Managing your trading chanceOf course, understanding the problem is the biggest part of the solution. Capital preservation is an aspect of trading the markets that you can actually control. It is imperative that you understand and create a financial trading plan that you can easy implement. When trading with leverage it is even more important that a protective stop is used and managed with every trade. Capital conservation is essential and foremost. Profits are earned and a large loss can come from silly mistakes, and an error like this can take time to recover. The trader need be diligent not only with the financial plan, but with finding a system for placing stops in the market. Each market is the same but different, and may need a different type of stop loss technique, it may be discretionary or mechanical.
Understand how the order procedure works
Be very clear on how all of the orders system works within the Market Maker platform. For instance if you have placed a long trade, then place a stop loss order, the trade hits your target and you release the trade with a profit; do not forget to remove your old stop loss order, as it is still active in the market and can be triggered as a sell short order. Many losses come from a lack of understanding the ordering system - how orders work and how they are filled and not filled, or they simply forget to remove the order. So have a method to check the pending order box. There's no consistence luck in trading, its preparation and opportunity meeting. Have a financial plan and have a policy checklist to implement and manage it.
Where to place stops?
Understanding the markets takes time; how it works, how it moves, where it moves to and why. In terms of volume, which creates the rate, the market can be viewed as a work of aggregation and distribution, and this process occurs in unlike degrees which demand to be understood. Let's look at the basic principle using the example of an auction sale. Let's say the auctioneer brings out a vase and wants to start the bidding at $10 and every one giggles, so the auctioneer drops the price to $7. And then there is silence, “okay” he says, “$5?” Then a bidder from the crowd says, “I'll give you $2”. A price has been struck, and the auctioneer accepts the bid and the bidding now starts in earnest. Next someone comes in at $3 and then they all start to pour in and at around $5 and $6, everyone in the game at this point in the auction thinks they have a good chance of getting the vase. The important point here is that this is where most of the action is, where most of the energy is spent (the correction/accumulation). From this halfway mark in the auction we all know what happens next, the heat becomes too much as the price rises (distribution into the trend) until finally the last high price is reached and the vase sells for $10. The highest price ($10) has been attained due to the energy and interest at the midway point of the auction, and from a statistical viewpoint at the bell curve of the data spread. The midpoint was the foundation of the distributing trend that created the high price.
This is relevant to both micro and macro events. When analyzing a market, the degree of accumulation and distribution needs to be understood. The concept of squaring time and price comes from this. Very simply the correction time can be converted into price. Essentially, the larger the correction - and a correction correcting in time would be stronger that a correction correcting in time and price - the larger the trend.
Once a trend begins to move away from the accumulation correctional phase, stops tend to be wider to accommodate the swings of a trend beginning - the beginning of a trend can be a building process of sharp retrenchments of around 50%. A correction has phases - a beginning, middle and end. A position can be taken in any part of the correction before the next trend but you need to know what type of correction the market is in, and what stage the correction is at. Elliott Wave identifies 11 different types of corrections plus there are all the classic standard patterns that can help in understanding corrections. When you think about the profits you have made, you will have made them from certain patterns and you tend to look for those patterns; the more patterns you can recognize of course the better. Flicking through 200 stock charts each day is one of the best ways I know of learning about patterns, observing their development as they unfold.
Taking a position in the market and placing a stop is best when the market is confirming that the balance of the market is moving in your direction, corrections can essentially be expanding or contracting - the contracting corrections like triangles are the most traded patterns - so a correction that has been swinging around its point of centre for a while and is now balancing towards that certain price point is part of an entry set up. From this final price balance point the market will move in the direction of the major trend, the position and the stop needs to be established during this process. The stop can be placed in the safest position under the balanced level, which is a minimal distance from the entry point. Whenever the market breaks away from the rectification, mostly on strong volume, then having this breakout as earnings. If you wait for the break out the opening stop hazard will be often higher. Traders with small account are essentially exposed to more risk that is percentage risk per trade so your edge to compensate for this is your entry and initial stop and this reverts back to your understanding of corrections. Most traders are merely looking at trends so study corrections and the net ratio may depart to seem best.
The rectification has damaged out of the trend channel and is now at the 50% level of the correction, it is more importantly, at the balance point of the correction. The opening stop could even be moved closer, nevertheless for this check the market depth and place your stop under the largest orders on the bid side.
If you're intraday trading you would be trading of the market profundity window; the trader would be reading the lodge flow in the depth window and whenever the trader had long positions, the trader would place stops nether the largest orders on the bid position. As this is a game between the largest orders on both sides, everything in between will come to pass. The trader might exit on noticing sellers moving in, hitting the bids, the break in movement, the balance of buyers and sellers. The momentum of change can first be seen in the market depth window, in fact, at times you can see the change coming, simply be observing the depth changing - the depth is a leading indicator.
Once in a trend after a good correction, you need to let the market have room to move, otherwise your profit ratios are going to be small. One of the first aspects you need to decide for your trading plan is the time frame. If I'm trading between $10 and $20 I will mostly use the monthly low as my stop loss, because on average it will keep me in the trend. However each market is different and the answer about where to place the stops will come from that stock's history. If you look back at a stock's trends, not its corrections, (of course note what whole numbers the market corrected at 10, 20, 30 and so on) look at the trends and study them; the ranges and lengths of trends will be larger each time, as when you're trading in the new trend - into blue skies - the ranges and length will naturally be more; in fact long term trends should be viewed in logarithm i.e. changing the chart into percentages. Learn the historical trends, and ask questions - does using the monthly low work? Is the weekly low better? How about one simple moving average; each stock as its own finger print, its own personality and the analyst needs to tune with this, as it is all the fine subtleties that put dollars in the pocket. The stop loss, entry, trade management, target exit, money management and trading mode in my personal thought are all equal nevertheless countless will debate that the exit is more import than the entry and so on. They all very important and they must all come together to make trading successful. Whenever this happens it makes trading seem uncomplicated.
QUICK TIP
Cut your losses short and let your profits run.
Super Trend
Super Trend is an indicator that works on all timescales (intraday or EOD ) and all instruments (stocks, futures, forex and so on). It is the ideal tool to trace market trends and optimises your winnings. SuperTrend evolves below or above the prices depending on the trend. You can use it as an exit position indicator when its direction changes. You can also use it to place your stops. However, it is generally better to take buying opportunities when the Super Trend is below the prices and sell short when it is above the prices.
Moving Average
Calculation: Simple Moving Average = (TodayClose + PreviousClose + Close(X-1 day before)/X. X is the parameter determining the number of days to consider in the calculation. The Exponential Moving Average gives a stronger weighting to the nearly recent prices and thus reacts added to the last price changes.
Calculation: %exponential = 2/(period+1). (Close of the day* %exponential)+(yesterday's moving average *(100 - %exponential)). You could use the weighted moving average.
Calculation: MA=(P1Ct+P2C(t-1)+... +PnC(t-n))/(P1+P2+... +Pn), P as period and Ct the close at the date.
Interpretation:
Moving averages are one of the most popular technical analysis tools. They are useful in highlighting a trend because they display the average price of a security at a given time. Put 0 in the parameter box in order not to display the moving average. When the short moving average rises above the long moving average there is an upward trend and when the short moving average falls below the long moving average there is a downward trend. You could equally use only one moving average and compare it with the price for trading purposes.
Welder’s Parabolic Stop and Reverse (SAR)
Calculation: SAR points are calculated from both prices and time. The parameters are the initial acceleration factor (typically 0.02), the addition factor (typ. 0.02) and the acceleration factor limit (typ. 0.2).
Interpretation:
‘Stop and Reverse' points are useful to detect trends as they follow the price direction.
SAR direction is always the same during a trend. The trend continues while the points stay above or below the prices. Whenever prices penetrate a 'stop and reverse' point, a signal is given for you to liquidate your present-day position and possibly take the opposite place.
Trend Line
A very simple yet very effective method that should not be over looked.
Chande Kroll Stop
Calculation:
First high stop = HIGHESTp(high) - x * Average True Rangep
First low stop = LOWESTp(high) + x * Average True Rangep
Stop short = HIGHESTq(first high stop)
Top long = LOWESTq(first low stop)
Interpretation:
This indicator indicates the stop for a position (short or long). It is calibrated on the true range and forgotten the security's excitability. Hence, the stops are placed under (and on) the high (low) on the p last bars. The difference is proportional to the average True Range on P bars. The stops displayed on the chart are obtained with the first stops (high and low) on the q last bars.
Average True Range
Calculation: This represents the volatility of a stock. True range is the highest data in absolute value among: today's high - today's low; today's high - yesterday's close; today's low - yesterday's close. To calculate Average True Range, it is compulsory to apply a moving average of the True Range.
Interpretation:
This indicator of volatility measures selling pressure and buying pressure. When the ATR rises there is more and more pressure and a strong volatility of the stock. If the ATR decreases there is less and less pressure and a low volatility. The ATR in the common usage is set at 2.5 to 3 ATR as a trailing stop and is quite effective as a mechanical stop loss method that actually moves with the market as the ranges are expanding and contracting.
QUICK TIP
Never enter the market without knowing exactly where you will exit that position.
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