Trade Management Advice
Trade management
We are regularly asked our views on when to enter or exit a position and what stop should be used once in it. At this point I would suggest that there are no hard and fast rules, this article just gives my thought process. You may want to assume that we are talking about a stock here but many of the rules may apply just as well to commodities and currencies. I am also assuming we are looking at going long (buying the stock), you would simply reverse the rules if shorting.
BEFORE YOU ENTER
It is assumed at this stage you have made sure hat the equity that you are about to trade meets any fundamental criteria if used, otherwise we are looking purely at a technical play.
What should be an obvious question, but is often overlooked by many, is what is the target price gain. Subject to your trading mechanism, i.e. shares, options, spread betting, you should consider how much the underlying instrument needs to move to be profitable taking into account any trading costs and spread. If the risk does not provide a better reward than keeping your money in cash in a high interest account, then what is the point?
Subject to what technical indicators you are using to manage the trade, you should decide on an entry point and exit point. Note the latter does not have to be set in stone, as we will cover later although as already mentioned essential to calculate risk/reward. If you are using the Market Matrix system you may have some quite accurate points although you should also consider at least one fibonacci level either side. For the purpose of this article I will refer to these as support and resistance.
ENTERING YOUR POSITION
Timing of your entry is critical subject to the amount of movement expected. When you enter must be down to your attitude to risk and carefully managed. Lets assume you are looking to catch a turn, there is a saying that you should never try catch a falling knife, many believe it is the same for the markets. You may feel it is safer to enter a position when the price has turned.
In the example shown in figure 1, my analysis is showing that it is due to hit a 61.8% retracement level in price. As confirmation, it had gapped down three times, the last is known as an exhaustive gap. My expected support level is around $80 and my target resistance is $98 giving an $18 move.
With such a move you have enough room to ensure that the turn is in, thus a target entry point of $81 may be safer than catching the $80 point. This is really up to you and whatever indicators you may be using. However the next step is to decide where to put your stop.
PLACING A STOP
The initial stop should be placed immediately following the purchase order being accepted. If you prefer you can place the orders together as an OSO. (figure 2)
Where you set your stop must take into account a number of factors. Firstly look at how volatile the stock is, if you place your stop at $1 below the current price yet the stock has regular daily range of movement of $4 then you are very likely to get stopped out very quickly. This volatility can be magnified significantly if you are using leverage such as options so you must take this into account.
You may decide to set your stop just below the support level you have identified. I say below, as the support may be tested a fraction before you see the move up continue. If using Fibonacci retracements you may consider using the next number (only if using the full range rather than the 3 common figures) but this is of course subject to the distance that it is away, in terms of price and volatility.
Some people set stops using a percentage, although the same percentage is not necessary right for all stock prices.
MANAGING YOUR POSITION
The key here is to let your winners run whilst keeping your losses short. You have already placed a stop but this should ideally be managed to lock in profits.
Many investors get knocked out of a position far too early as they move their stops up too tight before the price has run its ground. As a rough rule here, we would only move the stop for the first time once it has cleared twice the amount of average daily volatility. As soon as possible thereafter move the stop to the break-even point.
As a move is rarely a straight line but a number of waves (Figure 3) the stop should then be moved within two to three times the average days volatility until it closes on your target resistance where you may reduce it to one or at most two times. If it breaks through your expected resistance level you may want to move it to a fraction below the previous top to allow for any further test. Of course if you have calculated that a turn is due and any other indicators you use are showing that the stock price may be overbought then you can either move the stop up even tighter or simply close out (Figure 4).
In this example you would have bought at say $81 and sold at around $97.40, a profit of $16.40 (20%). You many have squeezed a couple of extra dollars out of the trade but you would not have left too much behind. Key to this process is that you have a plan, that being to take as much
profit as you can
Regards Darren Winters
Investment Training Seminars
We are regularly asked our views on when to enter or exit a position and what stop should be used once in it. At this point I would suggest that there are no hard and fast rules, this article just gives my thought process. You may want to assume that we are talking about a stock here but many of the rules may apply just as well to commodities and currencies. I am also assuming we are looking at going long (buying the stock), you would simply reverse the rules if shorting.
BEFORE YOU ENTER
It is assumed at this stage you have made sure hat the equity that you are about to trade meets any fundamental criteria if used, otherwise we are looking purely at a technical play.
What should be an obvious question, but is often overlooked by many, is what is the target price gain. Subject to your trading mechanism, i.e. shares, options, spread betting, you should consider how much the underlying instrument needs to move to be profitable taking into account any trading costs and spread. If the risk does not provide a better reward than keeping your money in cash in a high interest account, then what is the point?
Subject to what technical indicators you are using to manage the trade, you should decide on an entry point and exit point. Note the latter does not have to be set in stone, as we will cover later although as already mentioned essential to calculate risk/reward. If you are using the Market Matrix system you may have some quite accurate points although you should also consider at least one fibonacci level either side. For the purpose of this article I will refer to these as support and resistance.
ENTERING YOUR POSITION
Timing of your entry is critical subject to the amount of movement expected. When you enter must be down to your attitude to risk and carefully managed. Lets assume you are looking to catch a turn, there is a saying that you should never try catch a falling knife, many believe it is the same for the markets. You may feel it is safer to enter a position when the price has turned.
In the example shown in figure 1, my analysis is showing that it is due to hit a 61.8% retracement level in price. As confirmation, it had gapped down three times, the last is known as an exhaustive gap. My expected support level is around $80 and my target resistance is $98 giving an $18 move.
With such a move you have enough room to ensure that the turn is in, thus a target entry point of $81 may be safer than catching the $80 point. This is really up to you and whatever indicators you may be using. However the next step is to decide where to put your stop.
PLACING A STOP
The initial stop should be placed immediately following the purchase order being accepted. If you prefer you can place the orders together as an OSO. (figure 2)
Where you set your stop must take into account a number of factors. Firstly look at how volatile the stock is, if you place your stop at $1 below the current price yet the stock has regular daily range of movement of $4 then you are very likely to get stopped out very quickly. This volatility can be magnified significantly if you are using leverage such as options so you must take this into account.
You may decide to set your stop just below the support level you have identified. I say below, as the support may be tested a fraction before you see the move up continue. If using Fibonacci retracements you may consider using the next number (only if using the full range rather than the 3 common figures) but this is of course subject to the distance that it is away, in terms of price and volatility.
Some people set stops using a percentage, although the same percentage is not necessary right for all stock prices.
MANAGING YOUR POSITION
The key here is to let your winners run whilst keeping your losses short. You have already placed a stop but this should ideally be managed to lock in profits.
Many investors get knocked out of a position far too early as they move their stops up too tight before the price has run its ground. As a rough rule here, we would only move the stop for the first time once it has cleared twice the amount of average daily volatility. As soon as possible thereafter move the stop to the break-even point.
As a move is rarely a straight line but a number of waves (Figure 3) the stop should then be moved within two to three times the average days volatility until it closes on your target resistance where you may reduce it to one or at most two times. If it breaks through your expected resistance level you may want to move it to a fraction below the previous top to allow for any further test. Of course if you have calculated that a turn is due and any other indicators you use are showing that the stock price may be overbought then you can either move the stop up even tighter or simply close out (Figure 4).
In this example you would have bought at say $81 and sold at around $97.40, a profit of $16.40 (20%). You many have squeezed a couple of extra dollars out of the trade but you would not have left too much behind. Key to this process is that you have a plan, that being to take as much
profit as you can
Regards Darren Winters
Investment Training Seminars
posted by Darren Winters at 12:31 PM
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