Apr
24
Investing Systems Stock Trading Research Lab – Trades to Watch for Week of April 26th, 2010
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Welcome Research Lab Members. We offer the following for your viewing pleasure.
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You know the drill.These are not specific trade recommendations, but an “artists rendering” of some potential trade set-ups we are watching.
Be sure to check the the Waiting Trade Plans Monday morning to see which of these make the cut, if any, and other trades we may like.
Each one of these set-ups can be traded in several ways and can be used on multiple timeframes, so be sure to ask for details on the show.
We know the market is toppy. We know the system is fragile. We know the game is rigged. We know it’s a traders market and NOT a time to “invest new money for the long-term”.
We also know gold and silver are the only real money, but it will be interesting to see the NEW $100 fiatscos hit the street.
Have you ever actually seen real money?
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As far as stocks go…
Trade ‘em if ya got ‘em we always say. We know it’s a game of musical chairs and we’re always 6 clicks away from taking the trading account to ALL CASH.
as long as the music plays let’s have some fun and make some money.
As always use stops on every trade.
Join us Monday morning at the opening bell for the good stuff.
Have a great weekend!
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Apr
17
Research Lab Blog – Week of April 19th, 2010 – Trading Strategies That Work
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Welcome members. If you were looking for market insight, we have it. Much of the story is too long and involved to tell on this blog.
Jeffrey and Doug will discuss the state of the overall market on the Sunday night show here:
Market Toolbox Live (8:00 PM Eastern)
Wednesday evening we will offer a longer-term perspective for investors on the show (live 7:00 PM Eastern) archived on the RL Homepage.
This week on the blog I want to to focus on a strategy that you can take with you for the rest of your trading career. This strategy alone may instantly improve your skills.
I haven’t come up with a proper term for the strategy but at one time I phrased it “dynamic scale trading”.
In simple terms it works like this:
- Find a stock that looks ready to move up. Set an Entry slightly above so you only buy if it indeed moves up.
- Identify a perfect stop-loss point on the chart. The Stop should be easily recognizable on the chart.
- Set 2 or 3 targets at fixed percentages above the Entry.
- Sell partial positions as the trade plays out.
In other words, scale-out of the trade, reduce your exposure, take small profits, and lower your average cost per share on the remaining position.
Pretty simple eh?
This basic technique can actually be implemented in multiple advanced strategies.
Here is an example that we detailed on Wednesday, March 3rd on the show. Q had a dividend yield of 6.8% at 4.50
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Buy 2000 @ 4.50 = 9000
Sell 500 @ 4.64 = 2320
Sell 500 @ 4.73 = 2365
Sell 500 @ 4.82 = 2410
Including $40 in commission, the net result is we are left with 500 shares with an average cost per share of 3.89.
We have reduced our exposure and lowered the average cost of the remaining shares. Better yet is the effective dividend yield on our last 500 shares.
Let’s see what Q did after we sold 2/3 of our position.
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At this point we can choose to set a stop-loss say below the 43 EMA and wait to collect a dividend. Perhaps we would set the stop at the prior low of 5.15 and cash in the chips if the trend reverses. Perhaps we view it as an “investment” and set the stop at the Entry of 4.50. If Q fell all the way back to 4.50, we would get stopped-out with only a 14% gain.
Regardless of which exit strategy one would choose, the key to the technique is simple and removes a lot of risk from trading.
Another benefit of scaling out of a trade is that it removes emotion form the equation. That doesn’t need a lot of explaining.
The Dynamic Scale Trading technique is well suited for stocks you wouldn’t mind owning for a period of time as opposed to jumping in and out of a “mover” the same day, or taking a quick swing-trade based on a good pattern. Scale trading offers great risk management for a trade and also can net low cost shares you can tuck away.
We use this technique on each Trade Plan.
Speaking of Trade Plans there are currently 2 open. This is a good thing at this juncture.
The market got quite a shock Friday with the GS debacle and we are headed into next week with major uncertainty in the market.
We have a few potential trades on deck, however we will not feed them into the “system” until we see what happens Monday. Honestly we have been suggesting the market is about to correct, and as usual we were about four weeks early. Regardless of the overall market there are individual stocks that we can trade, but buying anything first thing Monday would be foolish until we see how this GS fiasco affects things. In 2008 we all witnessed what a “liquidation environment” looks like and we are erring on the side of caution for Monday the 19th.
Friday’s big red candle looks similar to the one back in January that kicked off the pullback to the bottom of the channel.
Things do not look so well for the overall market and we are 10 trading days away from “sell in May and go away”.
As Yogi Berra once said “I hate to make predictions, especially about the future”. However I bring you a chart of the SPY with the likely trading range shown in red. The bottom right of the rectangle coincides with June 1st, and the bottom of the current channel. We shall revisit this view down the road.
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One thing we have learned is to expect the unexpected, which characterizes the prior 3 months perfectly.
We have used phrases like “whistling past the graveyard” and “a game of musical chairs” frequently on our shows. It doesn’t take a market strategist at GS to see that we should pull in our horns at this juncture.
Moving on…Friday we saw something that we have not seen in a very long time. The Alpha list was full of “inverse ETF’s”.
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We will carefully observe how the short ETF’s react at the initial stages of this potential pullback. We may decide to trade some of them in the very near future. One thing we know is that they have an inherent decay in the price, so it will take a multiple series of down days over time to counteract that flaw. We will discuss this on the show to clarify the finer points. The potential does exist for the compounding to work in reverse once again and we will be analyzing their behavior thoroughly.
Here are some ways we protect ourselves in a market correction:
Spend some days on the sidelines – cash is a position.
Take smaller position sizes when you do find a trade set-up.
Sell all at target 1. Set your initial target on a trade at 2% to 3% and get out quickly.
Don’t hold overnight. We adapt with the environment and daytrading is less risky given the current uncertainty.
Trade the inverse ETF’s, but only if you are intimately familiar with their behavior. They are designed to mimic the “daily” percentage movement of the underlying index.
Lighten up existing positions. Most traders are investors as well so it’s a good time to evaluate the potential draw-down on longer-term accounts.
Have a GTC (good till canceled) stop-loss on EVERY stock in your trading account. (you might come back from lunch one day to find your acct. 100% in cash).
The market is like a busy airport. There will be another flight leaving shortly all the time. Don’t be so impetuous as to charter a plane to risk flying into a volcanic plume.
This would be a good time to mention that we suggest keeping one’s trading account separate from one’s investing account.
Dealing in stocks requires focus on timeframes and the strategies for managing long-term money is much different than trading.
We discuss long-term investing, money-management and offer a proven strategy on the Wednesday show. If you are interested or have questions on the 10-month moving average asset allocation strategy we discuss please feel free to ask Wednesday. While we focus primarily on trading in the Research Lab we have a lot of great information to offer when it comes to the “investing” account for those of you that are interested.
Let’s wrap up with some stocks that show potential just in case all this blows over and the party continues unabated.
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Have a great weekend and be sure to join us at the Opening Bell Monday morning as we “trade what we see, not what we think”.
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