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Trading Without a Trend

The Great Bear, Jesse Livermore, is credited with many trading axioms still used today. One such phrase certainly applies to the market we’re facing right now:

“There is only one side to the stock market; and it is not the bull side or the bear side, but the right side.”

Right now the Nasdaq and S&P 500 indexes (depending upon your timeframe) are stuck in trading ranges. Tonight the S&P 500 is facing a potential breakout, but we haven’t seen it yet. It truly is a market of stocks right now, which means there are some swing trading opportunities on both the long and short sides of the market. It’s a good idea here to focus on trading the best setups rather than insisting on forcing trades in any one direction. Do your homework, scan for chart patterns, and trade the best setups with great risk/reward profiles. Don’t marry an opinion tied to the bull or the bear side, but make your day’s pay by trading them both!

Simplify Your Trading Layout

Trading platforms have come a long way in just a short time. Now you can set up your trading layout just the way you want it, reflecting all kinds of information back at you to enhance your decision-making process. It’s easier than ever to monitor positions, set a quick stop-loss order, and watch multiple timeframes with several charts. But that doesn’t necessarily mean that more is better!

Information overload is a widely-used term but it certainly applies to trading. I’ve known more than a few traders who suffer from paralysis by analysis. It’s easy to get so into the information that you fail to remember what it’s all there for – trading to make money! If you’re overcomplicating things and getting too wrapped up in making sure all the stars are aligned before you can pull the trigger on a good trade, then maybe it’s time to streamline your process.

Take a good look at the information your trading layout displays for you. Do you need it all? Are those indicators doing anything for you other than just adding color to the charts? Is there conflicting information which is regularly keeping you from capturing good moves in this market?

Start with the bare essentials for trading: a level 2 window, an open positions window, a chart of the futures, a chart for your stocks, and a ticker. Add only what you need to this list, and soon you’ll be able to monitor positions and market momentum without getting lost in the shuffle. Simplify your layout and spend your time and energy focusing on the tape this year rather than suffering from information overload!

Silence is Golden

I used to commute to a day trading office until about 2 years ago. It was good for a while but my needs changed. While I did enjoy interacting with other traders on a daily basis, it was harder at times to concentrate on the market with the sounds of a busy office. The occasional sounds coming from upset traders banging on their desks or yelling was plenty annoying. Others seemed to do more visiting than they seemed to trade. Making the move to a home office saved me some time and gas money, but it really made me a better trader.

Learning to rely on yourself as a trader is an important and ongoing lesson. While I would encourage a beginning trader to surround himself with more experienced traders, there are a number of advantages to flying solo once the learning curve passes.

I turn on CNBC some mornings just to catch up on some headlines while I am getting set up for the trading day, but once the bell rings, I rarely leave the TV on. I find the endless opinions (valuation schmaluation) to be distracting and not useful for my style of trading. Plus, their idea of “breaking news” is often too late. Instant messenger is another line of communication I typically cut off for the trading day. In the past, I’ve spent trading days chatting with other traders, but in the end I’ve found it more distracting than helpful. At times a good call was made that I might have missed, but having one more window to focus on seemed detrimental to my tape reading and trading results. Now my typical day is extremely quiet with nothing but a snoring dog and an occasional phone call which can easily be dismissed. Much better!

Silence is Golden

I used to commute to a day trading office until about 2 years ago. It was good for a while but my needs changed. While I did enjoy interacting with other traders on a daily basis, it was harder at times to concentrate on the market with the sounds of a busy office. The occasional sounds coming from upset traders banging on their desks or yelling was plenty annoying. Others seemed to do more visiting than they seemed to trade. Making the move to a home office saved me some time and gas money, but it really made me a better trader.

Learning to rely on yourself as a trader is an important and ongoing lesson. While I would encourage a beginning trader to surround himself with more experienced traders, there are a number of advantages to flying solo once the learning curve passes.

I turn on CNBC some mornings just to catch up on some headlines while I am getting set up for the trading day, but once the bell rings, I rarely leave the TV on. I find the endless opinions (valuation schmaluation) to be distracting and not useful for my style of trading. Plus, their idea of “breaking news” is often too late. Instant messenger is another line of communica

When to Trade Aggressively

As important as it is to be able to manage your trades properly, it is equally important to have a money management system for your trading. This includes knowing when to trade small and be picky, as well as when to trade big and be aggressive.

For me, there are 3 occasions when I trade aggressively:

Trade aggressively when you’re ahead. Losing streaks in trading call for trading less frequently and cutting down position sizes. It only makes sense, therefore, that profitable times are the best times to press and get bigger. Profits come as a result of being correct in your trades, so capitalize on being in sync with the market by increasing your size. When you’re seeing things clearly and gauging momentum correctly, take every signal you get. Trading bigger and more often when you’re ahead will allow you to make much more money when you’re right than the times when you’re wrong.

Trade aggressively in the midst of a clear trend. The market doesn’t trend all the time, making it important to be able to recognize an uptrend or a down trending stock.

Trade aggressively when good setups are plentiful. When there’s a lot of good chart patterns showing up in your stock screens, it’s usually because the market is giving a stronger indication of an impending move. When a sector or the market in general is on the verge of a breakout, it can be tough to determine which stocks will be leaders in the next move. This makes it important to enter more positions than usual as good chart patterns confirm. You may wish to trade on margin to accommodate the additional positions during such times.

Consider these 3 ideas when it comes to margin trading:

Margin is for experienced traders only. Beginning traders can be more susceptible to emotional swings that come with trading. The urge to “make it back” after a loss can easily be compounded into a major error when trading on margin. Consider trading on a cash account for a while until you feel comfortable with the added leverage that a margin account can provide you.

Margin doesn’t have to be used every day. On a day trading basis, I use margin more frequently than I do when I’m holding overnight positions. Market conditions and the stocks you’re trading will determine whether you need or should be using margin regularly. If you’re day trading several thousand shares of QQQQ and SPY simultaneously, you may need the additional buying power that a margin account can offer you. A liquid issue like QQQQ or SPY which are index-based will move far less than a headline-driven stock like RIMM, making them prime candidates for trading on margin.

Margin demands your respect. Any veteran trader would agree that only on occasions will market conditions be ripe for going “all in.” Putting the pedal to the metal with regularity will at times no doubt leave you leveraged in choppy markets, digging a hole which will take you some time to get out of. Don’t let the scary stories of margin trading spook you away from using it as an instrument to your trading, just be sure you respect what it can do – both for you and to you!

Trading on margin can offer tremendous benefits to the trader who knows what he’s doing. If the market has momentum and you’re in sync with it, you can make much more money when you’re right and boost your returns significantly.

Day Trading Headlines

Anytime headlines come out on a stock you’re trading, you’ll probably know it. Today I was long CHNR when a negative headline hit and this stock changed character quickly. When that happens, it’s best to remember the day trader’s motto: “sell now and ask questions later!” With commissions so cheap these days for direct access trading, it’s usually better to be safe than sorry when it comes to headlines.

I had highlighted CHNR as a long candidate in my stock newsletter last night with a buy point of $16.80. This momentum stock had settled into a powerful bull pennant pattern, and an upside breakout was the swing trading buy point.

Today, CHNR caught a bid during the morning and quickly advanced, hitting my buy point and moving higher by another 9.5% in just 2 hours time. With a nice profit on my screen in such a short amount of time, I took partial profits on the way up and had planned to ride the rest as a swing trade position.

During lunchtime, however, a headline hit the wires which was picked up by my news feed that CHNR would have to seek continued listing by filing a new listing application with Nasdaq. This was major news, and the stock began to react in a hurry. My ticker went solid red and I knew it was time to take my remaining profits now that the landscape had changed so drastically. While I don’t mind giving an active stock some room to move, it was the fact that a significant headline had come out that caused me to sell.

Keep a close eye on trades even when they are working! Don’t be afraid to take partial profits into unusual strength to book some gains, and be willing to walk away if fundamental news surfaces. The market doesn’t always act rationally, because traders will almost always sell now and ask questions later.

It’s All About Personality

Recently one of my subscribers emailed me a few charts for review. This particular trader wanted to know which stocks I would trade of the handful that he inquired about. I told him that although each of the stocks looked good in the short term, I didn’t like them all for trades.

One thing I always try to consider when scanning stocks for chart patterns is to take a longer term look at the chart to review that stock’s trading history and personality. Is it prone to gaps? Does it seem to trend well? Does it follow through and make continuation moves or does it reverse out of nowhere? While a stock might have a very clean bull flag pattern or double top in place, it may have a history of ignoring such developments. Looking at factors like that helps me to decide if I think the most recent pattern is likely to develop into a good trade or not. Some stocks will set up good patterns but just might not have a history of really confirming them well, which will cause me to move on to the next setup on my list.

Chart reading isn’t a crystal ball, but it can sure give us a glimpse of how a stock usually moves. Taking a stock’s personality into account when contemplating a trade can sure help us determine more accurately how it may behave going forward. In the end, good trading is all about putting the best odds for success on our side, so trade the stocks with consistent personalities!

Watch Trades for Clues

Some trades are profitable while still offering us clues as to just how well they are working. While our primary objective is to turn a profit with our trades, it is certainly important to monitor the behavior of our trades to do our best to determine what we should expect going forward.

I highlighted SNDK in my stock newsletter on Wednesday night with lower highs in place and a bear flag pattern which had subsequently formed. The short selling entry point was a downside break of $66.00 at the lower line.

The following day, SNDK triggered and showed us $0.98 in profits. On Friday, it dropped another $0.97 for us, showing us a total profit per share of $1.95 from our short entry.

While I do like the fact that this short sale trade is working, I am a bit concerned by HOW it is working. Although beggars can’t be choosers, I would much prefer to have seen volume kick in with higher levels on Thursday or Friday to indicate intense selling in SNDK as it confirmed the bear flag. So far, we’ve gotten profits but it looks a bit iffy to me. As a result, I’ll plan to take partial profits to lighten up on shares in case this stock bounces. Doing so will prevent me from giving back full profits, while at the same time allowing me to stay in the trade if a larger move develops. Perhaps soon SNDK can find greater downside volume, but it’s important to operate with the facts we are given as traders, so I’m turning slightly cautious on this trade which is working but not technically sound.