So you want to be a Stock Trader?

[whitster]

" A wise man told me that, no matter what you trade, the secret to success in the market is simply good risk management. Cut losses short, wait out the winners. "

he's right about the first part. as for the second part... not necessarily.

"Is 0.20 an ideal stop loss? No, not if your target movement, or the probable movement, is 0.10. If the target were say 0.5, then 0.2 could be acceptable, however it depends on many different variables when it comes to where a stop should be placed"

what matters is positive expectancy. stop (and targets) are SETUP dependant. if one is swing trading equities, using certain styles, it is absolutely correct to cut losers short and let winners run. however...

this is not necessarily the best way to trade. it is dependant on character of market (you are trading), trading style, timeframe, etc.

for example.

one setup i use has a stop of 11 pts, a first target of 6 points (then move stop to entry) and a 2nd target of 9 points. the tertiary target is market internals dependant.

this does not fit the above meme (cut losers short bla bla bla) in that the stop level is larger than the target. in fact, it's the complete opposite.

however, with this specific setup (and many others) i can be assured of over 82% winning trades, and a nice positive expectancy EVEN THOUGH my initial stop is WIDER than my initial target.

why?

because with THAT setup, that is the proper stop distance.

so, one of my first rules is that many people will try to take narrow rulesets and think they apply across the board to all trading styles, modalities, markets, timeframe, etc.

that is absurd but constantly repeated.

 

[2manywhiners]

For the post that my specific comments came from, the original poster was making very quick trades (like 5 - 30 minute trades, from a PM I think). In that time period, letting a loser run for 20 minutes when you don't expect to be in the trade for more than a half hour anyway isn't a good idea. In longer-term trades I use much wider stops than I do in intra-day morning setups. Sometimes wider stops are acceptable but for the most part, especially when it comes to beginning traders, a general rule of thumb is to cut losers quickly. As far as Target profits go, many of my trades never reach their target, because often times I exit positions when they start to stall (significantly more often during morning trades). I exit many of these positions before the price ever reached it's target level, expected win, or stop loss price levels. Because of this, my overall win:loss ratio becomes skewed. However, when I compare my trades that reach or exceed their expected price levels, to those that fell to the stop loss levels (non-trailing stops) my win:loss ratio looks much more balanced.

so, one of my first rules is that many people will try to take narrow rulesets and think they apply across the board to all trading styles, modalities, markets, timeframe, etc.

that is absurd but constantly repeated.

I agree completely. Trading rules and risk management vary greatly over the different time frames for trading. Traders have to adjust accordingly if they expect to win. Thanks for the insight whitster. Good post.

I don't recall having re-posted anything about exiting positions early, but often times new traders stay in positions for far too long, simply because the price action is still between their target and stop loss. When in a position like this, sometimes it pays to wait it out, but often times you can find other positions that are moving more significantly that you current position. Don't worry about exiting a break-even trade, and taking a hit on commissions, if it means getting into something that is moving... Just don't overtrade. On bad days, where you've been jumping all over the place and taking on lots of commissions, new traders should just sit back and watch.

In addition to moving stops up after reaching certain levels (which is a good practice to undertake) it isn't always a great idea to have tight trailing stops. The idea behind a hard stop is that you are limiting your losses at a specific point, but when it comes to trailing stops, often times these are set too tightly and traders get shaken out of otherwise high-quality trades. Go lax on the trailing stops and watch volume and price charts for exit confirmations while you're in trades.

 

[andread]

Well, talking about risk management, how about the % you put in each trade? I know many people say you should put a low amount, like 2%. Now, I haven't read van Tharp's bible yet (I ordered it, together with other books), but it seems a bit crazy to me. Hell, 2% means that I'm busy with 50 different trades at the same time. And I wouldn't like to leave some money in the account.

 

[jho]

Quote from andread:

Well, talking about risk management, how about the % you put in each trade? I know many people say you should put a low amount, like 2%. Now, I haven't read van Tharp's bible yet (I ordered it, together with other books), but it seems a bit crazy to me. Hell, 2% means that I'm busy with 50 different trades at the same time. And I wouldn't like to leave some money in the account.

2% is the amount at risk. For a $50,000 account, you wouldn't want to risk more than $1,000 per trade. So if you are stopped out of the position, you don't lose more than $1,000. Your actual position size will depend on where your stop is placed.

Are you a swing trader or a day trader? What is your average hold length?

If you are a beginner I think your risk per trade should be less than 1%. The goal is to stay in the game long enough to learn from your mistakes. Right now my risk per trade is around 0.15%.

 

[andread]

Quote from jho:

2% is the amount at risk. For a $50,000 account, you wouldn't want to risk more than $1,000 per trade. So if you are stopped out of the position, you don't lose more than $1,000. Your actual position size will depend on where your stop is placed.

Ah, it did sound a bit strange. I was completely misunderstanding. Next time I'll read the book before asking. Thank you

Quote from jho:


Are you a swing trader or a day trader? What is your average hold length?

If you are a beginner I think your risk per trade should be less than 1%. The goal is to stay in the game long enough to learn from your mistakes. Right now my risk per trade is around 0.15%.

At the moment I'm papertrading. I'm trying to understand how all the things we talk about work. After that, because of money and time constraints, I will swing trade, holding positions overnight and possibly a few days or (unlikely) longer.
Yes, it would be wise to go slow, but I'm afraid I'll do something stupid. I'm very discretionary and I don't have many rules, but the few I have are often violated. And I thought I had discipline
At the moment I'm around 1-2%, and mostly not beyond 3%. Maybe I'll try tighter stops

 

[Vista]

You had mentioned that you trade breakouts and look for % Gainers from the Open.

What do you use to scan for these %Gainers?

 

[whitster]

"Anyway, what I noticed is that you didn't mention indicators like TRIN."

i use TRIN, TICK, A/D (breadth), sectors, tape, etc.

i personally don't use any LAGGING indicators for my intraday dow futures trading. i will use them on swing trading stocks and commodities and occasionaly for investing (i invest mostly off fundamentals. charts are secondary at best).

with very rare exceptions, TRIN means almost nothing in and of itself, but is a great overall way (when taken in concert with other market internals) to guage the character of buying or selling that is going on in the market.

i often look for divergence to help give me confluence for a trade OR OR OR (very important) when i have conflicting internals, it is often best to just PASS on a trade (if a trade is not a high probability trade - why take it?)

for example

if TRIN is trending lower and price is remaining in horizontal balance, i would be very hesitant about taking any short setup. the TRIN trending lower means market pressure is building up AND there is risk for shorts. again, TRIN in isolation doens't mean that much. in concert, it is a nice guage.

another thing i have noticed is that TRIN is completely useless in the first 1/2 hour of trading, basically (at leat for me) and on OEX day as well.

OEX day is weird in general

 

[2manywhiners]

Quote from Vista:

You had mentioned that you trade breakouts and look for % Gainers from the Open.

What do you use to scan for these %Gainers?

Me: Screening Tools I use multiple screening criteria for multiple market directions, times of day, and types of trades. Some screening criteria is very simple, like Price between $X.xx and $YY.yy with Volume between W and Z; and some is a bit more complicated, like screening specific long-term technicals, intra-day technicals, and basic fundamentals of a company into one screen. What is the purpose? I have screens for up days, down days, sideways, choppy, etc. Morning, Lunch, Afternoon, etc. Short, Long, Short one related vessel, Long the other, etc... I highly suggest all intra-day traders learn about the basic fundamentals of companies, what their significance is, and learn the functions of long-term trading and investing. It will open doors to your understanding of what exactly is occurring intra-day and why. Investors and Institutions still control the markets intra-day... when traders learn that, light bulbs start to flicker...

Try running some screens with % +/- from the open. Then build from there... I'd get into some more detail, but I'm slightly intoxicated and there's a half-naked woman waiting for me in my bedroom... Probably more to come later....

Quote from whitster:

...i personally don't use any LAGGING indicators for my intraday dow futures trading. i will use them on swing trading stocks and commodities and occasionaly for investing (i invest mostly off fundamentals. charts are secondary at best).

with very rare exceptions, TRIN means almost nothing in and of itself, but is a great overall way (when taken in concert with other market internals) to guage the character of buying or selling that is going on in the market.

i often look for divergence to help give me confluence for a trade OR OR OR (very important) when i have conflicting internals, it is often best to just PASS on a trade (if a trade is not a high probability trade - why take it?)...

I couldn't agree more. Excellent post.

Keep the questions coming... this is actually turning into a fun thread. I figured it would just die and become a reference thread down in the catacombs of the evil Search dungeon... Great posting everyone.

 

[andread]

Concerning high probability trades and passing. Why do you pass? Do you have a better trade? Or you just prefer to leave the money in the account and not risk it? Wouldn't it be better to just risk a small amount, maybe using tighter stops or taking a smaller win?

 

[billp]

Thanks for starting this thread.

What timeframe charts do you trade with? 1 and 5 minutes chart? Thanks