Education
Risk Management
by Greg Secker on Mar.09, 2007, under Education
- The risk on each trade does not exceed the predetermined acceptable level of risk
- The risk on each trade is worth the potential reward
- That procedures to manage these risks are followed
- The cumulative portfolio risk does not exceed the predetermined levels
- the purpose of managing our risks is to preserve our capital so we can continue investing over the long term
- It covers both risks for individual trades and portfolio risk
Managing the Risks for an Individual Trade
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•The risk on each trade does not exceed the predetermined acceptable level of risk
- Risk should not exceed 1% of portfolio
- The risk on each trade is appropriate for the potential reward
- Reward ratio minimum of 3:1
- Use Trademinder (TM) to calculate £/point and reward ratio
Follow the Procedures:
- Always place your stop loss at the predetermined level
- Always use the pounds/point you calculated – never more than that
Portfolio Risk:
Limit Sector Risk
Suggested limit per sector is 3%
That is, no more than 3 concurrent trades in any sector
Limit Portfolio Risk
Suggested limit is 12%
No more than 12 trades open at one time
Trade Breakouts
by Greg Secker on Mar.09, 2007, under Education
There are 3 types of Breakouts:
- Breakout from resistance
- Breakout from a consolidation
- Breakout to a new high
The Rules: The following are essential –
-
•Sector – only trade in ACTIVE sectors that are PERFORMING
- Fundamentals – loosely applied ( not vitally important)
- Stop loss – set stop loss close to the breakout point (remember you are in for the short term!)
- Check spread – the smaller the better
- Check liquidity – small capitalisation stocks represent greater potential risks
- Risk to reward – check for resistance/support on the long term chart
- Improve – trail your stop up each day, or even intra-daily
- Volume – keep an eye on volume (daily)
Follow the Traders University Stock Selection Strategy:
- Economy – where are we in the economic cycle?
- Markets – what are the overall markets doing?
- Sectors – which sectors historically perform well in this part of the economic cycle? Which of those sectors are currently performing?
- Companies – Analyse the charts of the companies in those sectors that are active and also performing.
- Strategies – Assess those companies for technical setups such as 3 day power plays, etc. While doing this also look for potential breakouts.
Breakout from Resistance:
As a general rule we want to see at least 3 clean touches on the resistance line and no false breakouts
Breakouts from Consolidation
As a general rule we want to see a tight consolidation between two reasonably straight lines
A good increase in volume gives us more confidence in the move
Breakout to new highs
Check for next level of resistance and calculate potential risk to reward ratio.
How do we Enter and Trade Breakouts?
Entering Breakouts – End of Day (EOD)Traders:
- Option 1 – Enter on the day of the breakout by setting an ‘if done’ order to enter the trade just above the resistance line, with a stop loss just below the resistance line. Note : you will not be able to see the current volume or Level 2 therefore you will be subjected to a higher number of falsebreakouts.
- Option2 – Enter on the day after the breakout has occurred. Ensure the breakout day has closed above the resistance line and the volume has increased. If you still wish to enter the trade you will enter just after the open with a stop loss just below the resistance line. Note : this is the safer and more conservative option, but potentially you may have to pass up some breakouts because they would have moved too far by the time you spot them
Entering Breakouts – Intraday Traders:
- Wait for breakout to occur. Check volume and Level 2. Decide whether to enter or not. If you enter, place a stop just below the resistance line.
Trade Management of Breakouts:
- EOD traders – trail stops up at end of each day to the low of the previous day
- Intraday traders – can trail stops at the end of the day to the low of the previous day or trail stops intraday
Accurate Trade Records
by Greg Secker on Mar.09, 2007, under Education
Keeping Records of Open Trades:
- How many do I have?
- How many long v. short?
- Where was my entry, stop, target?
- What is my risk to reward ratio?
- What was the reason for the trade? (strategy)
Keeping Records of Closed Trades
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•What did I trade?
- Did I reach my R: R target?
- How much did I make or lose?
- How long was the position open?
- Did my strategy go as planned?
Why Bother? Ask yourself 2 questions:
- Do I want to make money?
- Do I want to improve?
If the answer is yes, then you need to be diligent and organised about your record keeping. If you are not, then you stand to lose money in the market and will have difficulty improving your trading. Learn from your mistakes in order to improve.
Remember it is your money so know where it is and how it is working for you.
Excel spreadsheets:
If you are good at formulas etc. then you can set up a very functional sheet that will work out your trade sizes and track your position.
Added advantage of having all your records together on one page.
Easy to do monthly comparisons of your results.
Records trade’s size, direction and result
Keep a record of your thoughts about the trade
Easy to calc monthly % returns
Colour coded for easy visuals
TrademinderSoftware
All the hard work has been done for you
Tracks all your a/c’s in one place
Trade sizing and full risk management analysis
Full reporting functionality
Links to Live Trading Floor
Always alerted to potential trades
Historic Records
What theories might we want to test?
Which strategies work best?
Are longs better than shorts?
Am I achieving my R:R targets?
What is my ratio of wins to losers?
Did I trail my stop in the best way?
Why ask? To learn….
Don’t Leave it until Later
If you think this all seems a bit laborious – You are right !
BUT, the longer you wait to get yourself organised with record keeping, the longer it will take you to improve your trading.
POWER PLAYS
by Greg Secker on Mar.09, 2007, under Education
What are you trying to achieve with a Power Play?
- You are looking for a pivot in a share’s movement.
- Ideally you want to catch the point at which a retracement turns and the main trend continues.
- You need to apply the Power Play Basic Rules.
- You also need to use some filtering rules on other indicators and signs to confirm the validity of the Power Play.
- You also need to use your common sense and judgement.
Power Play Terminology
Day 1. The day used to define the Activator Day
Day 2. ‘Activator Day’ – The day used to define the entry and stop levels
Day 3. ‘Trigger Day’ – The day you potentially enter the trade.
Day 4+. Days during which the trade is potentially open.
- The Activator Day (day 2 ) must close significantly lower than the intraday low of day 1.
- Buy on Day 3 when/if the intrady high of day 2 is broken.
- Place stop loss at intraday low of day 2.
- Trail up your stop after day 7 to the intraday low of the previous day.
Checklist
1. Two down days in a row is a must.
2. On the activator day the volume must be above the 25 day average line
3. Stock must be in an uptrend and above both it’s moving averages
4. Ideally the activator will be bouncing off MA, tend line or a support line.
5. Active sector that is also performing well.
6. Small ranging activator bar.
7. Risk/Reward mist be at least 3:1.
8. Check that indicators aren’t at their extremes.
9. Ideally the fundamentals will be good.
And finally…..
- For reverse Power Plays all the rules are the same as before but they are flipped upside down.
- A useful exercise is to write down these rules and incorporate them into your Trading Plan, both for the long and short Power Plays .
- Do your own research and see if there are any other factors that you think will help you sort out the very best opportunities.
- Keep a logical, clear head when trading this strategy – it is simple, but do not rely on the simplicity too much.
CHART PATTERNS
by Greg Secker on Mar.09, 2007, under Education
Two types of chart patterns
- Continuation patterns
Trend Continuation patterns
- Excellent trading opportunity as with the overall trend and will generally be above both of the major moving averages.
- Reversal patterns
- Occur at the end of a trend and are a signal that the trend is likely to change direction
- Are a slightly higher risk trading opportunity as they may be against the long/medium term trend and they tend to form on the wrong side of the moving averages
- Can be very profitable when you get them right as you catch the start of the move which is often the most powerful
Locate and stalk the trade
Ideally you would locate a chart pattern while it is still setting up
You would then stalk it until it finally breaks out. Use the portfolio function in Sharescope to build yourself a list of stocks that you are stalking
How do we enter and trade chart patterns?
- Option 1. – Enter on the day of the breakout by setting an ‘if done’ order to enter the trade just above the resistance line ( note, you will not be able to see the current volume or Level 2 therefore you could be subjected to a higher number of false breakouts)
- Option 2. – Enter on the day after the breakout has occurred
- Ensure the breakout day has closed above the resistance line and the volume has increased
- If you still wish to enter the trade, you will enter the next day just after the open with a stop loss just below the resistance line. (note, this is the more conservative option however you will often miss the move)
Entering breakouts – intra day traders
- Wait for breakout to occur
- Check volume and level 2
- Decided whether to enter or not
Placement of stops
- Aggressive – place the stop below the resistance breakout level
- Conservative – place the stop below the uptrend level
- Alternative – place the stop below the resistance breakout level and alos below the 50ma to provide even stronger support
Exiting the trade
- Set a ‘limit’ order to exit when your target is hit, OR
- Run a trailing stop. Ensure you give the stock enough room to move before trailing your stop. This is an individual decision based on your risk profile, but ensure that you do give it some time before moving your stop. Trail your stop to just below the low of the previous day
