Sunday, October 01, 2006

Long overdue article A.K.A. "My trading style"

[this article applicable to bull/stagnant market - bear market calls for entirely different approach]

The idea behind this blog was not so much to gain popularity ( I did not expect to discover that somehow, without me advertising this blog people started to visit this blog, ask questions, criticize, use ideas), but to have an organized "journal" of "when, what, why" kind of.

But, like they say: "If you build it, they will come".

Now it is a really good time to explain my trading style in greater details.

First and foremost "Set of Trading Rules" is a cornerstone for disciplined trader ( especially the one who wants to be making money, not just trading for adrenaline rush).

Here is how I use my own ideas:
When I make a selection, mostly night before ( I don't do day trading, I do all research after the market close), sometimes - once a week, I'm not necessary rushing in the very next day and buy/short out of prior night's selection - I BEGIN TO WATCH candidates listed - I do not expect my picks to skyrocket or fall right away, as a matter of fact - I try to STAY away from stocks someone might expect to skyrocket during the short period of time, I dim that kind of trading hazardous for people who are not watching screen 24/7 - and I DON'T sit in front of monitor all the day long ( may be once or twice bi-weekly).

Sometimes, if I am in the mood to watch market open and I see that currently listed ideas begin strong intraday move in direction expected (or not) - I MIGHT jump in, but then I feel "obligated" to continue to watch such "surprise" move very closely and if I get 5-10% in 1 day - I mostly will CLOSE that position and look for pullback to re-enter. That was the case with LEA, profiled on the morning of Sep 21st, I shorted it in the morning, covered next morning, since there was no continuation of the move and I tend to think when there is no such that prior day's move was an overreaction/temporary/reversal prone move.

UPDATED on October 28th
Speaking of LEA and mentionned above "overreaction/temporary/reversal prone move" it proved to be just the case - LEA reversed and added 70% in 4 weeks. This is a very good illustration that not only you have to be flexible, but you have to always monitor ALL stocks you follow on a daily basis in order to capitalize on reversals, which in many cases are "fast and furious". I broke this rule - and only made 10% on downside and missed ROCKET move UP of 70% in 4 weeks.

Next, "how long I wait for expected move for "candidate" trades.
Mostly somewhere from 1 to 2 weeks at most ( If not much changed in "Why I selected those stocks" ). If move continues ( even at a slow pace ) in the direction expected and I have position I continue to monitor the stock to ensure that the "reason" is still there, if I think the "reason" begin to change or no longer there - I close position EVEN if direction does not change - I know that I will never get out at exact "turning point" and I'd rather keep $5 and watch "un-made profits" go to $10 then been able to make $5 and forced to get out of position with a loss of $3, you getting the point.

"Stay with the winners" - I think the only way it is possible is when entire sector for stock I have position in continues to move in direction of my trade, when sector changes its pace - even if my position continues to go into profitable direction - I watch for an exit - if entire sector weak - almost no stocks will be able to continue insulated move contrarian to the sector direction.

Now it is time to talk about "8% loss rule" - it is a must to obey, but... as traders gaining experience, sometimes it pays to go with "the gut feeling" and distinguish between 8% drop which WILL continue and "shake off" and following reversal into direction expected. How can one tell? There is almost no way to say when it is and when it is not. Very sad... Well, in my experience, most of the stock poised for substantial move attract a lot of institutional buying - and "they" LOVE to get it at cheaper price - this is their extra margin - who would mind? This is why I, myself wait until I see such "shake off".

Trailing stops - I hate those - specialists on the floor - LOVE them, so I don't use trailing stops in most cases.

That is it for today - might be continued.