It's lunch time, and I am about to go down and meet an "old friend" at the new "El Pollo Loco" that opened here in Utah last week. They are one of few decent franchises that have been able to penetrate the state borders. Hopefully it is worth a 30 minute wait.

I have two contributions that came in that I wanted to share with you.

First, the trading terminal Susan From Manhattan recently purchased. Per popular vote, here are the pics. Check it out...

Big Pimpin'

Next is the "hands off" trading system that Stan Lake offered up to the readers. As a matter of fact, I am in the process of backtesting something along these lines right now, which you'll be able to follow shortly, but in the meantime, here is his write-up. I haven't traded this system yet, so make sure you direct your questions to him.

Thanks Stan.

Hands off trading method

This method of trading is for:

1. Those that have time constraints that do not allow them to watch the market all day

2. Those that make decisions based off of emotion

3. Those that find they change their rules on the fly and not always for the better

4. Those that aren’t sure where and when to get in and out of a trade

This method is Not for:

1. Traders with too much time on their hands

2. Emotionless intraday traders with ice in their veins

3. Traders that never vary from their rules

4. End of day traders

There are upsides and downsides to every trading method. Many people are End of Day traders because many times when a trade seems to go against you if you just hold on until the end of the day when the volatility dissipates you often save a good trade or are able to exit a bad trade in a better position. Sometimes not. Here is an example:

For the End of day trader the Large red candle would have provided a large loss. Later in the week if they were back in the trade they would have been rewarded with a smaller loss by holding out until the end of the day as seen in the dragonfly doji. Both intraday and end of day traders will be have good days and bad days. Pick one and stick with it, no sense in jumping back and forth if it all comes out even in the end.

What makes this a “Hands Off” approach? All trade decisions are made and mechanically entered in advance. This eliminates all emotional decisions, gets you out at a predetermined acceptable gain or loss and frees up your time to do other things than watch your positions advance and retreat. This method can be tailored to fit trend traders, swing traders, bounce traders, breakout traders or any other method you can dream up. The method I will describe will use the Thinkorswim desktop platform for trading. I will use a Bullish Support Bounce trade on POT as an example. The rules for this trade will be to automatically enter when the stock bounces off of support by $1 or more. A trailing stop will be entered using one times the ATR ($8.60). A time stop will be used giving the stock enough time to reach our target. We will scale out of half of our trade at our target to give ourselves a chance to get extra money out of the stock if it hits our target.

On April 16^th, 2008 POT gapped up to a new high of 192. The price rallied up, fell back below the opening gap price on April 29^th and rose again on May 5^th. On May 23^rd the stock came down to the support line I drew, closing at 192. A mechanical trade could have been set up to enter a trade if the stock traded $1 higher than the previous day’s close to 193 or more. On May 24^th POT did not trade above 193 and in fact settled lower to close right on support at 190.40. Once again a mechanical trade could have been set up to enter a trade if POT trades at least $1 higher than the previous day’s close to 191.40 or higher as follows:

For a target we could use the previous high of 215 on April 23rd for a primary target for half our positions. This also lines up with Fibonacci lines of support and resistance as shown below.

If half our positions are sold at 215 we will keep our trailing stop for the other half. We will allow 15 trading days for the trade to make our target (a $23.60 move) so we will place a time stop of 7 trading days to reach the half way point (up by at least $11.80). The OCO order was entered as follows:

Buy 10 July 190 calls at $12.65 with an $8.60 trailing stop loss as measured on the stock (One times ATR).

Time stop of 7 days to close out entire position if POT trades at or below $203.20 (half way to target of $215)

Target to sell 5 of our 10 calls if and when POT hits 215.

If POT hits our stop our At the Money calls will lose about $4.30 of value. If POT hits our primary target we stand to make about $9 of profit for a slightly better than 2-1 reward to risk ratio.

The trade is successfully entered and there is no intra-day watching needed. Only to look at the position at the end of the day to see if we have been stopped out or closed out of all or part of our position as happens on June 5^th when half of our positions are sold at our primary target letting the second half continue on with the $8.60 trailing stop loss in place. It continues up and we are stopped out as follows:

On 6-19-08 the second half of our trades are stopped out and according to the Thinkorswim thinkBack tab we have cleared $19,650 on this trade without any interference on our part. Of course I chose this trade among the ones I have taken because it worked out in my favor. Sometimes I am closed out of a trade the next day at a loss but it is a loss that I have predetermined to fit within my comfort zone. I do my calculations in advance and figure out if it is worth it to me if I make X amount or if I lose X amount is it worth the risk?

The use of an ATR is for demonstration purposes only. You might use one and one half times ATR, two times or none at all, you might use a fixed dollar amount or if it trades below support. The rules you use and the numbers you plug in don’t matter, what matters is that you figure out Before you enter the trade what you believe to be a reasonable target and a comfortable loss to take, ideally using support and resistance. You use the OCO order tools in TOS so that if your primary target is hit, you either take all of or a percentage of your profits off the table and it cancels out your stop loss and enters a new stop order for the rest of your trade, or if your stop is hit either by dollar loss or by time going by, you have a pre-determined loss that is acceptable to you and you can look for a better re-entry point. Many times you will be correct on the stock movement but your timing was off by a day or so. Think ahead for all possible outcomes and enter them in as part of an OCO order. Either you will be happy for a profitable target being hit or you will be happy because you followed your rules and only took a small loss leaving you with plenty of funds to continue to trade with.

This will free you up from staring at your monitor hoping the stock will go this way and that, no more intraday Maalox moments as you only check your positions at the end of the day. No more wondering what you should do as you have already figured it out ahead of time when your head was clear and free of emotion. New potential set ups are entered the evening or morning before the market opens. I you are filled, fine, if not, that’s ok too, no more chasing trades as there are always more and better setups to come.

Yes, there will be times when you get bounced out of perfectly good trades because of a price spike. If the stock is back trading where you wanted it to and it meets your criteria for entry, go ahead and get back on the horse and ride it. If you choose a volatile stock, reduce your position size and widen your stops so as not to be prematurely kicked out and allow yourself to make it to your target.