I was inspired by recent comments to open up some dialogue on trading style and general trading practices. I don't know what I am trying to accomplish with this post, so bear with me.
Trading is unlike any other profession in the world. You wake up every morning to trade against the best of the best. In what other profession are you going up against individuals that in all honesty, are at a totally different skill set than you are?
Jack Schwager said it best...
"Trading provides one of the last great frontiers of opportunity in our economy. It is one of the very few ways in which an individual can start with a relatively small bankroll and actually become a multimillionaire."
"Of course, only a handful of individuals succeed in turning this feat, but at least the opportunity exists."
Face it, we are amateurs at this sport. I have been trading for a decade and still feel I have a lot to learn. I look at the competition out there, and there are individuals out there who could trade circles around me. How does that make me feel? It motivates me.
I hope by now that I have been able to teach you that profits exist in the market, but they are also easily lost if you are not careful. While being so young in your investing careers, the biggest advantage you have against the market is... managing your risk and creating a trading style/system. I want to quickly touch on them both.
A traders only hope of making it big is by focusing on risk first, reward second. If you find your account consistently fluctuating in double digit percentages, you are not properly position sized or diversified. If you are white knuckled during market hours, you are not properly position sized. If at any point you are wondering if you are not properly position sized, you are not properly position sized.
Trade small, don't be a hero. Plan on doing whatever is necessary to be here to trade again tomorrow. If you are on a bad streak, step away! If it seems that you are always on a bad streak, maybe it's not the market.... maybe it's not the stock... maybe it's your system!
"(So you didn't have a clear exit point) In other words, the only way you could stop trading was by losing." ~ Ed Seykota
I have generated a lot of profitable trading ideas on this blog, and others have contributed great ideas here as well. What is troublesome is to hear the comments about how one of these ideas has given someone the greatest trade they have ever had, and yet the next comment is how someone has taken their biggest loss on the same trade. Where does the inconsistency lie? Trading style.
It's easy to take a trade without a plan just to get in. Like Ed said, these usually end up as a loss since you never identified when to get out. If you fall into this profile, you need to take action immediately.
I want to review a simple concept first, then ideally follow up with a video about this later. Ask yourself, are you a trend trader or a swing trader? If you are drawing a blank, allow me to illustrate.
FIG 1. Swing trade on KIM
Here is a chart on KIM. I mentioned shorting this shortly before it broke support. For those that entered the trade, what were you looking to accomplish? For the most part, you will not be able to always accurately predict a top or bottom of a trend. Here is an example of why you might just aim for a quick move in the stock, versus trading with the trend.
Figure 1 shows a great move in the stock, and how profits can be captured by reasonable entries and exits based on support and resistance. I watched a lot of traders start off with great profits in this stock (stock lost about 10% in 2 weeks) then watched those profits dissipate as the stock rallied back towards old resistance.
I talk about this specific event in a trade as the difference between the trend trader and the swing trader. Forget all that for a moment, what are your thoughts? How do you like being up triple digits on your option, then feeling obligated to give it all back knowing that the stock is going right back up to where it came from?
FIG 2: Uhhh...why did I let this happen?
You have probably heard me discuss this same topic many times on the blog, and heard me tell you how I trade it. I hold on during this re-test, but I wind up with a few more losing trades than the swing trader. However, in the long run, I wind up with bigger profits. That's the incentive to trade with the trend. If you are more emotional than the next trader, or uncomfortable with having more losses than the swing trader, why do you allow yourself to go through it?
Decide on the path of least resistance. In many cases I find that individuals are trying to mix and match both strategies, or are trading a strategy that doesn't fit them very well. Remember that in trading, no system is one-size-fits-all.
Fig 3: Various exit strategies
Having the right trading system, exit strategy, position size is the difference between a winning or losing system. I hope we can open a good dialogue on the topic. I have written about this numerous times in my archives, but another post was due. Especially now that we are seeing some turbulence in the market.
That's it. I am done rambling. I am going to bed. See you tomorrow.
Recommendation: That was way too long to hold your attention, wasn't it?
Long: Post
Short: KIM
Tuesday, June 26, 2007 at 08:59PM
Reader Comments (94)
You’re not rambling at all- great post as always. The changes in the market have forced a lot of us to look at our trading styles, and your comments are dead on.
Since I am not able to fuel losses with funds generated from outside the market, I am in this for the long term. I may be making short term trades, but my capital is precious- once it's gone it's gone, hence I am still a long term trader in some sense of the word.
We are all living longer, and retirement for many is becoming a thing of the past. One of the beauties of trading it seems to me is that as long as I still have my marbles, and can peck on a keyboard, I can be successful at this game to generate income. Many of us in the Kohler blog community are relatively new at this (speaking for myself), and should be both careful and patient as we gain experience. If you’re "blowing up accounts", it’s time for a time out.
This is coming from a guy who is up 2% YTD. Pretty ugly compared to the broad market. However, I feel the trading experience I have gained in the last year, and education I’ve gained from your blog and IT, is invaluable for the long term. If I can hang in there while a green horn, I believe I can eventually far out perform the indices. My goal is one day to be able to generate a living income through trading (though I might be eating beans and rice every day).
Thanks Jeff.
Peter V
Long: Bean-o
Short: Blowing up accounts
We will all suceed if we continue following the rules layed out here.
Thanks for the efforts Jeff and fellow addicts.
Mahmood
JK! Nicely done! One of the best yet! There are so many it is hard to pick a favorite.
Without the “…option addict exit” strategy, I would probably be dead in the water right now. Since I started reading this blog, I have had so many 100% plus trades. I would have never realized that this relatively unemotional process/strategy existed. I am definitely indebted to you and our fellow addicts for drilling this into my head.
My current challenge now is cutting losers shorter (this is a learning process). I have to follow my exit rules a little tighter, especially during this volatile market. Staying in a trade that I might have stayed in during a less volatile stretch of a trending market, positioned towards the far outside of my crayon in the sand, could crush my risk calculation.
What I have learned this month, the hard way:
- Follow my rules!
- Don’t exit until the trend is broken or my predetermined exit is reached whichever is sooner!
- Don’t over trade!
- Buy enough time!
- When exiting a trade because I am running out of time on the option, wait for a suitable reentry instead of picking up where I left off!
- Don’t think I am above the market! Since I am below most things (except for dwarfs) I should have already known this!
I missed out on a couple trades for exiting after a violation of my trend lines but not the trend or pattern. PVTB comes to mind. I exited it 6/15, three days before the big gap down. To my defense, I entered it on 5/8 after it retested the first ascending triangle break out. How I could have stayed in this trade if my line in the sand wasn’t a diagonal trend line on a triangle breakout, instead it should have been a breach of the breakout point. So the story goes, learn from it and move on. Like the barber says, “Next!”
I am real heavy on bearish plays right now. What say everyone else?
Long: Beer, OAES (option addict exit strategy), CAT, DECK, GOOG, MMM, NVTL, PCP, POT
Short: Sleep, AMAG, ALB, FPL, DNA, HNI, JEF, LCC, LVS, PFCB, ROG, TOL, UNFI
Shorts are doing real well, most longs are on shaky ground. Today I exited the following long positions: PCU, X (one day outside my line, bad move…), ½ STR, CHK
Thank you, good illustration of the differences of trend vs. swing vs. emotional trading. Hard and fast examples help 'us' understand what the differences are and how to manage them. 'Manage' means rules that may need to be modified, (read as improved upon), as we learn and grow, which in-turn should be helping us to manage our emotional actions. For me personally, I've come a long way and while an extremely disciplined person, if not careful could get emotional about my trades. I've actually found it easier to follow what I see as my rules and 'lines' (areas), taking much of the guesswork out of the equation. I don't get 'as' emotional any longer (I'm still somewhat human), I just react to the what's happening in my trade, typically at the end of the day.
The things you impart to us are as informational and unemotional as you intend, they are as they should be, just the facts!
John Logan, Great comment above: "Like the barber says, 'Next!'” Heard it many times, although this succinctly captures the concept, once you're done with a trade, "learn from it and move on", excellent! Another crystallized moment, thanks!
Can't sleep either and thought I'd check the blog. Obsess much?! Yes, I do! I love the visuals. Very cool. I think Chip's word usage: 'succinctly' pretty much says it all. Thanks!
Now I'm off to get a few hours of sleep.
liz
Wow, what a nice surprise. I couldn't sleep and got up at 5:00. Nice to see the post. I did have reasons for getting INTO the trades I did, but didn't have defined exit points. That's why I'm holding the bag on some trades. And, yes, I was one of the KIM emotional traders, that took profits and then got back in. I see that I need to sit down and decide how I am going to exit trades. It is costing me profits and money.
Thanks, Jeff.
Michelle
I'm noticing a pattern to these buyouts. First, you see an incredible explosive breakout pattern on ridiculous volume. Next, often times JUST BEFORE the breakout, there's a selloff (which i have fell victim to a few times) and out of nowhere...POOF...The buyout!
Congrats to the longs, and most of all, thank you Jeff. This was the biggest trade of my career so far!!!
Great post and great example. Thank you!
I have a question on this trade exactly. I took the KIM trade, rode the first leg down and exited my swing trade just about where your first illustration showed the exit. Once the stock came back up and started back down, I took the trade again for another ride down. Are you saying that a trend trader would have stayed in the one trade all the way up and down whereas a swing trader would do what I have done? Are you saying one style is better than the other or just different?
Thanks for the heads up on GTRC the 13th of June when it was breaking out. I took a position on the breakout and have held onto it because it had not reached its target nor broken support. It is good to see that patience is rewarded, even though luck was involved on this buyout.
Jeff,
Thank you for your post on trend and swing trading. It has crystalized the type of trader I am striving to become. In this choppy market it has been more difficult to to trade with the trend, since many of my positions, the trend has broken down. But my rules are if the trend or support is broken it is time to get out of the trade. This is basic knowledge, but with your many helpful reminders, it does sink in.
Jon P.
OC, Oregon
CME
Draw a trendline from the top of the candles around 1/24, to the top of the candles around 4/17, 4/18 area.
Draw another trendline from the bottom of the candle on 2/27 through the bottom of the candle on 4/23.
There is your triangle.
Now, draw a horizontal line at the $560 area. Resistance to as far back as about the end of Nov last year.
See how CME broke out of the bottom of the triangle on 4/24? That is when CME broke out to the downside. What would we expect this stock to do when it got back to the retest of the $560 area?
Yup, re-test, and bounce back down. You bought a call when a Put would have been the better play, especially after seeing the candle on 6/12 (a hanging man, at resistance) which was confirmed the day you bought a call, 6/14.
If you were to ask me where do I see support at this point, I would look for some at about $527ish area, and see if it holds.....
Now, that being said, someone else may look at this chart and see something completely different than me.
Hope this helps. Keep your chin up.