stock trading lessons: failed directional moves

Sometimes you can get valuable information from a trade entry signal that does not follow through, you just need to pay attention and have an open mind.

 I generally trade in and out of stocks during the day looking to get a “feel” for good order flow and if I do; those stocks will be the ones I carry overnight for a longer term trade. I came into this week looking to reestablish my short positions that I covered last week. So naturally my bias was to the short side and was stalking entries in that direction. As any good trader should, any time I got an entry signal based on what we teach in Equity Trader 101, I took all the trades.

What I started to get was a lot of trades going nowhere or moving quickly against me. I have been taking quite a few small losses this week. Now this is where most new traders go back to Borders and buy another trading book because what they read in the last book “doesn’t work.”

The market “should” have started back down this week, the subprime mess has not gone away and the FED keeps trying to stave off infaltion with surprise rate cuts and another one expected today. With all this happening the market has not sold off and actually looks strong, the financials have gained almost 30% in 7 trading days.

In order to be a successful long term trader you must learn to pay attention. I don’t have a good feel for order flow right now because it is not following through based on the price model we at Keystone Trading have for price action. There fore I am trading lightly or not at all.

day trading lessons

I see it happen over and over again. New traders sit down at their screen with a list of 75 stocks they can’t wait to get involved with. They have every indicator on their screen that money can buy. These are the traders who ultimately never make money. They think they need to know the most and they think they need to watch everything to make steady money (thinking if they are not watching as many stocks as possible they will leave too much money on the table).

Your job as a short term stock trader is to find those pockets of opportunity during the day where you can make your living. Ultimately those pockets are opportunities are where you can use more leverage because the trade”lines up” well. It is very hard to get the gut feeling it takes to use additional leverage if you do not know how the stock trades.

The only way to learn this is to watch fewer stocks that are liquid enough to manage your risk but have enough intra day movement to earn a living. It can be a basket of unrelated stocks you trade every day (how I trade) or it can be the large cap stocks from a specific sector. This method of stock selection has proven itself over time.

Learn the stock, increase leverage, then add another stock and repeat.

day trading and money management

Day trading for a living requires discipline. Of course we all know about “stop loss” discipline but what about the decision you must make before you decide on a stop loss point for an unprofitable trade?

How much are you going to risk on the trade? This must be a definite dollar amount you are comfortable placing at risk. Whatever this dollar amount is to you, it must be consistent. This decision is money managment. How you manage the trade after you are in the trade is risk management.

Why is it so important that this dollar amount be a number you are “comfortable” with? Most new traders enter a position thinking about how much they can make on a trade, if the trade moves against them they are not prepared to take the loss because they never thought they would need to. This is what turns reasonable small losses into account draining catastrophes.

In order for you to earn consistent money as a stock trader you must exit losing trades flawlessly. It will be easier to do if you “look both ways” before you put the trade on. If you accept the possibility of a loss or profit on any trade and you are comfortable with the amount you are risking on each trade you will never let one trade blow you up.

I have seen it time and again where a talented trader sits on a losing trade for hours or days just because he or she did not have a money management plan. If you accept the risk (the dollar amount) before the trade, a flawless exit is a cinch! Once you have decided on a dollar amount, then stop loss and this dollar amount will combine for the amount of shares you will have in the trade………more on this in a later post