Simplify Trading Rules When Using BetterTrades


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Home \| Finance Simplify Trading Rules When Using BetterTrades By: Loredana Sargu, Posted on: 2007-10-12 Trading in the stock market can be very tricky, especially if you’re looking at more than one position. While certain strategies are inherently complex, managing multiple positions of even the most simple strategy can quickly become an "awesome" task! I prepare a "Trade Of The Day" for my daily on-line trading labs. This report is published every morning prior to the market’s opening and it details or ‘outlines’ a ‘trading plan’ for that particular stock. Recently, I was looking at trading ADVP down for the day. Additionally, I prepare a list of 3 or 4 other stocks to watch. The idea is to have an additional trade or two to fall back upon in the event that we’re unable to get into the Trade of the Day. The challenge that morning developed very quickly as the planned trade appeared NOT to be cooperating for an entry. We quickly moved to a secondary trade in CMCSK, moving in and out 2 or 3 times in the first hour. During this time, ADVP began to move and while our attention was diverted, it had actually confirmed down and moved below what we later determined was a prudent entry point. In other words " we MISSED an almost ‘sure’ trade on the ADVP ‘tombstone’ while our attention was diverted to CMCSK. While you’re in the ‘rattle of the battle’, with the stock price squirming and wiggling around, it’s extremely easy to totally miss the precise time to move into a position, despite your best efforts! For the past several months in the Trading Lab, I’ve been paying a lot of attention to teaching the traders how to use a given set of rules to help simplify their trading. These rules were NOT in place at the time the trading was being done. The results, while NOT devastating (we made about $200 on the trade) certainly were responsible for us missing another $500-$600 of profit. So let’s spend a couple of minutes going over these rules so we can minimize preventable losses. We’ll come back and apply these rules to the above chart to demonstrate the difference in profitability. Let’s take a close look at the ‘rules’ and how they can simplify your trading, freeing up your attention for additional profits. Rule #1 Always let the stock price CONFIRM the anticipated direction before entering the trade. For example, if you are trading into a short … that is you anticipate the stock price will move down, and then let it do something to convince you it’s actually moving lower BEFORE you enter the trade! That confirmation can be something as obvious as a specific dollar amount of movement or it can be a less conspicuous move below a current support price. Rule #2 Once you’re in the trade, immediately place a stop loss on the position. I use an amount equal to about 1/2 the average daily movement of the stock price. This allows the stock price to ‘wiggle’ around a bit without taking you out of the trade prematurely. It also caps your potential for loss! Rule #3 Once you're profitable by 1/2 the stop loss amount, replace the stop loss with a trailing stop, lagging the current price of the stock by about 1/2 the stop loss amount (1/4 the average daily movement). This allows you to stay in the trade more 'tightly' but still allows the stock price to wiggle around without taking you out too soon. Notice also that it moves your "stopped out" point to approximately breakeven! If your stock continues up for even greater profit, you should consider tightening the trail to around 1/2 the present amount, thus locking in even higher profits! Rule #4 LEAVE IT ALONE! Let the stock price movement take you out of the position via the stop loss or trailing stop! This is like putting your trades on 'auto-pilot', freeing you up to attend to other trades! Think about it...following these rules consistently can free you up to do other trades and possibly double or triple your profits as you find yourself trading much more safely on 2 or 3 times the number of trades! Bob Eldridge Article Source: http://www.allthebestarticles.com Content Source: Option Trading from BetterTrades featuring their free Better Trades Stock Tutorials Please Rate this Article # of Ratings = 1 \| Rating = 5/5 Click the XML Icon Above to Receive Finance Articles Via RSS! 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