In this issue:
or Trading to make money vs. being right
or Stop loss orders: more than just taking a loss
or How to properly use moving averages
or How to choose which stocks to trade
? Trading to make money vs. trading to be right.
One of the most common problems new traders' face is truly understanding the fact that losses are a part of the business. Trades that don't make money are as inevitable as needing air to breath. Here is the key new traders fail to grasp that:
To losing trade isn't necessarily a bad trade. Trades entered based on a well thought out and written trading plan are good trades, no matter the outcome. Often we on our trading floor traders ask "what Would you make the same trade again?" after they exit to trade that was not profitable. If the answer comes back yes we know the trader is on the right track.
To trader who can answer yes to this question is to make money trading. They understand this is just one trade of maybe hundreds they will make this month. A trader who has attained this important mindset will move effortlessly from one to the next trade. Ask yourself if that is how you react from trade to trade.
The trader who gets frustrated and yells at the screen or keyboard is trading with his ego pounds. He is to prove his brilliant analysis correct trading.
The easiest way to monitor if you are trading to be right: pay attention to how you exit at trade losing flawlessly. If you hesitate at all, you have some mental work to do.
Another important question to ask yourself while in a trade: "If I did not have this position, would I want it?" If the first answer comes back NO, and you don't get out of the trade, you are trading from your ego.
A trader's maxim: Assess probabilities, put the trade on, let the trade unfold, do what you planned to do.
? Stop loss orders: more than just taking a loss
If I had to put a percentage on the time spent on entry signals vs. time spent on exit techniques, I would say its 90-10 entry signals. Learning how to manage a position properly will ultimately be the reason you take home a check every month. Your ultimate goal is to "make what you should" on your trades. Obviously its not possible to get out at the extreme of a move on a consistent basis, but there are some techniques you should use to maximize profits and minimize losses.
Before we discuss specific stop loss techniques we should cover the proper trader psychology for this topic.
or The stop loss must be a dollar amount you accept before you place the trade. This small distinction will be a huge shift in your thinking about a trade. Once you have "accepted" the risk, this will ensure flawless execution. If a trade moves against you, it will be easy to exit because you have already accepted the dollar amount risk and were comfortable with taking the loss on that amount.
Initial Stop Loss: Risk as defined by your original entry point.
Break Even Stop Loss: When a position moves in your favor, you move the stop loss point from the original spot to your break even area.
Trailing Stop Loss (profit taking): Used to protect significant profits on a winning position. Objective is to lock in some profits.
The buy stop and sell stop limit, orders to learn important limit.
or Typically used in place of market orders.
or Intention is to take advantage of liquidity and get price improvement.
o Helps get filled in "fast" market conditions, but cannot get to worse fill (as with a market order) than the limit price entered.
or A buy stop limit order to buy an is placed above the current best offer to sell.
or A sell stop limit is an order to sell below the current bid to buy.
? How to properly use moving averages
Let's keep things simple, we are here to make money. It is very easy to get sucked into the myriad of fancy indicators over and use them. The original use of moving averages by floor traders was not very complex.
There are 20 trading days in an average month. "What Is today's action above or below the average price?" Based on the answer to the question, floor traders would have a bias to the long or short side. It was very simple how it was used; It was not a magic tool.
The last thing you want to be doing when you are trading is thinking too hard, you want to be listening to what the market is telling you. Proper use of moving averages in today's technologically advanced market is to us them as a filter.
Here is the best and most profitable way of using them:
1. As a trend filter. Use it to quickly identifying bias; method should I be long or short. Use it to filter out the noise so that you are not placing too much emphasis on every blip and print. We recommend using a simple 20 period moving average
2. Use it to determine strength of trend. If the 20sma is sideways, there is no bias, don't trade you are guessing. If it has a nice upward or downwards slope, you should be trading aggressively in that direction.
3 Use a second moving average to determine momentum. We teach to use 5sma to determine the momentum on all time frames we monitor. The method a great tool to help hold good trades. If momentum remains above the trend, stick with the trade until you see exhaustion in the move or when the momentum crosses the trend. There are more techniques we teach in the Equity Trader 101 course but you get the idea. Use moving averages as a filter, not as magic points.
? How to choose which stocks to trade
The objective in short term trading is to make a consistent living. Far too many traders decides to trade stocks that are too illiquid or too volatile to manage risk. An illiquid stock is one that does not have sufficient bids and offers to get out of to where you want to easily trade. If you were to place to sell order and it would knock the stock down. 10, it is not liquid. The trading of stocks that are volatile sounds exciting, and would appear to provide the most profit potential. On the surface this sounds great, but remember why you decided to become a professional trader, to pay your bills every month, trading maximum volatility everyday is a quick way to the poor house.
Money making stocks should have two characteristics if they are to be a part of your daily business: liquid enough to manage risk and active enough to provide money making opportunities.
We recommend you pick one of two groups of stocks:
1. To basket of non correlated stock that you trade every day
2. To sector or industry that you learn like the back of our hand. You can find a breakdown of sectors and industries here to get ideas.
If you would like to learn about trading a Keystone Trading Group corporate account, or would like to take to Keystone Trading Concepts class, please contact us here: info@keystonetradinggroup.com
If there any topics you would like to see in future newsletters, please let me know. prenzulli@keystonetradinggroup.com
Have a great and profitable week. http://www.keystonetradinggroup.com
The founders and instructors of Keystone Trading Group have managed to profitable short term trading desk for the last seven years. Our specialty is short term intra day to five day stock trades.
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