The most important
strategy
to learn is the one which will work for you. No one strategy works for
everybody. We need to develop our own approach and work with it until
we
have a trading strategy that works best for us.
Trading
Strategies
The whole point of
trading
is to make a profit, so why put money in a stock that isn't moving or
making
you money? That's accepting risk without getting the intended
reward.
Furthermore, a position showing a loss should be cut immediately
because
small losses are one key to successful investing. Losses are
a part
of the game, so you must respect them and always keep them manageable
and
small. Therefore, try to invest only in stocks which are on
the move
with the intention to ride them into profits and sell the stock as it
looses
it's upward momentum (evidenced by daily volume). It's at
this point
in the trading process that we sell the stock and take the profit.
A basic
strategy is to buy
stocks which are "breaking out" of tight consolidations on an expansion
in volume. This type of move in a stock tells us that the
previous
area of indecision (consolidation or trading range) has been resolved
to
the upside and money is flowing into the stock (volume
expansion).
Volume is the fuel that pushes the stock upward once it begins to
move.
A lack of volume is a lack of fuel, and the upward move may be
short-lived.
Be wary of breakout (or breakdown) moves on light volume as they are
prone
to failure.
Be in no hurry
to trade.
Trades placed out of boredom or anxiety normally lead to bad habits and
poor results in the long term. This leads to a loss of
trading confidence,
which can be more damaging than simply losing dollars.
It takes confidence
to trade effectively.
Over time
(weeks, months,
years), be absolutely sure to keep your down (negative) days as small
as
possible. Growing your portfolio account happens when you stay in
winners
while they are running, and cut your losers at the first sign of
negativity
(max -10% is often recommended). Big winners are not for
offsetting
big losers. Portfolio growth comes from the big winners, so
keep
the losers as few and as small as possible!
Investment
Timeframe
Strategy
What is your
timeframe for
your investment? It's important to know because it not only
determines
the size of your investment, but also at what point you intend to sell
out of a trade. Stock picks should be selected because they
are set
up for initial moves which are ideal for day trading, as well as longer
term moves which are ideal for swing trading. Deciding which
approach
works for you will help you to determine which exit strategy fits your
trading plan best. So determining your exit point is important to your
trading strategy mix.
Regardless of
which timeframe
you trade, whether day trading or swing trading, the key is to keep
your
risk profile for every trade in check. Keep in mind also that
when
market conditions change, it's wise to change trading methods too in
order
to maximize your rewards and minimize risk.
Stay informed watch the
trends.
Swing Trading
Strategy
If your trade
timeframe
supports swing trading, here is the strategy many people like to
use.
This may not be the exact way you wish to swing trade, but it is
intended
as a guide
to help you determine a trading strategy that suits your
personality as a trader.
When swing
trading, your
position size will usually be smaller than when day trading due to the
fact that you are looking for a larger move in stock growth.
Your
profit targets are larger and farther away timewise, so patience is
always
a necessity.
Stocks often
gap, so here
are some guidelines for swing trading:
Buy
incrementally,
dont invest all your intended funds all at once. If the stocks breaks
down
you will be at a loss with no ability to buy more at less cost. If the
stocks breaks up you have the opportunity to add more and be in the
green
immediately.
Try to keep a
decent gap
between where the stock is currently trading to where your average
price
is at. By doing so you have a profit buffer that will not only grow but
you are minimizing your risk exposure should the stock reverse
unexpectedly
which can and does happen at times.
Here are a few
rules of thumb
to help determine sell points (exit) when swing trading:
If the prior
day's low is
taken out on the breakout day (or high for shorts), exit the
trade.
Once a trade is
held overnight,
place a stop-loss order (if you use stop loss orders) no further away
than
below the recent consolidation area, as a move beneath it would signal
a failure.
Once a trade is
profitable
by at least 10%, never give back more than half of the open
profit.
This helps to avoid the frustration of letting winning trades turn into
losing trades.
Once a trade is
profitable
by at least 5%, move the stop-loss order to breakeven on a closing
basis.
Partial buys
and sells can
be very helpful. If a stock breaks out in a sluggish fashion,
consider
entering only a partial position. If a trade is exhibiting
little
follow-through after the breakout, decrease the position size.
Always monitor
the health
of the overall market, and the health of your positions. When
things
aren't acting right, either lighten up or go to cash entirely to
preserve
capital. It's easy to get back in!
These are some
general guidelines
for any trader with a swing trading strategy to determine exits that
fit
their timeframe, and are intended for educational purposes as you seek
to define a swing trading strategy that suits your needs.
Day Trading
Strategy
This day trading
strategy
should be a good starting point. This may not be the exact
way you
wish to day trade, but it is intended as a guide to help you determine
a day trading strategy that suits not only your timeframe, but also
your
personality. Trading in accordance to your personality will
ultimately
serve you best. If you prefer a longer timeframe, please see
the
swing trading strategy for more information.
If you are a
day trader,
your position size is likely larger due to the fact you are looking for
a smaller move with your short timeframe. Keeping a tight
stop is
extremely important when trading larger size, as a day trading strategy
gives stocks multiple opportunities to work. For day trading,
the
strategy is rather simple:
Always keep
your profit objective
at least 3 times greater than what you are willing to risk.
Allow no more
than a 1% move
against you from your entry point. Ideally, you are in the
trade
beyond the trend line and out of the trade below it. You can
always
get back into the trade if the stock returns to the buy point.
If the futures
(Nasdaq and
S&P e-minis) make an intermediate lower high intraday (or
higher low
when trading the short side), exit half of your position.
This implies
a weakening market and can make it tougher for open positions to
continue
working.
If your stock
hits a new
low for the day (long trades) or new high for the day if you are short,
exit the position. A day trade is intended for initial moves,
so
there is no purpose in widening stops to accommodate a stock moving in
the wrong direction. Get out if the stock breaks a low (or
high if
short) as you can reenter the trade if it triggers again.
Once momentum
fades and buyers
are thinning out, take your profit. This can be done by
carefully
monitoring the intraday chart and the time & sales window for
fading
momentum.
These
guidelines should help
any trader with a day trading strategy to determine exits that fit a
day
trading timeframe. These are general guidelines given for the
purpose
of trading education, and each individual trader is responsible for
their
own exit and trading results.
Trading Rules
for Swing
Trading
These trading
rules below
should help swing traders yield more profits. By following
some trading
rules, your trading approach will be far superior to any trading method
without rules. The objective for all of us is to maximize
gains while
minimizing losses along the way. Successful trading requires
discipline,
and these guidelines will help you in your quest for
profitability.
1. Emotional
control
is at the heart of good trading.
Controlling
yourself allows
the ability to think clearly at each moment, resulting in success as a
trader. If you are emotional it will work against you, better to take a
break.
2.
Cut losses with
the most strict discipline.
We must preserve
capital
at all times. Losing is part of trading, but opportunity cost
is
to be considered when hoping for a losing position to reverse
course.
If your trade reverses and violates support, get out and be willing to
re-enter. This will save you from big losses and you can
always re-enter
if the stock crosses the entry price again.
3.
Make good decisions
and winning will take care of itself.
Focus on how you
play the
game and not on the scoreboard. Trade with discipline and
follow
your game plan.
4.
When you lose,
don't lose the lesson!
Forget the names
but remember
the events. Those who don't remember the past are doomed to
repeat
it. Make mistakes with composure and character, without
blaming others,
and don't dwell on mistakes. Profit from lessons learned.
5.
When in doubt,
get out.
Scrutinize your
positions
at all times, each day, and you will not be left holding a stock
without
reason. Be willing to change direction at any time, because
your
flexibility as an individual investor is a big advantage which should
be
embraced! Watch the trends and the bigger picture.
6.
Keep your risk/reward
profile in check.
Profits can exceed
losses
even if the number of losing trades is greater than the number of
winning
trades. Always properly manage money, size positions
accordingly,
obey stops, and protect profits. This will keep you in the
game.
7.
Avoid scheduled
news.
We are unable to
foresee
breaking news, but scheduled news we can step aside from.
Scheduled
news includes interest rate announcements, corporate earnings
announcements,
and various daily economic releases. Remember to trade only
when
you've got the best of conditions.
8. Consider
your account
size for appropriate trading.
An account that is
too small
magnifies the effects of each trade, which keeps us from thinking
rationally.
Trade with the attitude that the next trade will simply be 1 of the
next
1000 trades you will make.
9.
Get a charting
program that allows you to build watch lists, sort stocks, and draw
trendlines.
This is essential
to learning.
Price action and volume are vitally important in finding good chart
patterns.
10.
Scale out of winning
positions as they work for you.
This achieves two
goals:
taking some profits off the table and keeping you in the
game. If
your trade reverses, you took some profit at good spots. If
the move
continues, you are still on board for the ride to greater gains. Don't
be greedy.
11.
Don't dig yourself
into a hole early in the day or in your career.
Be willing to
observe the
market and make an informed decision. Missed money is better
than
lost money, so wait patiently for the best opportunities to come your
way,
they will come be patient.
12.
Trade with a blend
of anticipation and confirmation.
Balancing these
two will
mean that you adopt a system of "if this happens, I will do
that."
Wait for your pitch!
13.
Beware of your
trading process following a winning streak.
After a win
streak, be extra
disciplined! Many will make money in the market, but
discipline is
required to keep it. Stay on your guard at all times.
14.
Evaluate your
results at least monthly.
Monitor your
P&L, your
win/loss ratio, and the relationship between your biggest wins and
worst
losses. Reviewing these results helps you continually improve
your
understanding of the markets and your own performance.
15.
Finally (perhaps
most important), always be patient.
Long-term patience
will
keep your confidence and optimism high, and short-term patience will
help
you wait for the best trades. Success doesn't come easy, and
rarely
are fortunes made overnight. Be willing to pay your dues and
put
in the work in order to achieve your goals.
Avoid
Buying High, Selling Low
Buying High and
selling
low violates the most fundamental element of investing, yet many
investors
do it every day. As soon as the stock they are investing in loses
ground,
they sell and go looking for the “hot” stock.
Eventually a new stock with
some recent gains is chosen to invest in and the investor is again
confident
that he or she is back on the fast track to riches. Then it happens
again,
an again and again. All the stocks they purchase may have proven track
records, yet their overall portfolio reflects a below-average return or
worse!
This may sound
like a bumbling
investor, but study after study shows that he is probably average; an
investor
who makes emotional decisions, tries to time the market perfectly, or
loses
sight of his goals. In other words an investor who has forgotten the
following:
Diversify:
Don’t put
all your eggs
in one basket. The solution? Develop a portfolio that invests across a
number of stocks that match your overall accumulation goals with
respect
to your risk tolerance and time line. Every investment product has its
own inherent risks. Some products can be very high risk, others very
low.
Some will be more affected by interest rates, others by commodity
prices,
consumer confidence, management decisions or a host of other factors.
For
most investors, what is important is the risk profile of their overall
investment portfolios. By combining several different investments in
your
portfolio, you can reduce the level of expected risk. This is the
benefit
of diversification. Diversification simply means not putting all your
investment
eggs in one basket. It is one of the key strategies that every investor
should know and follow.
Incremental
Buying /
Selling:
Incremental buying
is the
systematic purchase of stock in a progressive manner as the stock
rises.
Some people like to buy in 1/3rd or 1/4th lots and avoid one lump sum
purchase.
Buying incrementally protects your investment from unforeseen reversals
and you maintain a lower average cost with each new purchase placing
you
in a gain position assuming the stock price has been going
up. This
is a valuable strategy in volatile markets where dramatic swings are
experienced
and buying lump sums on the wrong day could be a significantly sobering
event. No investment can guarantee a profit or protect against a loss
in
a declining market. So incremental buying involves the progressive
systematic
acquisition of a stock.
Discipline:
Although the stock
market
moves based on the economy and trends, it can also swing wildly based
on
psychological reasons such as political turmoil, rumors on interest
rate
changes, war, government policy changes or other events. Generally
speaking,
if the fundamentals of the market still match your overall portfolio
objectives
then you stay the course and not allow yourself to be “shaken
out”.
Be very careful to not allow emotions to rule sudden investment
decisions.
Its good to have an advisor to bounce your thoughts around with so as
to
avoid wrong decisions based solely on emotions have not being
harnessed.
All successful investors MUST be disciplined both to stay the course
but
also to manage their emotions.
Averaging Down:
This involves a
situation
where the stock you own has dropped below your cost price leaving you
exposed
to increasing losses. To reduce the losses you can acquire more and
more
stock as the price drops thereby lowering your average cost and thereby
your losses. This is all predicated on a stock that is healthy and only
undergoing a minor market correction. If there are fundamentals that
affect
the stock you might wish to reconsider averaging down. It can be an
effective
strategy in the right circumstances.
Volume and
Momentum:
These two
indicators confirm
the health of a trend or warn of an impending change in direction. Is
buying
spreading to other investors, as evidenced by rising trading volume? We
also want to know if days when prices rise outnumber and result in
bigger
price moves than days when prices fall (momentum). If either volume or
momentum starts to fade, then we can surmise that the trend is
weakening.
Personal
Investment Strategies
and Objectives:
Before you start
investing,
take the time to develop a personal investment strategy. To establish
your
personal investment strategy, you and or your advisers must consider: a)
Your
knowledge of financial markets
b) Your financial assets
c) Your
tolerance for risk
d)
The amount of money you plan to invest e)
The
things you hope to accomplish through investing (investment objectives).
Once you can
answer these
questions you will be able to begin the process of selecting the
investment
products to meet your financial goals. There are three basic categories
of investment products: 1)
Equity investments 2)
Debt investments
(Bonds, Gics etc) 3)
Cash or equivalent. The combination of these
types of products within a portfolio is referred to as you the asset
mix.
The asset mix that you choose is important in establishing the overall
risk of your portfolio and the expected returns. Allocating your funds
between the three types of investments is a way to diversify your
portfolio
and ensure you are getting the best return for the level of risk you
are
willing to take. The right asset mix will depend on your investment
objectives.
Asset mix is an important part of your personal investment strategy and
should be explored in detail with your financial adviser.
Financial
advisors are not created equal so shop around for one you feel
comfortable
with, one who is familiar with various investments not just debt
securities
or mutual funds but has a broad spectrum of understanding, knowledge
and
is not afraid to encourage you to take risks if that is your bent
beyond
his/her own comfort zone.
Recognize Your
Limits:
Before investing
your money,
you should consider your investment knowledge and experience. Avoid
investment
products or investment strategies you don't fully understand. If you
have
questions about an investment recommendation be sure to find the
answers
before you make your investment decision. YOu want clarity about what
you
are going to invest in. There are courses and books on investment which
may help but in the end it is a compendium of risk tolerance,
knowledge,
funds and investment selection which will help guide your success or
failure.
Do not approach investing casually or you may regret your choices.
Certain
personalities are better suited to investments depending of the
individuals
involved and nature of the iunvestment.
Managing
Emotions:
Your emotional
response
to adverse risk and changes in the value of your investment is
important
to understand and manage within yourself. Some people are
quite comfortable
with the ups and downs of the market, while others lose sleep when
their
investments fluctuate in value. The amount of risk you can
handle
is a personal thing. Its your portfolio and you should be able to
endure
only that which you can comfortable handle without losing sleep. Risk
tolerance
is a personal issue. You should never feel obliged or pressured to take
more investment risk than you are comfortable with. Remember though,
that
there is no such thing as a high-return risk-free investment. You
cannot
expect to be rewarded with high returns on your investments if you are
not prepared to accept the risks that go with them. One piece of advice
- NEVER PANIC.
A
get-rich-quick mentality
makes it hard to maintain gains and keep to a strict investment plan
over
the long term, especially amid a frenzy, in the face of the irrational
exuberance of the overall market. It's times like these when it is
crucial
to maintain an even keel and stick to the basic fundamentals of
investing,
such as maintaining a long-term horizon, dollar-cost averaging and
avoiding
getting swept up in the latest craze. Understanding how fear
and
greed affect you is important to helping you become an effective and
profitable
investor.
Do Your
Homework:
It's been said
that some
people do more research before buying a new television than they do
before
investing their life savings. Successful investing requires upfront and
ongoing
time and effort. That time and effort may be spent doing your own
investment
research. It should also be spent carefully selecting your financial
advisers,
consulting with them, and reviewing their recommendations. There are
thousands
of investment products available to the public. There are also
thousands
of investment professionals and each offers different skills, products
and services and competentcies. There is a great deal of information
available
to investors in periodicals, newspapers and books. Another good source
is the company issuing the securities. If the company cannot provide
detailed
written information about itself and its securities, you should look
elsewhere.
Remember to do your own "DD" (Due Diligence).
