Woes of trading stocks

[the1337fleet]

Hello everyone,

Even in the bull markets the past few months, I have been burned pretty badly in swing trading stocks. I have identified some problems I'm having and would like to share them. Perhaps someone can take me in the right direction.

1. Stop loss
How to handle this? I usually put it a few cents below the nearest support such as the MA50, day's open, or the previous day's low. And usually, I will hit this and see it go down a few more cents, then come right back up into green land, costing me about 2.5% of my principal.

I don't want this to be so tight that I get stopped out a bunch of times (I don't have a daytrading account, so I can't do this often), or so loose that I wait for days until it finally hits it at a bigger loss.

2. Breakout or fakeout?
When I identify a price heading toward a resistance or support, I'll think that it will bounce back in the opposite direction. How am I supposed to tell whether today will be the day that it breaks out of the resistance/support? For example, today I was looking at STLD, thinking it will hit 18.50ish and go back down. To my surprise, it popped up 6%, blasting through resistances! On the other hand, the one I was actually playing started trickling down until it hit my stop loss (thankfully, it is still hanging around where I set the stop loss, so I don't feel too bad).

3. Not having the conviction to pull the trigger
I have a list of stocks I want to pay attention to, with notes. I'll put down something like "go long over xx.xx" or "watch the xx-yy range." However, when the time comes for me to take action, I cannot pull the trigger until it is too late. More than half the time, I will see it go in the way I predicted. But sometimes I panic that it will go even further, and then end up buying/shorting at the high/low!

I thought about putting in a contingent or stop order so that it will be done automatically, but I worry about the breakout/fakeout problem described above.

What do you think about them? Any viable solutions and tips for me to consider? Thanks!

 

[intradaybill]

"Perhaps someone can take me in the right direction."

It is the direction of the trend.

 

[DionysusToast]

For a long, Position size = $ risk per trade / (entry price - stop loss price). That should stop you from blowing 2.5% on a bad trade.

Stocks will occasionally gap past your stop loss. Take it on the chin.

Don't trade breakouts in trending stocks. Look for a pullback, then a sign of the original trend commencing. Let's say you are in an uptrend and you pullback, wait for a shiny green daily bar. Then take a look at the 15 min timeframe to see that you are satisfied that the days action may actually signify a resumption of the trend. Stick your entry a few cents above the shiny green daily bar and your stop loss a few cents below the low of the pullback. Don't put in your entry orders before the open - let the market open first. If a stock blows through your entry point at the open - pat yourself on the back for not slipping 30 cents. If it blows through like this, wait for it to come back to your entry. If it doesn't - just pass on the trade.

Then look at the last swing high. That would be my first target. If the last high is $1 away from your entry price but the last low is $2 from your entry price - skip the trade. Your upside needs to be better than your downside.

Once in, use the 15 min timeframe to trail your stop loss - you should see intraday support levels that make logical sense - of course you'll end up out of some trades early because of this, so it's up to you. Just try to as a minimum get a break even stop loss. Don't reset your stop losses intra-day - just look at the trade outside of market hours on a daily basis and decide if you need to move the stop on any of your trades.

If the stock starts moving sideways, get out of the trade.

Consider that if the market makes a major move - your stocks will move in that direction, pretty much regardless of the strength of the stock. So don't be fully invested in swing trades at any time because you have market risk associated with your trades. One major drop could wipe out a years gains if you are fully invested.

 

["D"]

The above post by DionysusToast offers some good advice. I would like to add to it.

The trigger you use to enter the trade will be determined by the market conditions. More conformation usually results in a wider stop loss. I would evaluate your reasons/trigger for entry. By adjusting your trigger you may be able to get a tighter stop. Having a predefined entry signal(s) will also help you with timing the entry. Entry becomes more mechanical. When a signal/trigger occurs, enter the trade. You shouldn’t have to think about it.

Concerning trading a breakout, if you drop to a lower timeframe you may be able to find a nice trend trade within a range. Play this trend on the lower timeframe and if the breakout does occur on a higher timeframe you are already on board. If the breakout does not occur play the trend according to your strategy and exit as you normally would. You can also go up to a higher timeframe. On a higher timeframe there may not be much of a breakout/range to play. Again you can play the trend according to your strategy

Dropping down to a lower timeframe to exit and enter is typically how I like to trade. This is a double edge sword though. You can often get better entry and exits with tighter stop placement, but you get a lot of noise too. You need to be able to sit on your hands and not exit a trade prematurely because the trade looks like it is in big trouble on a lower timeframe, when in fact you are doing just fine.

Many traders like to move their stops to the breakeven point as soon as they can. This works very well for some traders. Personally, I do not like to do this. With my strategy, I have found the breakeven point is very often tested. By moving my stops to the breakeven point before the trade develops I get stopped out a lot more than I should. You need to determine what works best for your plan. Neither strategy is correct or incorrect. It depends on what works best for you.

Remember when you place a stop below your 50 MA, the MA is an area not a exact point, but an area. If you watch the major moving averages, price will often come down and violate them to some degree before bouncing back higher. You need to take this into consideration with your stop placements.

Lastly, I would evaluate why you keep getting stopped out more than you should when you enter a trade. You are most likely placing your stop in a technically significant area price likes to test. There is most likely a technical reason for this. I would do a little research and try to discover the reason why. It can only improve your trading.

 

[subarashi]

I use several different types of stop. Two of my favourites are a count back stop and a stop based on an average true range.

The count back is simplicity itself. Look at the low of the last price bar or candle, then go back to the next lower low and then again. If the loss is now about 2% of the trade value then you are OK. If you have some margin left then go back another bar or candle. Don't exceed the 2% limit.

Now check the ATR stop. I have a Bollinger Band wrapped round the 26 day ATR but you might use a 10 or 14 day ATR. The Bollinger Band tells me the current ATR's value at 2 standard deviations. I look at the ATR and then I use the higher Bollinger Band, either the centre line or top band and add 10% to that value. I use this as a stop. If the ATR is already running along the top band then I use that and add 20% to it's value.

I usually set the stop that loses me least or protects most.

 

[jerome681]

I have gone thruogh alot of the things you've described. What has worked best for me is to keep it simple. I use a few indicators and get a feel for the market. I enter at a support or resistance level with stops just below or above. My profit pionts are pre-determined, usually a support or resistance level or time 2-4 days. Many times, depending how i feel about the overall picture i will sell 50% of my position at these levels. If the fakeout occurs close out the trade and if the breakout occurs I will use an ATR trailing stop. Entering at support or resistance allows you to pull the trigger and if your getting stopped out often you can try reducing your position size and increasing your stop. I've been doing this for 3 years and I am learning the simpler you keep it the better.