves and direction of the stock market."
The next list is for more advanced traders.
JAPANESE CANDLE STICK CHARTING TECHNIQUES: By Steve Nison
Recommended by Dave Colletti:
"This book has everything you need to know about Candlestick charting. If you are interested in learning Candlestick charts and formations as a short term trading tool, look no further than this book."
TRADING CLASSIC CHART PATTERNS: By Thomas Bulkowski
Recommended by Dave Colletti:
"This book covers most trading patterns and explains the statistical chances of each pattern being successful. Includes a scoring system for each pattern. Whether you believe in the probabilities in the book as they relate to each pattern is not important. The patterns themselves are the heart of the book in my opinion."
OPTIONS AS A STRATEGIC INVESTMENT: By Lawrence McMillan
Recommended by Dave Colletti:
"This book is pricy but it’s a super book. If you have any desire to learn stock options, this a must read. Stock options have very high risks and should not be traded if you are a beginner"
THE ENCYCLOPEDIA OF TRADING STRATEGIES: By Jeffrey Owen Katz and Donna L. McCormick
Recommended by Dave Colletti:
"Probably the most advanced book I have every read on the subject of trading. Very complicated reading but once understood, you will learn what methods work and what doesn’t. Skip this book if you are a beginner. If you think you know everything there is to know about trading, you haven’t read this book yet."
Knowledge is the key to be successful in the stock market, but which books should you read? There are thousands books available on every aspect of stock trading - and not all are created equal. The following recommended readings are what we feel are the truly great books available on the each subject. We hope you will find them as useful as we have.
REMINISCENCES OF A STOCK OPERATOR By Edwin Lefevre
Recommended by Dave Colletti:
"A story based on the life of legendary trader Jesse Livermore who was famous for being short the market just before the 1927 crash and made over 100 Million dollars while 99% of all investors lost their life savings. A truly fascinating story and after reading it, I was a believer that timing the market and individual stock moves can be done with great success. My journey into the world of TA began after reading this book."
THE MASTER SWING TRADER by Farley
Recommended by Alan Maxfield:
"The Master Swing Trader is not for beginners, and is a difficult read from cover to cover. But I constantly refer to mine, and I have it highlighted throughout with the margins all marked up. It is very technical but also very thorough. More than any other book this one is responsible for my quest for perfection in my trading systems."
HOW TECHNICAL ANNALYSIS WORKS by Bruce M. Kamich
Recommended by Dave Colletti
SECRECTS FOR PROFITING IN BULL AND BEAR MARKETS by Stan Weinstein
Recommended by Dave Colletti
STICKY STOCK CHARTS : Learn How to Manage Your Stocks -- In an Hour or Lessby Laurence Holt
TOOLS AND TACTICS FOR THE MASTER DAY TRADER by Velez & Capra
Recommended by Alan Maxfield:
"They have written the perfect book for the beginning trader or the trader who is struggling and needs to get back to the basics. They cover trading psychology thoroughly and offer an excellent introduction to basic trading systems."
TRADING FOR A LIVING: by Alexander Elder
Recommended by Alan Maxfield:
"I think he’s the best author I’ve read as far as being able to put a master trader’s mind to pen and paper. He’s a brilliant man who will help you to sharpen your trading instincts and develop an effective trading plan. Trading For a Living is easy to read yet very thorough in its instruction."
TECHNICAL ANALYSIS OF THE FINANCIAL MARKETS: By John Murphy
Recommended by Dave Colletti:
"A must read. Technical Analysis is the heart and sole of my trading style, it doesn’t always work but it sure works enough of the time to make very profitable trades. If you trade on T/A, this book is a must."
TECHNICAL ANALYSIS OF STOCK TRENDS: By Robert Edwards & John Magee
Recommended by Dave Colletti:
"For 50 years, this classic has remained the bible on technical analysis. It explains every aspect of charting from basic principles to advanced trading techniques. I love this book."
ELLIOT WAVE PRINCIPLE: By A.J Frost and Robert Pretcher
Recommended by Dave Colletti:
"A clear and easy to understand discussion of the Elliot wave theory. Readers are shown how they can apply the theory to forecast market and stock direction. If you want to study 'the wave', surf through this book."
MARKET WIZARDS: By Jack Schwager
Recommended by Dave Colletti:
"Interviews with some of the world's top traders. A very enjoyable read. It’s like talking to the best traders in the world right in your own living room."
THE AMAZING LIFE OF JESSE LIVERMORE By Richard Smitten
Recommended by Dave Colletti:
"Jesse Livermore is considered by many on Wall Street to be one of the greatest stock market traders who ever lived. This book is about Jesse Livermore's life. It was written after interviews with Livermore survivors and witnesses to the events which took place during his life. A Wall Street classic."
THE BATTLE FOR INVESTMENT SURVIVAL: By Gerald M. Loeb
Recommended by Dave Colletti:
"A timeless classic first published in 1935, this book remains one of the most popular handbooks on investing. It covers such essential topics as market timing, portfolio selection, hedging one's losses, switching stocks, investing in new products and much more."
HOW THE ECONOMY WORKS: By Edmund Mennis
Recommended by Dave Colletti:
"This book covers a vast amount of subjects concerning the economy. Every investor should know how our economy relates to the stock market and our investing and trading."
THE ALL SEASON INVESTOR: By Martin Pring
Recommended by Dave Colletti:
"This book explains a variety of successful strategies for every stage of the business cycle. The business cycle is a very important part of timing the moves and direction of the stock market."
The next list is for more advanced traders.
JAPANESE CANDLE STICK CHARTING TECHNIQUES: By Steve Nison
Recommended by Dave Colletti:
"This book has everything you need to know about Candlestick charting. If you are interested in learning Candlestick charts and formations as a short term trading tool, look no further than this book."
TRADING CLASSIC CHART PATTERNS: By Thomas Bulkowski
Recommended by Dave Colletti:
"This book covers most trading patterns and explains the statistical chances of each pattern being successful. Includes a scoring system for each pattern. Whether you believe in the probabilities in the book as they relate to each pattern is not important. The patterns themselves are the heart of the book in my opinion."
OPTIONS AS A STRATEGIC INVESTMENT: By Lawrence McMillan
Recommended by Dave Colletti:
"This book is pricy but it’s a super book. If you have any desire to learn stock options, this a must read. Stock options have very high risks and should not be traded if you are a beginner"
THE ENCYCLOPEDIA OF TRADING STRATEGIES: By Jeffrey Owen Katz and Donna L. McCormick
Recommended by Dave Colletti:
"Probably the most advanced book I have every read on the subject of trading. Very complicated reading but once understood, you will learn what methods work and what doesn’t. Skip this book if you are a beginner. If you think you know everything there is to know about trading, you haven’t read this book yet."
Subscribe to:
Posts (Atom)
