Blog
Below, you will see links to new pages that have been added to my website and updated information on existing pages. I also post interesting news items that I find around the web and trading ideas.
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May 05, 2013
How Discretionary Traders Lose All Their Money
Imagine that you are about to go down a river.
In a raft.
With violent whitewater rapids.
You cannot predict what adjustments you will make to stay afloat. You only know that you have the skills to adapt to whatever actually happens.
The same is true with discretionary trading.
There are two parts:
- Your initial bias - which direction you think the stock will move.
- Adapting to the reality of which direction the stock actually moves.
The first is easy. The second is where traders lose money.
1. Your initial bias
Let's say you find a stock that has a bullish engulfing candle, at a support level, that is oversold. You think this stock will reverse so you buy the stock. You have just developed a bias as to which direction this stock will move next. In this case - up.
So good so far.
But now you have to forget this bias entirely and move on to the next step. This transition (or lack therof) is where traders lose money.
2. Adapting to the trade
Unfortunately, the next day this stock falls and closes under the low of the engulfing candle. It did not reverse so your bias is completely irrelevant.
You must adapt.
You must take the loss.
The biggest mistake
This is the biggest mistake that discretionary traders make. They don't transition from bias to adaptation. They hold on to their bias and try to force their hopes and wishes on a stock:
"This stock will go in my favor eventually."
"This stock has good earnings."
"I'll just adjust my stop loss order a little."
Etc...etc.
It doesn't work that way. What could have been a small loss is about to turn into a nightmare.
In a raft you adapt to protect your life.
In trading you adapt to protect your money.
Apr 21, 2013
Is it Time for the Stock Market to Correct? Probably.
Just a reminder...
We are starting to enter that time of the year when the stock market is prone to a correction:
The areas that I have circled all happened during the months of April to May. Now might be a good time to brush up on your short selling skills.
Be careful out there!
Mar 30, 2013
Want to See an Example of Volume Preceding Price?
You've probably heard the saying that "volume precedes price". But what does that mean? It means that (sometimes) volume will increase significantly before a big move. Here is an example:
See how volume increased dramatically (bottom arrow) compared to previous days? Now look at the candle for that day (top arrow). Price didn't move much on that day. So you have a high volume day with very little price movement.
Look at the 15 minute time frame for that day. You will see huge volume spikes near the end of the trading day.
The breakout followed a couple days later.
Volume preceded price.
Feb 07, 2013
Which is More Important: Entry or Exit?
Of course both are important. But, as a swing trader, which should you put the majority of your efforts into? Which should you try to perfect first?
Definitely your entry.
Your money is most at risk when you first enter a stock. This is where you can get stopped out for a loss. Get the entry right and you will either have a win or a small loss.
Get it wrong and you can lose a lot of money.
What about the exit strategy?
You can do a lot of things wrong with your exit strategy - and still make money. You can sell too soon or too late. The good news is that once a stock goes in your favor you can move your stop to break even and the worst thing that will happen is that you will lose nothing (assuming there are no overnight gaps against you!).
What is the secret to getting a good entry?
Candlestick patterns? Fibonacci? Technical indicators?
None of the above.
I've spent a lot of years perfecting my entry and I can tell you that the secret to getting good entries can be found in the lower time frames. Find a good setup on the daily chart and then move down to the hourly and 15-minute time frames to find your entry.
You'll see reversals taking place before they show up on the daily chart. And sometimes you can get a closer stop allowing you to buy more shares.
New to swing trading? Spend a lot of time perfecting your entry strategy.
I promise it will be time well spent!
Learn more:
Jan 23, 2013
How to Judge Trend Quality by Analyzing Volume and Swing Points
In L.A. Little's book, Trend Trading Set-Ups: Entering and Exiting Trends for Maximum Profit
The basic idea is this:
Jan 19, 2013
How to Tell When the Market is in Momentum Mode
How do you tell when the market will offer nice pullbacks or when it will trade off of momentum? The easiest way to check this is to look at the ADX indicator.
Readings below 25 indicate that the market will offer nice pullbacks to initiate swing trades. Readings above 25 indicate a strong trend - pullbacks will be shallow or nonexistent.
As long as the ADX indicator is above 25 and sloping up, the market will continue to trade off of momentum. Momentum is lost when it begins to slope down.
It's not a perfect technical indicator (none are) but it does a good job of telling you the current strength of the trend.