The Basics of Trading

This is a discussion on The Basics of Trading within the First Steps forums, part of the Reception category; Hi Mr.Charts I totally agree with you, but as a starting point, you have to understand the risk / reward ...

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Old Feb 8, 2003, 9:04am   #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, 10:21am   #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, 10:33am   #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, 10:35am   #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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Old Feb 8, 2003, 6:49pm   #61
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The Basics of Trading

Right Mark, for what it's worth here is are my views on your choice of shares.

BSY Short S/L 589 (previous high) Target 458 (previous support)

CBURY Long S/L 319 (previous high) Target 390 (previous support)

FP Short S/L 99 (previous high) Target 82 (previous low)

GKN - would not trade short - all my indicators show downward trend.

VOD - long S/L 105 (previous low) Target 126 (previous high. )

As a novice I have probably made a right dingbat of myself, but if you don't try, you don't get constructive criticism
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Old Feb 8, 2003, 8:50pm   #62
 
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BSY - currently at the lower edge of a range approx 555 to 690. As such it can be traded short if it breakes down through the range or long if it bounces.

For the long trade I'd enter at 571 on the swing with a stop at 550 and a target of 660.
For the short trade I'd enter at 550 with the stop at 620 and a target of 470.

Long: Reward/Risk is 89/21 = 4.2
Short: Reward/Risk is 150/70 = 2.1

CBRY - Interesting! Either a base forming OR start of a measured move down. Currently at support as last defined in Feb 2000.

Long above 340.Target 370. Stop at 315. RR 30/25 ~ 1 = rubbish.
[Short below 315. Target 285. Stop at 340. RR almost same as above.]

FP. Horrible congestion just above current area at 100p from Sep/Oct coincident with downtrend line from beginning of December. So the stop has to be about 102p. Just wouldn't short this share myself ... do you know what the yield is? It is projected at >7.5% ... has me almost salivating as a value player ... just want to see a retest of 82 for a 2B long entry ... very confused. Pass!

GKN - If your insisting on a long (and the yield warrants it) then the target is about 199. The entry is at the first high to go above the previous days high and the stop at the previous days low. Assuming Monday delivers the goods it is:

Entry at 182, stop 174. RR is 17/8 = 2. Horribly small on 'points' though - would need to check the spread/costs and factor in.

VOD - Long above 115, Target 124, Stop 104. RR 9/11 = 0.8. Too low.


Having done that can you expand upon why you selected the trade direction in each case? If it's to test us then that's fine but I'd like to understand the logic as several seem to be against my perceived direction of trend ...

Of them all only the first would seem attractive to me. A very interesting exercise though which will probably throw up all sorts of things/assumptions I have to learn/unlearn!

Cheers,

Andrew
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Old Feb 11, 2003, 7:38pm   #63
 
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FTSE Beater started this thread Hi all

I'll be posting up my views tomorrow night, so if anyone else would like to put there views forward - feel free, and remember there is no wrong or right answers
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