Robert J Sullivan IV
Trading is a skill.
The skill of finding high probability entries and exits.
The skill of managing risk.
The market is unpredictable.
However, certain scenarios present themselves at various times that provide relatively good risk/reward opportunities.
If you know how much you are willing to risk, you have a better idea of how much reward you are hoping to capture.
Risk>Reward. Risk ≠ Reward.
In dealing with currency the risk of losing money is much greater than the potential reward of profits because if you lose all of your money: You cannot make any more money. A 50% drawdown would need to make 100% just to break even.
Quantifying Risk : The Stop Loss
Like it or not you are going to be using a stop loss.
Will you be getting chopped out frequently? Yes.
This little bugger will also Save You From Ruin. All it takes is one bad trade to destroy your account beyond recovery. You never know when it’s just chop or The Dump.
The stop loss saves you from yourself and your emotions. It is also the only way to take an abstract concept like risk and quantify it into dollars and sense.
Getting Your Bearings/Staking Your Claim
The market moves up, down, and sideways. If you were to watch it in action it would appear as if there's no rhyme or reason to its movements. Thats not true however, at least entirely. You see there are lines drawn across sand at certain prices that everyone is watching. These are levels of support and resistance. The major ones are called pivot points and these pivot points are essentially the levels the market needs to get through in order to continue to move higher or lower.
The great thing about pivots which are basically major (daily/weekly) levels is that your charting software maps them out automatically taking the guesswork out of finding important levels to trade against. Perhaps the most important thing about these pivots is that they provide major levels for entry and a solid level to place your stop behind that if broken should let you know immediately if you are wrong.
Should I Buy or Sell? : RSI
So the market has reached the pivot point I was watching. It looks like it’s about to breakout. What should I do?
This is the scary part of the game. Everyone wants to catch the big breakout. In 2013 stocks were breaking out left and right destroying any short seller that dared bet against them. However, most of the time they just don’t posses the energy needed to actually break through and keep going. Remember that 90% of the time the stock will be consolidating. It is only roughly 10% of the time that you will be able to catch the bigger move.
The RSI will be letting you know which direction and how far extended from the average current price is. A stock flashing overbought (no matter how strong it is looking at the moment) is to be sold. RSI>70=Sell. A stock flashing oversold is to be bought RSI<30=Buy
Remember that you aren’t trying to catch THE Bottom or THE Top. Only A Bottom or Top.
Mechanical Strategy/System : Follow the Rules, Stay Around A While
All the Pros say that the one thing that is the most important rule in trading is to “Cut your Losses Short.” If a trade goes against you, Get out Immediately. Perhaps you were just too early and a better entry will present itself. Or perhaps you were just plain Wrong. It happens. Nobody can predict the future and a lot of times you will be wrong. It’s no big deal. Tomorrow is another day.
Say you were right. You’re profitable; when should you sell?
Well assuming the market is random and you will be wrong 50% of the time, If you have a system in place that is 1:2 Risk:Reward. That is to say you’re price target is twice your stop. Statistically, you will make money over time. But you’ve got to honor those stop losses. Realistically if you have any profits at all and especially if you think the stock might move against you, Get Out. Lock in Profits while you’ve got them or you could soon see them evaporate into a loss.
Have at least one Price Target in mind. If greed is getting to you, you can have 2 or 3 price targets but you have to sell at least part of your position at each price target and when you sell you should raise the stop on the remaining position to breakeven and that way you will not lose any money if it decides to reverse against you.
Listen up. It’s not an exact science and there’s no such thing as a perfect entry so you will likely be entering and exiting in three pieces. Start small. A third of your entire desired position. This is to test the waters. You could be right immediately and if so great! Flip it for profits. Most likely its going to consolidate around the pivot for a bit though or even go against you and run peoples stops. So save two bumps to bump your cost basis at better prices. After it slows down and has been consolidating for a while you can often tell the moment before it breaks and that is a good place to put in your final bump.
With every purchase put in a stop loss and PT sell immediately.
Look for major trends and patterns especially the H&S pattern.
Get out there. If the markets a movin, there’s money to be made!
Plan on trading the first 2 hours and possibly the final half hour of the day. The middle of the day most of the time is dead and trading during those hours is a great way to get chopped up.
-Good Luck. Stay Disciplined and Make High Probability Trades!