Sunday, October 30, 2005

Should You Trade That Stock?

Traders have personalities of all sorts. Some are hyper-active and impatient, darting in and out of trades at a moment’s notice. Others are patient and willing to let a bigger move develop. Some take small risks, while others go for broke. Some watch the tape, while others make decisions based on chart patterns or indicators. You name the personality, it can be found on a trading floor.

Stocks are the same way!

Grandma’s slow but she’s old. Some stocks are both old and slow. Others make real-time quotes seem slow with the speed at which bids and offers change. Some stocks trend nicely, while others change directions every other day. Deciding which trades you should take is largely a matter of matching your personality with that of the stock in question.

The next time you’re stalking a trade, take a look at the history of the stock you’re watching. Does it frequently have big overnight gaps which might be costly? Does it move so much that it may stop you out too quickly? Or does it move so slowly that it’s likely to bore you out of it? Consider your personality and determine whether your stock matches it. Patient traders willing to wait for profits may be better served to trade the slow but steady stocks. Scalpers will likely do better in the high-volume momentum stocks which are in play for the day, providing them a number of chances to make incremental profits over the course of the day.

Whatever your personality, be sure to find stocks that are a good fit to trade. Seek out stocks with the right personality for your trading style. Whether you’re day trading or swing trading, you’ll be miles ahead of most traders who never take this into consideration.

Jeff White
President, The Stock Bandit, Inc.

Thursday, October 27, 2005

Why Technical Analysis

When people find out I’m a trader, one of the first things they as is “what stock should I buy right now”? My answer, of course, is that I have no idea.

They want a buy-&-hold investment. They’re wrapped up in their own jobs and lives, and they wouldn’t notice something like a lower high or a high-volume reversal as a signal to bail out. They need some diversity, a long-term outlook, and most importantly, an advancing stock market.

I’m a technical trader with a short-term horizon. If something doesn’t act right, I can change my opinion in a heartbeat. I may even reverse my position. The market can stagnate and I can still make money. That’s the beauty of being short-term. I only have to be right for a limited time, ring the register, and then move on to the next trade.

When I try to explain why I select trades on a technical basis, several reasons always surface:

Short-term trades are all about supply and demand. Technical analysis is founded on price action, not fundamental trends over the course of a business cycle. I want something that can pay me today. Waiting for next year isn’t going to work for me. Chart patterns help me take notice of support, resistance, and momentum which will tell me whether I should be in or out of a stock. Knowing where buyers and sellers lurk provides me with opportunities to make money as I consider the emotions each group may be dealing with. Only technical analysis can reveal this.

Technical analysis of chart patterns provides me with good risk/reward setups. Trading is much more about money management than many give it credit for. By entering positions where I stand to lose only a little if I’m wrong but make much more if I’m right, my approach puts me at a big advantage. Finding chart patterns with a nearby stop-loss allows me to put my money to work with more confidence.

Trading on fundamentals puts me at a disadvantage. If I try to convince myself that my research of XYZ Company will reveal the same information that a multi-billion dollar fund can uncover, I’m kidding myself. Scouring Yahoo Finance in my spare time and trying to guess what next quarter will hold for a company will never compare to a research team that’s regularly in touch with management. The little guy doesn’t have access to the same info as the big dogs, so the playing field isn’t level.

I can compound my money faster. Technical trades are short-term in nature, so I’m in and out of the market much more frequently, compounding my money. Making 5 consecutive trades which each earn me 2% on my money will outpace the return of making one investment which shows me a 10% gain. Considering that fundamentals can take months, quarters, or even years to play out, I’m convinced that consistently hitting singles in the meantime will put me in the Hall of Fame without trying to uncover the next Microsoft or Cisco.

“Good companies” don’t always go up. The object is to turn a profit when my money is at risk. That means only one thing: if I’m buying a stock, it better be moving up. I don’t care if it’s a great company or not, if there’s no demand for it or no new money flowing into it, then it is not going higher. While a company may be great right now, how long will I have my money sitting in it before it is discovered? What opportunities might I miss elsewhere because I’m waiting for this one to pan out? No thanks! Good investments go up, not necessarily good companies.

Ultimately, I put my capital at risk only when opportunities present themselves, and preserve it the rest of the time. Trading with a technical approach allows me limit risk, maximize rewards, and even have a plan of action as I go.

Jeff White
President, The Stock Bandit, Inc.

Wednesday, October 26, 2005

Trading: Art or Science?

I usually hate junk mail, but one popular broker recently sent me a card describing all the success I could have as a trader if I would just implement a more scientific approach. It got me thinking…..does the average trader just need to backtest and automate a strategy to find that golden road to the land of profits? I doubt it, but there’s something there for the new trader to consider.

I’ve encountered many traders with all different approaches. Some are rules-based traders who want to see conditions A, B, and C in place before they act with orders 1, 2, and 3. Other traders seem to have no written trading rules, but they do very well consistently with their instincts. Take my good friend Wes across town, for example. He’s day traded for over a decade, spending countless hours watching tickers and order flow. He’s a high-volume scalper who frequently will trade 200,000 to 300,000 shares daily. He watches only a few of stocks, trades each of them many times a day and does quite well. That’s trading that can’t be taught. That kind of trading is an art.

So where should one begin?

While I am not a proponent of backtesting trading strategies and retro-fitting the past to the future, I do think that trading by way of specific rules early in a trading career is a good idea. When a trader is first getting into the markets, there’s so much to see and learn and do. You have no instincts. Everything you read seems like a great idea and should quickly become your new approach. Having a bad day at the office must mean you need to make a drastic change, right? Surely there’s something out there that works ALL the time! No. Not even close.

The reason I like the idea of following a game plan, especially early on, is that only by being consistent can you truly measure your results accurately. Suppress those urges to fade a rally or buy a selloff, and stick to your rules. Only when you are taking the same kinds of trades consistently can you truly know over time if they are working or what needs to be adjusted vs. thrown out the window entirely. One day does not a trend make! Therefore, one day does not make or break a trading approach. In the beginning, it’s important to go slow and learn which approaches can prove valuable and which approaches will prove useless for you. In short, the beginning trader ain’t seen nothin’ yet, and those gut feelings he thinks he has are nothing but indigestion.

As time goes by, your trading style will evolve. Gut feel gradually becomes a part of your approach. You learn when to follow your rules and when to break them. It’s a matter of patience and experience, and learning to let your intuition play a role. No longer does that rally ahead of the economic release mean you should get long. Something just seems to tell you to watch for a sell-the-news reaction. That’s gut feel. It doesn’t mean that once you have it, it’s always right. Quite the contrary. Learning to trust your instincts means letting them play a legitimate role in your decision-making process, while not letting them take over and dominate.

So, take inventory of where you are. Have you done well during all kinds of markets? Have you been around long enough to know when to break your rules? If not, hang in there and follow your trading checklist for now. Start with making it a science, and you'll develop the feel that makes it an art. You’ll get there eventually, but trying to take shortcuts will be costly. Just remember, capital preservation is the key from day one, so starting with an approach that is quantifiable is a good idea.

Jeff White
President, The Stock Bandit, Inc.

Friday, October 14, 2005

Life-Savers: CyberTrader Alerts & Templates

I am fortunate to have a good relationship with CyberTrader. A group of us moved over to them from another day trading firm in Austin two years ago, and we actually traded in the building at the CyberTrader headquarters. Working with them each day for many months was a great experience, as their tech team (I.J., Sergio, Matt, Diana, Paisley and others) is a class act and fun to deal with. They provided us with a place to trade and we as traders provided input on what additional features would be helpful to us in executing trades. It was a great relationship which I continue to enjoy today, trading on beta releases of the software and being able to contact them directly with suggestions or to request support.

One of the features I like most about the CyberTrader Pro platform is the Conditional Alerts. I use these daily in a number of ways, and honestly couldn’t trade without them. Whether I want an order executed or just to be notified when stocks or indexes reach certain levels. I know that once I set the parameters on alerts, I can walk away without worry, knowing that my positions are taken care of.

The best way I’ve found to use the Conditional Alerts is through the use of Templates. Templates allow fast loading for alerts often used, without having to start from scratch every time I want to set an alert. For example, one alert I use regularly is a long position stop-loss. Setting up this Template is a one-time thing, and after that it is extremely fast and easy to load.

Here is where to begin to set up an Alert Template:

Next, select “Add”…..

Now, give your Alert Template a name, like “Stop Loss Multi-Day” and enter conditions where it says “When”……

Add conditions and actions which characterize the alert. In this example, I am using a long position stop-loss which will stay in effect until I cancel it, and is only good during market hours. I’ve stated that time must be “later than 9:30 AM ET” and “earlier than 4:00 PM ET” and that “’s trade price decreases to points.” By leaving the symbol and value empty, I can use this template for any stock I want. Be sure to check “Keep alert active after logoff” which will make this a multi-day alert. You can even set a future date as a time to deactivate. Click OK.

Now that the alert template is saved, you can use it anytime. To load it, simply right-click in the market-maker window (level 2 window) and select “Apply Alert” to (symbol) and then select the name of your template to load. In this example, we want to use “Stop loss Multi-Day.”

Finally, all you have to do on the fly is enter the price, share quantity, and order type (market, limit, etc.) and click OK. You’re all done!

Be sure to save your layout!

Using these Alert Templates has made a world of difference in my trading, and it allows me many freedoms during the day once I’ve entered positions. No longer must I watch every single tick for a trade if I know my exit parameters beforehand, such as the stocks I highlight and trade from my swing trading newsletter. And thanks to all the good folks at CyberTrader who continue to improve on the best trading platform out there!

Jeff White
President, The Stock Bandit, Inc.

Thursday, October 13, 2005

Focus on the Process Now, Results Later

One of the ideas that I constantly stress to other traders while reminding myself is to focus on how you play the game. Most of us have advanced trading software which will tell us the “score” at any point in time as measured by our P&L. However, I feel it’s more important to focus on the process rather than the results. Here’s why.

The subject of one of my favorite websites, Kenny Rogers said that “there'll be time enough for countin’ when the dealin’s done.” Yes, he was talking cards, but the same lesson applies to trading. Focus on the trades on your trading list, execute them as they meet your criteria, and then later, when the market is quiet again and the day is over, look at your results. During market hours, following your game plan is what is most important.

Lessons of this sort have occurred to me on both sides of the market. I’ve had plenty of days when I started getting signals for trades which all started to work, quickly taking me over my profit expectations for the day. When I watched the results (P&L) during the process (in the middle of trading), my decisions were affected adversely. Wanting to get above a nice round number kept me in some trades too long, while the urge to book profit and bag a good day would other times cause me to take profit too early in good trades I should have kept. On some occasions, I would pass up new trades entirely which looked great, simply because I wanted to keep my profit intact. On losing days, I shifted into defense mode and passed up good potential trades simply to avoid further losses. Many times the trades on my sheet for the day would have bailed me out had I only taken them.

Ideally, a game plan is designed during an unemotional time when the market is closed. This promotes clear thinking, and then when the market is open you can just execute the trades you have planned on taking. Focus on this process, and look at your results later. You’ll find that sticking to your original plan will help you in the long run to achieve the success you want so badly.

The Stock Bandit

Tuesday, October 11, 2005

Don't Lose the Lesson!

This market is causing the bulls lots of frustration since last week. Traders who prefer the long side are getting kicked in the teeth, causing them to second-guess not only their trade approaches but their ability to find profits anytime soon. As the landscape changes, the market has a way of frustrating traders.

Losing trades can have the same affect - if you let them. However, if you look at each trade as just one of your next 100 or even one of the next 1000 trades you’ll make in the next year, you’ll begin to attach far less emotion to the outcome of each trade. Detaching emotion from individual trades is one of the best ways to build confidence in yourself and your long-term success as a trader.

Losses are inevitable; they simply are a part of trading. How you handle losses is what can ultimately determine your level of success moving forward. Even a losing trade can be beneficial if you take what you can from it. Ask yourself, “Why did this trade fail? Is it a function of a market reversal, or a miscalculation on my part? Was my stop-loss set too close as a result of too large a position? Did I micromanage this trade and adjust my numbers on the fly? Did I completely abandon my trading plan?” A loss means you’ve already paid the tuition, so you might as well stick around for the lesson.

Ask the right questions when a trade doesn’t work out or when you hit a rough patch with your trading. The answers you find can help you greatly as you progress as a trader. Whether those answers allow you to avoid making the same mistake again or if they just give you some closure following a bad experience, take what positives you can find and move forward.

Bottom line: cut the loss but keep the lesson!

The Stock Bandit

Saturday, October 08, 2005

When I Turned the Corner

I got into the market in 1998 after getting married, and soon I was watching the market quite closely. I didn’t have a lot of money to trade with, but I was eager to learn and grow the modest nest egg we started with. CNBC became part of my morning routine before I left the house each day. In the evening, I would update my TC2000 charting program and begin to look through many charts, hoping to find two or three that looked promising. I did well trading breakouts and momentum plays, as the market was ripe for such a trading style for the next couple of years. This evolved into a passion for trading, and when the time was right, I decided to make trading my full-time job.

The first day I became a “full-time” trader, I placed 4 day trades and made $1006.00 after commission. I was so excited! My 4-point winning trade on the short side of GENZ with 200 shares made my day, and I was convinced that soon I’d be very wealthy. After all, it wouldn’t be long and I’d be stepping up my trading size and imagine what a better trader I would be by then! If I can make a comma ($1,000 or more on a trade) my first day, I couldn’t wait to see what results I’d be getting 6 months later.

Then reality set in.

I did remain positive in my trading account, and fortunately did not ever slip into the red. That was truly a blessing, as I didn’t ever want to have to fight back to get even. But what did happen was that my account stagnated. I would make money with a good stretch of trading, and then I would struggle and give back profits with the tough trading stretches that are bound to occur to all full-time traders. My strength has always been discipline, so where was I going wrong?

As time went by and I evaluated many months of trading results, I began to notice what I had initially missed. I wasn’t managing my losing trades very well! It was not an issue of large and staggering losses or standout hits to my account which had cost me. It wasn’t a matter of being able to admit when on the wrong side of a trade. Instead, my ratios were off. I was offsetting good winning trades with losers of similar size. Overall, my account was bigger, but I wasn’t making much real progress.

Following this initial discovery, I had to dig a little deeper. What was my win/loss percentage, and what should it be? What was my risk/reward ratio, and what did I want that to be? A closer look revealed that my ideals and my reality were different, and I had to get them more in line with each other.

My trade sheets for each trading day show the symbol, entry time and price, exit time and price, and gain/loss for the trade. By adding up and averaging out many months of these trade sheets, I noticed that it wasn’t my win/loss percentage costing me money, but rather my risk/reward ratios that needed adjustment. I was right more often than wrong (although still wrong plenty), and I was cutting my losses at acceptable levels. However, I wasn’t staying in my winning trades long enough to more than offset the losing trades I was bound to make. I was taking profit too quickly. Many of my winning trades kept moving in the direction I had traded them, but I was only getting a fraction of the move because I was unwilling to endure pullbacks and give them time to continue working.

By realizing that my winners could be much bigger if I did not allow myself to take profit so quickly, the opportunity for account growth became much more real to me. I adopted a 3:1 ratio at a minimum for profits vs. losses, meaning that I expect to make at least 3 times what I am willing to risk on a trade, or I simply will not take the trade. Now, not all of them worked out as planned, but by keeping my winners larger than my losers, I began to book profits very consistently, month after month. This added capital to my trading account, but just as importantly, it added confidence to my psychological capital, which is such a necessity for successful trading.

The Stock Bandit

Thursday, October 06, 2005

The "D" Word

For months, the market has offered fewer intraday trend moves, and more intraday reversals with narrow ranges. Tuesday was such a day, with the morning being choppy but positive, and an intraday reversal that made bulls’ hooves curl. When this is the case, it’s always a good time to review your trading style as well as your discipline.

While it is very important to have a sound stock trading strategy, it is equally important to have discipline as a trader. The word discipline has been used many times in reference to trading, and many ignore it completely as an overrated weapon in the trader’s arsenal. After all, they see magazine ads or get junk mail advertising a trading system with an incredible track record that can solve all of their problems. However, it still takes discipline to follow a system, whether yours or someone else’s.

So, what are some applications for discipline? What will discipline do for a trader? For starters, it can allow you to stay in the game. A disciplined trader will not allow losses to snowball and wipe out the trading capital which is required to play the game of stock trading. Discipline can help a trader make money. If the idea is to “cut losses and let profits run,” then the disciplined trader allows those profitable trades to continue working. Human nature urges us to take profit when we see it, but we will rarely come out ahead in the trading game by giving in to such urges, so discipline can help. Discipline can also help the trader know when to trade and when not to trade. By having the discipline to make and follow a game plan, a trader can capture profits during markets which offer opportunity, and protect capital during times which do not.

How exactly does a trader go about “being disciplined?” First of all, make a game plan. Decide which markets you like to trade (stocks, forex, options, etc.). Get clear on which kinds of trades you prefer to take (breakouts, reversals, etc.). Determine a position size that fits your account and your personality, and plan to take trades only up to that size. Next, seek out trading opportunities. This may mean subscribing to a stock pick service, downloading charts and taking the time to manually search for setups, or just patiently waiting in front of your PC for something to come along which you can’t live without. Finally, once you have found the setups which meet your criteria, you’ve got to HIT THEM! You’ve got to be in it to win it, so don’t be afraid to try. If you are wrong, your trading plan is your safety net to limit your losses so that you can try again.

As traders, we’ll be wrong plenty of the time, so the idea is to stick with an approach which lets us stay in the game and find profits. A disciplined approach is the single most important aspect a trader must possess in order to profit over time. Whether you trade stocks, options, futures, or forex, whether you swing trade or day trade, whether you prefer reversals or breakouts, the common requirement for success in every market is discipline. Find trades that fit your game plan, and have the discipline to follow it.

The Stock Bandit

Tuesday, October 04, 2005

The Best of Both Worlds

Yes, it’s a great Van Halen song. It also is a way you may wish to trade in order to reach your goals while minimizing stress, particularly during certain market conditions. I’m talking about blending day trading and swing trading into a stock trading strategy that can produce trading profits for you and let you sleep.

We’ve talked about finding a trading strategy that suits your personality, as well as when to day trade and when to swing trade. When the market is choppy or volume is light, you may wish to employ a day trading strategy. When market moves are smoother and a bit more predictable, a swing trading strategy may suit you best. How about a little of both? Why not blend each style in a way that provides profits on multiple timeframes? I’m all for it.

Sometimes the market road is a little rocky, but you want to have some exposure on. While you could simply enter half-size positions, you could enter the full position and trade it in a hybrid fashion. Why not enter the best technical setups with a full position on, and take half off as a daytrade to scalp the initial move? Then you can keep a half position for further exposure to a potentially larger and more profitable move. This way, you can pocket some profit and still sleep at night while you wait for a larger move.

I select stocks for my stock pick service which are set up for initial moves (ideal for the day trader) yet look good for swing trades (multi-day moves). Employing a hybrid trading strategy which takes into account the best of both worlds means that when a trade triggers by hitting the stated entry price, the trader can scalp the initial move and offer into strength on the first move up. For some stocks this may mean a quick pop of 30-50 cents, or it may mean a gradual, steady move up of a point or more. The point is, part of the trade is put on with the intention of selling into initial strength (or weakness if short). After the first wave of buying begins to slow down and the position is pared back to smaller size, some rest or retracement is likely but this move will not erase much of the paper profit that the remaining position is showing. Smaller size allows the trader to endure such pullbacks, waiting patiently for a larger and more profitable move over the coming days or weeks.

Trading a hybrid style helps to minimize losses on trades that don’t cooperate. The portion of the trade which was put on for a day trade will naturally have a tighter stop (maybe 1% or so), and if the swing portion of the trade is also stopped, the combined loss is significantly smaller than if the entire position was stopped out as a swing trade. Keeping losses small is the name of the tune, so this strategy is great for helping to minimize losses while seeking to book more frequent gains.

If there are a hundred ways to skin a cat, there must be 1000 ways to trade effectively. The key is to find the approach that works best for your unique situation. Utilize a strategy that fits your personality and your timeframe, and then be willing to adjust it if needed. If you need to take the best of day trading and swing trading in order to achieve your profit objectives and wake up each day stress-free, then perhaps the hybrid approach is for you. The market will open tomorrow, so you better be ready with your game plan!

The Stock Bandit

Monday, October 03, 2005

When to Adopt a Swing Trading Strategy

In evaluating trading strategies, we have seen that personality plays its part, and we’ve taken a close look at when day trading can be effective. Now let’s take a look at swing trading as a way for traders with a longer timeframe to achieve their profit expectations.

Swing trading allows the trader to take a position in a stock and look for an intermediate-term move of a few days to a few weeks before their profit objective is met. I feel it is no more or less risky than day trading, but rather a different way of finding stock market profits. The swing trader takes smaller positions and is therefore less exposed from a dollar standpoint intraday, but faces overnight exposure and the inherent gap risk associated with holding stocks overnight. Not all gaps are bad, it should be noted. Sometimes a swing trade meets its profit objective faster than anticipated due to a favorable overnight gap, but the opposite can also be true. It’s important to adjust trading size appropriately when considering holding a stock overnight.

When determining if conditions are proper for swing trading, take into consideration whether the overall market is trending or not. This observation alone can be helpful when deciding if stocks are likely to see follow-through for multi-day moves or if they will instead reverse course and not trend at all. Also, look at the price history for the stock in question. Does it have a history of large price gaps? Does it seem to trend well when it breaks out from chart patterns? Does the stock move for several days in a row when it breaks out or does it go for one day and soon after reverse course? Questions like these will help you decide if a swing trading approach is best for the stock you are looking to trade.

Another important consideration is scheduled news. Is the market on hold awaiting a big announcement or event such as a decision on interest rates or an unemployment number? Does your stock have an earnings announcement or conference call scheduled to take place soon? While there are definitely many unknowns in the market, one can be sure that scheduled events will command respect from traders who know their importance. This means your stock with a great setup may simply not move much ahead of such an event, with the deep-pocket traders waiting to take a large position until after the unknowns have seen the light of day. During such times, a day trading strategy is often a better approach.

Swing trading certainly has its advantages. When the market is moving well and volume is strong, swing trading can offer great rewards. Stocks and markets with momentum will often see follow-through in the form of favorable gaps. A swing trade allows the trader to participate in these gaps, which adds to your profit in the trade literally overnight. This is an opportunity cost of day trading. Swing trading also has the potential to generate big returns in short amounts of time, as breakout stocks can find momentum and move quickly to a profit target. Swing trading also allows a trader to enter positions and follow-up stop-loss and profit-taking orders and simply let the trades go. Swing trades require little maintenance once exit orders are entered, with trailing stop-loss orders being the only dynamic element of the trade. The part-time trader can enter a position, set a limit sell and a stop-loss order, and then walk away. This can be far less stressful than watching every tick on the edge of your seat.

If you’re a part-time trader or a full-time trader with patience, the right market conditions can mean great profits with the right swing trading strategy. Always be evaluating your approach and the market conditions, and then stick to your game plan as your trades develop.

The Stock Bandit