The Basics of Trading

This is a discussion on The Basics of Trading within the First Steps forums, part of the Reception category; Hi Techcherry It's simply the Reward Divided by the Risk. Hope that clears it up...

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Old Feb 7, 2003, 9:01am   #51
 
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FTSE Beater started this thread Hi Techcherry

It's simply the Reward Divided by the Risk.

Hope that clears it up
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Old Feb 7, 2003, 10:51am   #52
 
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Now I've worked out how to get screenshots of an acceptable size here is my attempt at analysis. I did the homework when requested but haven't posted it till now. Seems an excuse just like I'd use at school ;-) .

Looking at the chart now I wouldn't personally consider it as an entry yet as it is still too far from the trendline and as a result a logical stop the other side of it.

Cheers.

Andrew.
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Old Feb 7, 2003, 11:41am   #53
 
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For BOC: Large descending triangle broken to the downside. I'm undecided whether a pulback to R has occured. As such for now I'd pass.

However I would wait for a pullback and a potential 'High Swing Point' If the high touched 790-800 I'd enter a limit short at the low of the previous day ... so if the price made a new low I would have entered a short with a stop at the low of the previous days 'high swing point'. The triangle target is problematical due to the dreaded FA. Normally it is the height of the triangle which in this case is about 1100 less 800 = 300 taking the price to 500 (EPS is forecast about 58p Div 38p so that would give a PE of 8.6 and a Yield of 7.6%). It is not beyond possibility (but might be the end of the Bear!) but is something I like to check to see when the value players might start sniffing. Anyway given that, if I could enter on a bounce from 800'ish I'd have a target of 730. If the triangle was entered again I'd wait for a 'high swing point' from the trendline - same target - closer = higher probability.

Note to any readers - this is not the sort of trading I normally do. I might know the terminology but I haven't got the experience.

Cheers,

Andrew
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Old Feb 7, 2003, 3:15pm   #54
 
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FTSE Beater started this thread Hi ISquared

Your analysis of both BAY and BOC are excellent.

The Funndimental side of things went straight over my head, but the TA I could understand
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Old Feb 7, 2003, 4:02pm   #55
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Quote:
Originally posted by FTSE Beater

Trendlines:

Trendlines are made by connecting 3 or more points along the same line. They either connect the tops of the highs together or the bottoms of the lows. Trendlines work because everyone sees them and know that the next time price hits that level, a reversal should happen, so they either rush to buy or sell depending if it is an uptrend or downtrend.

Sorry Mark, but this is completely wrong.

A trendline requires two points (not three) the first point should be a reaction low if looking at a bull trend or a reaction high if looking at a bear trend.

The second point is ideally a second reaction high or low, but not necessarily, it may also be a level of support or resistance.

This is used particularly on breakouts, when the price charges up (or down) at an unprecidented and unsustainable rate (and thus is more likely to retrace than anything else). In this situation the trendline is linked from the high or low to a point along the broken support or resistance level, in line with the price action. The reamina like this until a second more established point is made.

Trendlines do not 'work' because 'everyone sees them', I've never read such rubbish!

They are an ever-changing level of support or resistance, points at which the buying pressure or selling pressure is sufficient to hold the price action - giving you your next points in the trend, not the other way around.
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Old Feb 7, 2003, 10:47pm   #56
 
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There is endless talk on risk/reward in trading/investment literature and forums.
That's fine, but let's think for ourselves here.
All risk/reward sums are without merit other than in spread and option trading.
Why?
Where is probability in this?
You might say you are trading 1000 shares with a take profit target (reward) of $1 and a stop loss (risk) of 25c.
Fine you say, 4:1
Sorry, simply not so.
The calculation is incomplete, totally meaningless in fact, without considering the probability of the two events occurring within any set time frame.
If the probability of the $1 gain is only 20% say, and the probability of a 25c loss is 80%, that rather messes up the maths, doesn't it? Messes up the trade actually.
So if we trade on the basis of R/R we are being self delusional, are we not? ;-)

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Old Feb 8, 2003, 10:04am   #57
 
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FTSE Beater started this thread Hi Mr.Charts

I totally agree with you, but as a starting point, you have to understand the risk / reward ratio and the support, resistance and trendlines that put the probability of a winning trading in your favour.

Remember everyone, this is a beginners guide. Nothing more.
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Old Feb 8, 2003, 11:21am   #58
 
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Yes, you're right ftse-b, but if people simply follow basics they won't succeed long term. It just isn't as straightforward as that otherwise most would become winning traders and in the real world most fail. But yes, sorry, this was not the most appropriate thread and you do need to learn to walk before you run.
Funnily enough I remember writing a similar series of articles on TA for ESI (which later became E*Trade) many years ago!
I've always found in my coaching that clients need to be taught to think for themselves and think laterally so they can learn to spot the opportunities before the rest of the crowd.
Learn to think and see and understand the forces under the surface - and learn just why most fail at this business so you avoid the pitfalls.
Oh dear, I've gone on for too long again.
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Old Feb 8, 2003, 11:33am   #59
 
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FTSE Beater started this thread Hi Mr.Charts

This really is just the walking stage (if that), but I think it's a good start to trading.


I hope the new traders will realise that this is only a basic guide, and to move onto the really profitable stuff, then you really have to do one on one courses, and learn from the masters
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Old Feb 8, 2003, 11:35am   #60
 
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Stop-losses

FTSE Beater started this thread Hi all

This really ties in with the last section on risk and reward. Knowing where to place a stop, is one of the hardest things to know. There are so many factors that come into play. Things like the volatility of the instrument that your trading, your risk tolerance..etc

Stop-losses are an important part of trading. I’ve said it before, when your learning to trade, the important thing is that you “stay in the game” long enough to put what you have learnt to good use. Stop-losses save you money, they don’t make you money. There will be many times as a trader, your stop gets hit, and your closed out of a trade only to look back later to find that you would have made an absolute fortune. This happens in trading, and it is time like that where you must remember that the stop loss is there to protect your capital.

The point at which you are incorrect.

The general acceptance is that your stop is placed at the point at which you are told that you were incorrect. Most of the time it will be a break in a trendline, or a point of support / resistance that got broken.

Click the image to open in full size.

With this example of SDRC, the support was at 450, and the natural place for the stop-loss was about 445. The support failed, the stop got hit and the price carried on lower. At 445 the price has violated the support line, so you would expect the price to fall futher, which is what happened in this case.


The trader versus the market makers

The unfortunate matter is that the market makers know where the stops are. They know because most people trade the same way. There are plenty of occasions when a market maker will go “gunning” for stops. What I mean by this is that they drop the price below support, to get the stops hit and then the price carries up, up and away.

Click the image to open in full size.

This GKN chart shows how the price fell below support at 197, hit 195 and then reversed. If you had placed a tight stop at 196, you would have been stopped out.

The only way to combat this is to allow the price a bit of room to move once the support / resistance / trendline has been broken, that way any stops that get gunned won’t be yours. How much you let the price move around is down to personal preference, but YOU MUST KNOW THE POSITION OF YOUR STOP BEFORE YOUR ENTRY, this includes the room for manoeuvre, and should be part of the risk calculation that we talked about earlier.

Mid-trade stop-losses.

In the risk and reward post, I talked about moving the stop-loss so that at any point in the trade, the risk does not exceed the reward. Moving your stop during a trade must only be used to lock in profits. If you move the stop loss to increase your risk, you are asking for trouble.

Moving a stop to protect your profits, should be placed under the last support for a buy or last resistance for a short. On a end of day chart you might look for the last low to act as the support, or the last high as the resistance, for example.

Click the image to open in full size.

If we entry this Corus trade, short at 59, with a stop-loss at 64 and a price target of 45.

Risk = 5
Reward = 14
Reward / Risk ratio = 2.8:1

Now if the chart does this…..

Click the image to open in full size.

At the current price of 52, and leaving the stop where it is, we would have this scenario

Risk = 12
Reward = 7
Reward / Risk ratio = 1:1.7

At this point we have more risk than reward. So the logical place to put the stop is at 57, as this is the last significant high, giving…..

Risk = 5
Reward = 7
Reward / Risk ratio = 1.4:1

Which is better than the 1:1.7 ratio.

Moving stop-losses to protect profits is just that, taking the profits that are on offer.


Stop loss placement is difficult and takes time to master, but as long as you remember the fact that stop-losses protect your capital, the emotional side of trading should be easier to follow.

For this week, I want you to image that you are in the following trades, where you think the stop-loss will be and a rough target. For all of the charts, we’ll be looking at the EOD chart, over the last 6 months.

<table border="1"> <tr><td>No.</td><td>Ticker</td><td>Name</td><td>Long/Short</td><td>www.ADVFN.com Link</td></tr> <tr><td>1</td><td>BSY</td><td>BskyB</td><td>Short</td><td>http://www.advfn.com/cmn/chrt/chrt_w...nd1_3=&ind2_3=</td></tr> <tr><td>2</td><td>CBRY</td><td>Cadbury </td><td>Long</td><td>http://www.advfn.com/cmn/chrt/chrt_w...nd1_3=&ind2_3=</td></tr> <tr><td>3</td><td>FP.</td><td>Friends Provident</td><td>Short</td><td>http://www.advfn.com/cmn/chrt/chrt_w...nd1_3=&ind2_3=</td></tr> <tr><td>4</td><td>GKN</td><td>GKN</td><td>Long</td><td>http://www.advfn.com/cmn/chrt/chrt_w...nd1_3=&ind2_3=</td></tr> <tr><td>5</td><td>VOD</td><td>Vodafone</td><td>Long</td><td>http://www.advfn.com/cmn/chrt/chrt_w...nd1_3=&ind2_3=</td></tr> </table>
As always there is no right or wrong answers and I would love to hear from you.

Take care,
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