Day trading is both art and science. When operating your stock trading business you will eventually 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 enter or exit a trade as well as how to manage risk in each trade.
Identifying Significant Reference Points
When trading stock for a living, you obviously want to know what you are going to do next in a given price action scenario. The key 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 initiate 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 mean by this is simple, while you are trading, you should always be prepared for any scenario, meaning what needs to happen for me to initiate 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 volume 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 volume printing in time and sales. Did significant volume 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 still probably valid! Stick with the trade.
The second method to earning what you should when your call on the trade scenario is correct is utilizing time tested order entry techniques.
Order Entry Techniques
Understanding how to manage share 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 share 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 share size all the time, regardless of conditions or risk points. I often hear My share 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 share total for the position.
I can hear what you are thinking, why is he telling me to average down? Averaging down means 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 identify 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 full size position.
The second method is price confirmation. Using this method you will enter 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 common 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.
Obviously 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. prenzulli@keystonetradinggroup.com
If you are trading remote and not taking advantage of the leverage and competitive fee structure available from Keystone Trading Group, please send an email to info@keystonetradinggroup.com to inquire about rates or extra intra day buying power. Please be sure to put in the headline the subject for the email so that it can be directed to the proper department.
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The founders and instructors of Keystone Trading Group have managed a profitable short term trading desk for the last seven years. Our specialty is stock trades lasting from 10 minutes to five days