Dark Side of the Trade
The information you are about to read is from my many failed trades with a small trading account.
We all study charting and the art of entering a trade. Watching for the indicators: volume, momentum, support and resistance, higher highs, higher lows, previous long term resistance, which I call the historical's, upward trend and downward trend, promotions, promoters, market makers (mm), and dilution.
I want to quickly go over those before I talk about what I call the dark side of the trade.
Volume, is being sure that there are enough trades going through to allow liquidity and easy access into and out of the trade. It is tied to momentum and dilution in many trades.
Momentum, is how high is the interest of trading the stock. It is tied to volume and dilution as well. My scanner has shown me that volume and momentum are not always the same. It finds some stocks that are rising very quickly in price but only have 10 trades and $4000 in volume that has pushed the stock into a stratospheric double or triple play. Momentum is very important to achieve better gains, however if the $ volume isn't there you can very easily become a bagholder, if those few who are trading this fast moving stock, sell out on you. It was those frantic "got to have it" traders who were driving the rise in price and when that driving force sells out or can't or won't place increasingly higher buys, the stock will stop dead, if there hasn't been new frantic buyers to replace them.
That is the job in which, promoters, with their promotions, have found a wonderful niche.
Dilution is the downside of those promotions, because the promoters get their pay, often, as shares or are helping their "employer", the company affiliated "third party" who have shares that they want to sell for a profit and do it into the rising stock prices. If the promoter and the market makers are not careful about how they manage that process of inserting all those extra trades into the promotion momentum ... they can easily stall or stop it. We see sideways price with a lot of volume, at the best of their not so good attempts, and falling prices of the promoted stock with tons of volume, at their worst attempts at inserting too many additional dilution shares, too quickly. These two actions can cause real traders to lose interest and sell or as this process accelerates, panic selling.
Really good promoters can recover a stock play by sending out exciting email and hard mailers, thus pumping the interest momentum back up. If they are successful, the new activity hits those traders who trade using scanners and the process resumes. It takes a huge database full of email and physical addresses to accomplish that, in my opinion. That is why you can see some of the less well known promoters fail at doing that same process, they just don't have the number of traders following them to recover any "over dilution" mistakes on their part.
All of the charting aspects of support/resistance, using historical charting (the long term past action of a stock), and trend, can be found in video's here: http://www.stockhaven.com/trading-university/trading-university-videos/
and here are the night class video's : http://www.stockhaven.com/?s=stockhaven%27s+classroom
and all of camaro's video's : http://www.youtube.com/user/Cam24Trader
What I want to address today, is the subject of selling your trade when things are not going so well, with a special slant towards those with the smaller trading accounts. This is important for all traders but especially those who are restrained by dollar amount and of course those FINRA/SEC rules.
Those of us with small accounts have to be extra watchful so that we don't fall to that old traders enemy: GREED.
Most of us would say that we are not greedy people. We would just like to make good trades and make a nice profit/living. But greed is not just the overt definition of the word. It infiltrates all levels of the trading process. We face it in most of the activities we are involved with during our trading. It is obvious that the promoters are trying to tap into that trader emotion in a big way. But we also face it in what we read all day long in our chat room experience. The larger account traders are able to get in and out in short amounts of time and with small price moves, making the wonderful gains that we too (greed) would love to get.
In chat I often see talk about having a plan. It is also the subject in many of our video's. What I want to impress upon the small traders today, is that it is absolutely essential that we make plans and adhere to them even more strongly than any other trader does. Why?
I addressed this also in my previous article when i said: http://www.stockhaven.com/dont-be-scared-be-prepared/
"Every day we are in chat, hopping into trades that are popular without checking that stock's charts first because we are trying to get in before being left behind. This behavior is a form of chasing that is hurting many traders accounts and has hurt mine as well. We hop in, having no idea of where support or even the next resistance area is, where we should be getting out, and then get stuck or sell at "even" or take a loss. Lack of having any plan by trading this way is a very bad habit to get into and may at some point cause you to leave the trading arena until earning outside funding again or in some cases, leaving trading for a long long time, if not forever."
What I am speaking to in this article is an excerpt line of the previous article: "and then get stuck (known as being a bagholder), or sell at "even", or sell for a loss". This is the dark side of the trade! That event that is so damaging to our small accounts.
Have a plan : We get watch lists everyday from numerous traders. Take each chart from those watch lists and draw the support and resistance lines. Look at them on each of the time frames for that chart. Attend evening classes or watch the new videos where stockhaven shows, as he is charting for us, how he looks at those charts in a 5 minute, 15 minute, daily back to a year, and weekly back multiple years. Practice until you are proficient at quickly finding these essential entry and exit points. Choose the stock that meets good support entry and also has good volume. Find the next resistance point.
Get out your calculator. Find out how many shares and at what price you would sell to make a $50 gain. That is your exit price. Is that exit price anywhere near the resistance? If it is above the next resistance, then you will have to see enormous volume to push thru that resistance to the next area to make profit on that trade. The first 5 minutes will tell you, but then you may have lost the entry point. So go backwards. Look at what they are using for the gap plays: Volume wise, what would that stock have done if there were just 15 more minutes to the trading day? Was the volume increasing?
Another way to find an exit point, which is always done in your plan before you put the trade in, is to find the support entry point and then look at the next resistance. How much gain can you earn if you make your sell order for just under that resistance point? Look back and see how strong that resistance point is. Are there a lot of that very same price bounces off of that resistance point. Was there a lot of volume associated with any of them? Lower volume means they are not as strong. They will be easier to punch thru if the current volume is triple or more of those older resistance points volume amounts.
Note: The big traders use %. We cannot. The 5% and 10% gains that they are trying to make, do not even cover our commission costs, most times.
So, we are going to have a plan. Use the watch lists. Chart those tickers. Find support and resistance. Check for good volume. Calculate the gains that can be made. If it is tradable with the funds you have available, to buy enough shares to play on that stock, then you have found a good "safe as they are able to be", stock trade. We all know the disclaimers: If you do not have funds you can afford to lose...
As soon as your buy order triggers and you are in the trade, make the sell order and send it.
WHAT? "But what if it goes ballistic and I miss out on all those wonderful gains because I had already made a plan and then executed that plan by sending the sell order already? " Gee, she says tilting her head sideways and listening: "Do I hear that old enemy, GREED?" Yep. That easily and that quickly greed gets us. And now if we cancel to allow it to run, we no longer have a plan, do we. Where are you going to sell, now? Is it when other people say they are selling? Alerts do not come in time to save you, for the most part. Experienced that, anyone?
So, until you, too have a big account, you must stick with your plan. It will come, I know, achingly slowly, but it will come. Then you too can adjust your new trading plans. Those people that appear to just jump in and grab great gains and jump back out.... well they have enormous trading experience.
What you are not seeing: they have internalized the process that I just laid out for you to use and practice. As children we did not just crawl, walk, ride a bike. We all put many hours of work into gaining those skills. It is the same with trading.
We have a member in chat who rides, BMX. He didn't just learn to ride, he spent even more time to become expert at all the tricks of his riding interest. To that extent of your desire to become an excellent trader, will you spend the hours and all of the hard work necessary?
Two more points before I finish. One is the subject of your loss stop and the other is a strategy to overcome the 3 day settlement rule.
The dark side of the trade. Where to put your stop loss. At what point are you going to preserve those precious funds? In penny trading this is very hard because we have to use mental stop losses. And this is where GREED gets us at our most vulnerable.
Of anything that you do in trading, I am finding that this is the most important action that you can take. It is our "lack of action" in this one thing that kills so many trading accounts. I've heard older, more experienced traders say from time to time, that the good trades will take care of themselves, it is those trades that are going against you, which you must learn to handle with the skill of a surgeon. Quickly and without emotion, you must cut away the bad.
With our small accounts, I am coming to the conclusion, that your stop loss must be no lower than your entry price. You will lose any commission on that trade but nothing more. I cannot stress enough how important I am finding this one aspect of trading for the small account is.
I too, get frustrated at having a trade that looked good, I had my plan, and yet it all goes wrong. It is GREED that prompts us to let it go just a little longer, maybe it will come back up and I will be fine. Yes, that does happen. But if you let it go under your entry price, then where will you pull that trigger? Setting that exit sell order helps you to avoid the emotions. Being a surgeon and cutting the trade at a retracement to your entry price also cheats GREED of your trading capital.
This is the most important aspect that I'm finding in the actual trading arena. This is the equivalent of the toddler who falls one more time skinning their knees. Children never stop trying to learn that wonderful skill of walking, no matter how many times they fall in the process. We must do the same. At all emotional cost, hold to that tight stop loss. You will get trades that give you profit. It is going to take us longer to get to those big trading accounts. But if we preserve the trading capital, we will trade another day towards that ultimate goal.
Ok, I'll leave you with the last process, or strategy, that can help you manage one of the hardest obstacles to our small accounts, the pdt trading rules of settlement. It will help you accelerate the times available to make additional numbers of trades.
I call it the "round robin" method of making your trading money work it's hardest for you. This is also in my previous article but I have found a second level that works, in addition to the one that I think works best.
"It is very frustrating that we have the 3 day settlement rule. It makes it hard to trade often enough to satisfy our desire to trade and grow that account to the point where it can comfortably be split into tradable amounts. I would like to see that point being around the $4000 amount. That way trading can continue the growth by using 1/4 of the total account for each trade, letting that portion settle on it's 3 days, while moving to the next 1/4 of account for another trade and letting it settle for the 3 days, continuing that in a "round robin", and moving from day to day, always having a portion available for a trade while the balance is taking it's settlement."
We lose less unexpected opportunities that way. Every day and night we get new watch lists and alert plays. This "round robin" strategy allows us to take advantage of the most of those that we can.
The new levels that I have found can be workable with this strategy is the $2000 amount. It is half of the original dollar amount that I had felt was attainable. Of course since it is half the amount of tradable funds, it will take much longer, probably, to also attain more pleasant levels of trading capital, gains. You will have to have even more patience, and be even more attentive to those stop losses and plans and in selecting the best of the tradable stock tickers. It may be a quite slow process, but persevere and you will be trading with the big boys some day, rather than not trading at all, anymore.
And as always .. have fun and good trading to you all! ANGELL