Time Tested Trading Tips…

An Excerpt from the Timely Trades Letter.
Trading is about risk management. I manage risk by adjusting position sizes, and the number of positions I am trading. When the market is trending I am willing to have more funds invested, so I use more trading positions and larger position sizes. When the market is not trending, I reduce my exposure by reducing position sizes, and the number of positions I am trading. When the market is in a narrow base I might only be trading two positions. That does not imply I only make two trades while the market is in the base, because when a position hits its limit or stop I will replace it with another setup that triggers. It is just that I am only holding two positions at a time; most of my account is in cash or ETFs. Only having a few positions at a time, limits my exposure to the market during periods of market uncertainty. Testing and experience shown that a three day holding period can be an effective exit strategy during trading range markets and that longer holding times can be used during trending markets. In practice I use this as a guideline and not a hard and fast rule. If a position approaches support or resistance I will generally take the profit whether or not it has been three days. The most likely thing for a stock to do at a key support or resistance level is to bounce or retrace. If the stock is going to bounce or retrace from support or resistance most of the time, then…in the short term the run is over and I am better off to be taking profits.

When a stock approaches support or resistance it is either going to break through or retreat from it. If, based on the definition of support/resistance the stock retreats most of the time then by taking profits in the support/resistance area I will maximize my return and not be ‘giving back’ profits as the stock retreats. In the cases where the stock does not retreat, and moves through support/resistance I will still have my profits and can roll them into another position. I do not need to continue making money on a specific stock, I can roll my profits into whatever is working. When trading I want to be positioned to profit if a stock, or the market, does the usual thing in a given situation. When the stock does not take the usual path I may lose a little, but since by definition stocks do the usual thing most of the time, that is the way to bet. Since downtrending stocks usually bounce from support, I am better off to take my profits before the stock reacts to a support level by bouncing which would reduce profits on short positions. If I have a long position and the stock is moving up toward resistance, then I want to take profits before the resistance area in case the stock follows the normal pattern and retraces from resistance which would then decrease my profits.Some traders are reluctant to take profits when a short position approaches support because they do not want to ‘be wrong’ and worry that they will ‘miss out’ if the stock keeps going down instead of bouncing. They are trading on emotion and ego, not logic. If the stock is most likely to bounce at support then most of the time you are better off to close the short position before it gets to support. There is no way to know what will happen on any particular trade. There are not magic indicators or super systems that will tell you the outcome on a specific trade. You are not smart if the trade worked and dumb if the trade failed. Traders focus on managing risk and being positioned to profit if the normal thing happens. When something unusual happens they may lose money, but it is by definition better to bet on the normal thing happening rather than the unusual. If the normal thing for declining stocks to do is bounce at support then I want to take advantage of this knowledge and use it to prioritize trades based on risk/reward, and also to take profits when a short position approaches support.In a trending market I may be holding 8-12 trading positions, and close to fully invested for the swing trading account, and replacing them when they hit their stops or triggers. I will also be taking larger position sizes and holding the positions longer when the market is trending. The clearer the market direction, the more funds I will have invested. When the market is uncertain I reduce exposure to stocks, and increase exposure to ETFs. The ETFs do not have the same bang for the buck as stocks, but there is usually something trending up and trends are good for the account.

Steve Palmquist a full time trader who invests his own money in the market every day. He has shared trading techniques and systems at seminars across the country; presented at the Traders Expo, and published articles in Stocks & Commodities, Traders-Journal, The Opening Bell, and Working Money.
Steve is the author of, “Money-Making Candlestick Patterns, Backtested for Proven Results’, in which he shares backtesting research on popular candlestick patterns and shows what actually works, and what does not. Steve is the publisher of the, ‘Timely Trades Letter’ in which he shares his market analysis and specific trading setups for stocks and ETFs.

To receive a sample of the ‘Timely Trades Letter’ send an email to sample@daisydogger.com. Steve’s website:www.daisydogger.com provides additional trading information and market adaptive trading techniques.

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