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P1
Technical Stuff
Stop Losses
A stop loss is the level at which you will close a trade on the basis
that it has gone too far in the 'wrong' direction, and therefore
negated the arguments for being in that trade. Always follow stop
losses when daytrading; it can be too easy for a £500 loss to
become a £5000 loss. A good trader takes a small loss and goes
on to the next trade. Remember that trading capital is your business;
if it burns there is no insurance. Your stop loss policy can be set
in a number of ways. Some use an actual figure (e.g. 20p), and some a
percentage figure i.e. they do not want a position to go more than a
certain percent, say 5%, against them. Others may use technical
analysis principles to set stops. Some traders have more tolerance
for pain and use larger stop losses than others. The most important
thing, however you approach the decision, is to know where you will
cut a losing position before entering the trade. Set the rules and
ALWAYS follow them.
Exiting a Losing Trade
The stop loss means that if a stock trades a certain amount below
where you bought it you will sell. You may use "programmed"
stops if they are offered by your broker. (Some brokers do not offer
this.) Given the option, it is better to watch the trade in real time
and try to exit it manually. In other words, watch the price and
enter the order when the stop loss area is reached. The reason for
this is that you do not want a market maker taking a stock down just
to hit your stop, which is like showing your hand at a poker game.
Both ways are acceptable, and both work, but be aware of the differences.
Profitable Trades
Once you are in a profitable trade, the next challenge becomes when
to sell. Optimising profits is the other main aim of trading, besides
limiting losses. As a trader you must determine the risk/reward level
that is comfortable for you, either on your own or by discussing it
with your broker. Below are some exit strategies, but these are not
exclusive; there are many trade management techniques. Take your
profits as you see fit, as it is your trade and you must manage it.
No one else can do it for you.
Exiting a Profitable trade
Trailing Stop: Once a profitable position has been established,
maintain a trailing stop below the current price. Again this can be
set in actual or percentage terms, or using technical analysis
principles. However you approach the stop price, it is a level beyond
which you are not prepared to give up profit, or where a position
slips back to evens or a small loss. As the price continues to rise
your stop 'trails' higher in tandem. As an example, if you were to
set a straight forward 20p trailing stop, it would be at 90p when the
share price was 110p, and move to 105p if the share price increased
again to 125p, thus keeping your profit protected. This strategy
helps you to maximise profits by letting winners run. However most
on-line brokers do not allow you to enter a 'programmed' trailing
stop loss into their system. To use this strategy you must watch the
stock yourself throughout the day and adjust your trailing stop
mentally as the stock moves up. Alternatively you must continuously
place "stop" orders with your broker; cancel, change them,
move them up and re-enter as the stock moves up. Real time.
Take partial profits
Another strategy commonly used is to sell, say, half your position
when you are comfortable with the profit level, and let the other
half continue to trade. In that event also use a protective stop,
either static or trailing, to prevent profit erosion on the balance
of the position.
End of Day
If not stopped out by a stop loss, or a trailing stop, exit day
positions before the market closes.
Holding Positions Overnight
If you are setting out expressly to day trade, it is safer to close a
position within that day. Once the market closes you are at the mercy
of overnight news and changes in background that can mean a long
position opens the next day much lower.
Buy Points
Once you have decided a price at which you wish to buy, adhere to
that strategy. This is particularly true if you are waiting for a
certain price to trade to confirm your bullish view. Jumping the gun
can be risky; the buy level may never be reached. Chasing a market up
can also offer the potential for greater risk and less return (but
see below). Also, when a stock nears its buy level watch very
carefully how it trades. Is the bid size larger than the ask size?
How is it trading? Do we see a lot of buyers at the asking price? Or
do we see sellers? All of this will help to determine if a trade is
likely to be a profitable one. No one has a crystal ball, but paying
attention to how a stock is trading will certainly help you make more
profitable buys.
How to "read" the tape
By watching "time and sales" you can learn a lot about how
a stock trades. As you watch each trade go by on a quote service you
can see whether demand is picking up or slowing down. This is a form
of tape reading and it takes some time to learn, but it is crucial to
being a good trader. Are there more trades at the bid or the ask; in
other words are there more buyers or sellers. Also, look at the
volume of the trades going by; are they 1000 shares, 100 shares,
large blocks? This can also help you determine if there are enough
serious buyers interested to move the stock. Also, you may want to
watch for a stock gaining momentum, meaning is it starting to trade
more rapidly? Or does it just seem to drift? Momentum moves stocks,
so if there are not enough buyers (or sellers) a stock may languish.
Or does a stock have a lot of buyers, but does not tick higher? This
could be an indication of weakness, or that there is a lot of stock
for sale at the ask.
Also keep track of the Bid Size and Ask Size. If the Bid Size is
larger than the Ask Size this may indicate (not always) that the
stock is stronger. For example if the Bid Size is 5000 and the Ask
Size is 1000, this may indicate more strength than if the Bid Size is
1000 and Ask Size is 5000. Remember that this is not absolute but
merely an indicator to take into account. If all this seems
confusing, try this simple exercise. Pull up a quote of any stock,
preferably one with a good daily range like Vodafone or BT, and every
5 minutes write down the bid, ask, bid size and ask size of a stock.
Track it throughout the day. This can seem time-consuming at first
but it will help you to learn how to "read" the tape. You
will see how a stock acts when it is "strong" and how a
stock acts when it is "weak".
Trade Size
We recommend that you familiarise yourself with overall market
conditions, stock market fundamentals and consult an investment
professional before making any investment decision. We do not
recommend the purchase or sale of any security. We are merely posting
for educational purposes a list of stocks that we are watching for
the day. As for trade size, this must be adjusted to meet a number of
factors; the size of your day trading account, the risk level you are
comfortable with, the number of opportunities at hand on any given
day, etc. Only you can determine these. Some day traders will trade
1000, 500, 300, or even 200 shares of any one stock at a time. A rule
of thumb that is sometimes used is do not risk more than 3% of your
portfolio on any one trade. For example, if your portfolio is
£20,000 do not risk more than £600 on any one trade. More
simply put, do not lose more than £600 on one trade.
Try not to put all of your eggs in one basket. If presented with 3-4
trading opportunities try to spread out your capital to take
advantage of as many as you can. This optimises profit potential and
spreads risk.
Homework
Remember to always do your homework. Check any and all news, and
consult your broker before making any investment decisions. This is
your money and you are responsible for it. We endeavour to give you
some timely and appropriate recommendations, but you must be prepared.
Shorting
When you short a stock you sell a stock first and then buy it back
later. How do you do this? Your brokerage house allows you to borrow
the shares, which allows you to sell them first. You must buy them
back or "cover" in order to close out the trade. In other
words you are betting that the price of the stock is going to go
down. There are many rules involved in shorting. These involve uptick
rules, shares available to short, margin requirements, holding shorts
overnight etc. Only your own broker can answer these questions about
their policies and procedures. As with all investments or trading, DO
NOT short until you understand all the risks and rules involved and
get advice from a licensed professional.
Chasing
If you miss a buy point because a stock is moving too fast or because
of broker problems, should you pay more for it? The answer is yes and
no. If you cannot buy at your preferred level the trade becomes
riskier. However if you think a stock is really running, paying a
small amount more than the buy point may still give you a good
profit. Again this is completely your decision, but as chasing does
change the risk/reward ratio you should set an upper limit as to what
you will pay. If miss a buy by too much, it is often better to let it
go. There will always be other trades.
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