Saturday, June 06, 2009

Two Points Relevant to Trade Execution

I want to thank participants in the Saturday morning Expo program; it was good hearing from so many motivated and dedicated traders. When I offered to stay after the seminar and meet with interested people for an informal coaching session, I had no idea so many would take me up on the offer. I greatly appreciate the interest.

One issue that came up a few times in the question/answer session was that of stopping yourself out of trades. My sense is that many traders have more trouble knowing when to exit a trade than knowing when to enter.

Two points that I stressed were:

1) I generally will move a stop only once: when a trade has traveled roughly halfway to its intended target, I will move the stop to breakeven. In other words, if the market is validating my idea, I don't want to overstay my welcome to the point where a winning trade turns into a losing one. Nor, however, do I want to move the stop prematurely and exit a trade because of normal, expectable noise that would precede a move to my target. Knowing where my target is (based upon identified support/resistance, edges of ranges, pivot points, etc.) is key to knowing where to place my stop: I always want more reward in the trade than risk.

2) As I so often emphasize, in your dance with the market, you want the market to lead. Wait for buyers to make their move and show their hand before you enter the long side and vice versa. That doesn't mean you chase highs and lows; often the first pullback from an initial thrust is a great entry. But if you're patient and wait for that first thrust that kicks off a trending move, you have a natural stop loss point: if market participants are truly rejecting price at the start of that thrust, we shouldn't see that price again. In other words, don't try to catch an exact top or bottom: wait for evidence that buyers or sellers are validating your idea.

Much of trading success can be attributed to solid execution of ideas. My strategy is to buy weakness in a strong--and strengthening--market; sell strength in a weak and weakening market. Generally, I wait for NYSE TICK to go negative before I buy and positive before I sell; those extra ticks you save yourself add meaningfully to profitability over time.