Saturday, February 13, 2010

How my mind works....stages of a winning trade.

(I am assuming that I have already identified a set-up that fits my criterion and the markets are giving me one of the buy signals I spoke about in an earlier post)

Stage 1: I write down by hand the entry trigger (usually HOD of previous day for pullbacks or major/minor resistance for breakouts), stop loss (usually below pivot low for pullbacks or 8% below buy point for breakouts). I use these to calculate number of shares I will purchase.

Stage 2: I wait for the markets to open. I watch to see if the markets are strong or weak. Unless they do something very extreme; I usually stick to my night before plan. If the stock I want to buy gaps up then I will decide whether I still want to buy. Unless the gap is extremely huge I usually still buy but generally I love when a stock gaps up on the day I am looking to enter (this is usually a sign that the stock is likely going much higher if it holds the gap low). If it does not gap up I place my buy stop order and wait.

Stage 3: If I'm not triggered no biggie since there is always tomorrow if I still like the set up. On the other hand, however, if I do get triggered I put in my stop loss order as soon as I realize I have been filled. From my own experiences, the best trades usually end the day in profit. Consequently, I get very antsy about trades that are negative as I am nearing the close of trading. Sometimes I will be wrong but it pays to stick to your plan and hold your position until stopped out as the markets always throw you curve balls (one recent example with me was DRWI).

Stage 4: From here on in its just a waiting game. Three things can happen. You get stopped out within the next few days. No biggie since you already prepared well in advance and knew and felt comfortable with your planned risk. Sometimes stocks gap down and you get a worst fill than you expected. You have to take it and move on. That is why I avoid initiating trades just before earnings announcements like the plague and limit the size of my portfolio I commit to any single trade. The second is that the stock can go no where for days or weeks with out stopping you out. From here you have to make a judgment call. You have to decide whether based on the market environment and other interesting stocks if you want to stick with the position or get out and move to cash or into other better looking setups. The third possible out come is that stock moves up and gives you a nice profit. This is what we hope for all the time.

Stage 5: YOU SIT ON YOUR HANDS. My first rule is to hold through at least one pullback. Once the stock follows through after its first pullback without stopping you out you are well on your way to a 3R+ profit trade unless something extreme happens. This is for trades near the start of a new intermediate uptrend. Although I have not really made any position trades like this before (except for CAAS and probably CMFO) my rules will be as follows. Pyramid into the stock on pullbacks/breakouts while moving a 'mental stop' below pivot lows for half the initial positions and the whole of the latest pyramid buy. Then exit completely on either a huge down day on massive volume or a close below the 50-day MA especially if the overall markets are still strong or both.


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