Archive for April, 2007

The market this week

As of last Friday, the Dow was up 19 out of 21 days. Quite a run. Great earnings mostly from MSFT and AMZN pushed us to new historical highs. The question is now what?

The key we will be watching here is the volume on the pull back we should be getting soon (you remember down days don’t you?  LOL). If the volume on the pull back is light, look out to the upside.

If we finally get some distribution days, the down side could get ugly, there is obviously quite a bit of retail money  long up here. There would be a ton of long and wrong, late to the party participants. That being said, we will have scenarios for trades on both sides in either case. No guessing, just mapping out scenarios and letting the market unfold.

Not too hard to find something to go long up here, but what if we get those distribution days? Will you be prepared? Take inventory of sectors that are weak while the market is making new highs. One such sector are the REIT stocks. AIV, ASN, AVB, EQR

Categories: Market Set Up

What does your “trade scenario” look like?

April 27, 2007 1 comment

One of the most common trading problems for new traders is very easy to overcome once its recognized. Looking at too much on your charts. There are so many indicators available with charting packages today its ridiculous. Most of the indicators are derivatives of price. We feel very strongly that if you can read price itself, why the heck do you need something that “indicates” what price is doing?!

Keep your trading simple and master the basics. Make a decision. Do I trade pullbacks well or breakouts well? Look over your trades, they will tell you the truth. The more specific the scenarios need to be when you are looking for opportunities, the easier it will be to be patient waiting for them. You won’t be chasing noise.

Categories: Chart Talk

WFC trade replay

replay.jpg  Picture perfect set up. Wells Fargo WFC moving up nicely on both the momentum and the trend. Two great entries on the five minute chart. Entries don’t get much cleaner than these.

Categories: Trade Replays

Newsletter 4.23.07

Welcome to the Keystone Trading Newsletter 4.23.07

In this issue:

  • Trading to make money vs. being right
  • Stop loss orders: more than just taking a loss
  • How to properly use moving averages
  • How to choose which stocks to trad

           Ø      Trading to make money vs. trading to be right.

One of the most common problems new traders’ face is truly understanding the fact that losses are a part of the business. Trades that don’t make money are as inevitable as needing air to breath. Here is the key that new traders fail to grasp:

A losing trade isn’t necessarily a bad trade. Trades entered based on a well thought out and written trading plan are good trades, no matter the outcome. Often we ask traders on our trading floor “Would you make the same trade again?” after they exit a trade that was not profitable. If the answer comes back yes we know the trader is on the right track.

A trader who can answer yes to this question is trading to make money. They understand this is just one trade of maybe hundreds they will make this month. A trader who has attained this important mindset will move effortlessly from one trade to the next. Ask yourself if that is how you react from trade to trade.

The trader who gets frustrated and yells at the screen or pounds a keyboard is trading with his ego. He is trading to prove his brilliant analysis correct.

The easiest way to monitor if you are trading to be right: pay attention to how flawlessly you exit a losing trade. If you hesitate at all, you have some mental work to do.

Another important question to ask yourself while in a trade: “If I did not have this position, would I want it?” If the first answer comes back NO, and you don’t get out of the trade, you are trading from your ego.

A trader’s maxim: Assess probabilities, put the trade on, let the trade unfold, do what you planned to do. 

Ø      Stop loss orders: more than just taking a loss

If I had to put a percentage on the time spent on entry signals vs. time spent on exit techniques, I would say its 90-10 entry signals.  Learning how to manage a position properly will ultimately be the reason you take home a check every month. Your ultimate goal is to “make what you should” on your trades. Obviously its not possible to get out at the extreme of a move on a consistent basis, but there are some techniques you should use to maximize profits and minimize losses.

Before we discuss specific stop loss techniques we should cover the proper trader psychology for this topic.

         The stop loss must be a dollar amount you accept before you place the trade. This small distinction will be a huge shift in your thinking about a trade. Once you have “accepted” the risk, this will ensure flawless execution. If a trade moves against you, it will be easy to exit because you have already accepted the dollar amount risk and were comfortable with taking the loss on that amount.

  • Initial Stop Loss: Risk point as defined by your original entry.
  • Break Even Stop Loss: When a position moves in your favor, you move the stop loss point from the original spot to your break even area.
  • Trailing Stop Loss (profit taking): Used to protect significant profits on a winning position. Objective is to lock in some profits.
  • The buy stop limit and sell stop limit, important orders to learn.

          Typically used in place of market orders.

         Intention is to take advantage of liquidity and get price improvement.

  •   Helps get filled in “fast” market conditions, but cannot get a worse fill (as with a market order)than the limit price entered.
  • A sell stop limit is an order to sell below the current bid to buy.
  • A buy stop limit is an order to buy placed above the current best offer to sell.


Ø      How to properly use moving averages

Let’s keep things simple, we are here to make money. It is very easy to get sucked into the myriad of fancy indicators and over use them. The original use of moving averages by floor traders was not very complex.

There are 20 trading days in an average month. “Is today’s price action above or below the average?” Based on the answer to the question, floor traders would have a bias to the long or short side. It was very simple how it was used; it was not a magic tool.

The last thing you want to be doing when you are trading is thinking too hard, you want to be listening to what the market is telling you.  Proper use of moving averages in today’s technologically advanced market is to us them as a filter.

Here is the best and most profitable way of using them:

  1. As a trend filter. Use it a method quickly identifying a bias; should I be long or short. Use it to filter out the noise so that you are not placing too much emphasis on every blip and print. We recommend using a 20 period simple moving average
  2. Use it to determine strength of trend. If the 20sma is sideways, there is no bias, don’t trade you are guessing. If it has a nice upward or downwards slope, you should be trading aggressively in that direction.
  3. Use a second moving average to determine momentum. We teach to use a 5sma to determine the momentum on all time frames we monitor. The method a great tool to help hold good trades. If momentum remains above the trend, stick with the trade until you see exhaustion in the move or when the momentum crosses the trend. There are more techniques we teach in the Equity Trader 101 course but you get the idea. Use moving averages as a filter, not as magic points.

Ø      How to choose which stocks to trade

The objective in short term trading is to make a consistent living. Far too many traders decide to trade stocks that are too illiquid or too volatile to manage risk. An illiquid stock is one that does not have sufficient bids and offers to get out of a trade easily where you want to. If you were to place a sell order and it would knock the stock down .10, it is not liquid. The trading of stocks that are volatile sounds exciting, and would appear to provide the most profit potential. On the surface this sounds great, but remember why you decided to become a professional trader, to pay your bills every month, trading maximum volatility everyday is a quick way to the poor house.

Money making stocks should have two characteristics if they are to be a part of your daily business: liquid enough to manage risk and active enough to provide money making opportunities.

We recommend you pick one of two groups of stocks:

  1. A basket of non correlated stock that you trade every day
  2. A sector or industry that you learn like the back of our hand. You can find a breakdown of sectors and industries here to get ideas.

If you would like to learn about trading a Keystone Trading Group corporate account, or would like to take a Keystone Trading Concepts class, please fill out this form

If there any topics you would like to see in future newsletters, please let us know.

Have a great and profitable week.

Categories: Newsletter

AMZN swing trade from yesterday

AMZN was up $12 today, guess we got the call right 🙂 Wouldn’t have been able to profit from it though unless you were long aready.

Sector Analysis: Home Builders

Home builders have been in a steady downtrend for the last several months after a tremendous run up. The sector pulled back to its 20sma near the end of March, after a double bottom 4/2 – 4/12. The next rally moved all the way to the 50sma, this deeper pullback would lead us to be ready for a nice move up. We can expect one more test of the 4/2 lows, probably finding support at the 20sma. This will form a nice clean head and shoulders bottom, we will look for a couple of up days with significant volume before we start to nibble from the long side.

Stocks in the sector include: BZH, CTX, DHI, TOL, HOV, KBH, LEN, PMH, RY

Categories: sector analysis

AMZN long set up

swing tradeAMZN has had a beautiful run the last few weeks. The next resistance is around $50. The market is at a big do or die point here, if we break 13,000 AMZN can pop to the resistance no problem. If we don’t get the follow through I think it is still got for a $2 move. Use a buy stop above $45.32 with an initial stop below $44.