Stock Trading Tips For The Online Stock Trader
Day trading is both art and science. When operating your stock trading business you will ultimately get to the point where you can use your gut or instincts. When you are just starting out however you should rely on very specific paramters to go into or exit a trade in addition as how to manage risk in each trade.
Identifying meaningful Reference Points
When trading stock for a living, you clearly want to know what you are going to do next in a given price action scenario. The meaningful to maximizing profits and minimizing risk lies in being able to anticipate where other traders are probably going to take action.
Using charts in your day trading, your objective is to locate areas where you believe traders will begin a position or exit a position. Once you have identified those areas, you MUST begin to form if-then scenarios about how other stock traders will react if the expectations they had about the trade are met, or just as important, if they are not met.
What I average by this is simple, while you are trading, you should always be prepared for any scenario, meaning what needs to happen for me to begin a trade or exit a trade. Most traders are looking at the same intra day information, once you understand fully what you will do under any circumstance, you will have a much better idea how the majority will react.
If you are in an uptrend and get long, what does price action and quantity need to look like in order for you to no longer to want to be in the trade any more? Now here is something I hear very often from traders who are disciplined, “I am getting stop loss to death. I am correct on most of my trades and make no money.”
How do you solve this dilemma? The first technique is asking yourself two simple but very important questions. Did the circumstances for my trade scenario change or is this move just noise? How do you know the difference? The answer is simple, pay attention to the tape, the quantity printing in time and sales. Did meaningful quantity hit the tape that would tell you large traders have an urgency to buy or sell shares? Or did price move without many shares trading hands? If price moved but few shares traded, your original idea is nevertheless probably valid! Stick with the trade.
The second method to earning “what you should” when your call on the trade scenario is correct is employing time tested order entry techniques.
Order Entry Techniques
Understanding how to manage proportion size is crucial to your success as a trader. Money management is how much capital you will allocate to a particular trade; risk management is how you will manage that capital. Risk scenarios will include stop los parameters and proportion size allocated to the trade based on stop loss points and risk per trade as defined by money management.
Too many traders make the mistake of trading the same proportion size all the time, in spite of of conditions or risk points. I often hear “My proportion lot is 1,000 shares per trade.” Wow this is a huge mistake. To be a consistent stock trader you need a predefined plan for how you will acquire the shares for a trade. Simply put, if you want to get to 1,000 shares for a trade scenario, how are you going to get them?
We recommend two strategies. One is building a position in a strong trend the second is entering a small portion of your intended total position and adding to it only when the position has moved in your favor.
In order to build a position you must have confidence in the strength of the trend. If your goal for example is to have 1,000 shares of a stock, you would buy the 1,000 shares in pieces as the stock pulls back or pauses in the trend. You may do it in two or three pieces, for example 400, 300, 300 for a 1,000 proportion total for the position.
I can hear what you are thinking, why is he telling me to average down? Averaging down method you wanted 1,000 shares, got 1,000 shares, the trade moves against you and you go get another 1,000 shares. That is like marrying the same woman you got divorced from, getting more of what is not working. To build a position like this you will need to clarify a window where you would expect the pullback to stop, we teach in our Equity Trader 101 course to use the 20SMA as the area we anticipate the pull back to stop. Stop loss will be based on the complete size position.
The second method is price confirmation. Using this method you will go into one third to half of your total position. When and only when the position moves in your favor you will add to it. Using this method it is shared to scratch a few trades, take a few small losses and small profits until you finally feel comfortable that you have a good head start on the trade in your intended direction.
clearly re entry is a big part of this method. Think carefully about what this method is allowing you to you to do, you are wrong on the fewest shares and correct on the most shares. It is terrific money and risk management. It will prevent you from being in a position where you will need to be perfect on your entry, you will gain valuable information based on how “easy” or difficult it was to get filled.
If you would like some help with any of the topics covered in this newsletter, please feel free to send me an email and we can work on it together. [email protected]
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