December 21, 2007
Holiday Cheer as AKAM Covers Initial Risk
Akamai, Wednesday’s long idea, closed higher again on Thursday, and has traded beyond the critical 1x initial risk level. Once a trade moves in my favor by one time (times? grammar alert!) the initial risk, I usually start thinking hard about how to manage (raise) the stop. Going to breakeven provides the greatest comfort, that’s what I experienced as a day trader, but swing trading may be different, I don’t know.
I do know that people who say you should use a volatility-based stop, or move to a larger time frame, or reduce your position size are often barking up the wrong tree. Trading is maybe 10% mechanical (technique) and around 80 to 90% mental (maintaining a good psychological state). Using chart-based stops and making sure your initial risk is as small as possible is the way to go, in my humble opinion. People who say otherwise are either automatons or don’t know what they’re talking about (usually the latter).
Anyway, here’s Friday’s idea, already emailed to the several hundred people on the list. If you’d like to join, just drop me a line. Sorry about the annotation error: 1x initial risk will be covered at 40.99, not 39.77 obviously (the trouble with copy and paste). You can’t beat facing 61 cents of initial risk on a $40 stock (~1.5%) off of the daily chart.
December 21st, 2007 at 7:21 pm
I agree that you’ve got to move the stop when you’re up 1R. I tend to bring it to around the breakeven mark - if there is support a bit further back, then I’m willing to take a small loss. The box’s VRSN pick a couple of days ago is an example (not up 1R yet, but nearly) - breakeven is at $37.02 but there is very obvious support there, therefore I would place the stop around $36.88 (and move it up if position goes more in my favour).
Re. AKAM, if I was trading it I’d be tempted to take a few quid off the table here - 50 day MA is just ahead. Might go past it of course, but then again it might not. It’s all very well to let profits run but it’s very frustrating when price comes back down to stop you out. Even if one takes very minor profits (say, 1/4 of the position), it provides a psychological comfort and stops you acting like a silly bugger later on.
December 21st, 2007 at 9:42 pm
Foxy: Thanks for your comment and I agree 100% on the silly bugger insight. Like VRSN and AKAM, the same could be said for HAL, another one which is right around 1x … LINTA was a better short, quickly going 1x. When I was day trading, the initial risk was often so small and the speed with which it was covered was so rapid, that it made stop management very easy. I don’t have any handle on stop mgmt off a daily chart and truth be told am deeply uncomfortable with swing trading in general.
December 21st, 2007 at 10:29 pm
“deeply uncomfortable with swing trading in general.”
Now you tell me ;)
Moving stops to break-even or an obvious support pivot nearby is what I do daytrading as well. I think you gotta do the same thing every time to let the emotions free of your decision. Of course I am preaching to the silly buggers in the choir.
December 21st, 2007 at 10:40 pm
Zoomie: Yeah, it’s a personality issue and everyone’s different, but I have a deep need to be flat at the end of the day and start fresh at the beginning of each day. Old habits die hard (or not at all).
December 21st, 2007 at 10:54 pm
Ahhhhh, nice to move stop up on HNT. Thanks CM.
December 21st, 2007 at 11:03 pm
Saw your request for stops here are my two methods based on my gut.
If im feeling anxious I set my initial 1% stop and then wait until I have made $200 profit at which point I set a trailing stop to protect 70% of my profit (30% trailing stop). That way if I didn’t get stopped out for my initial 1% loss then the worst that I can do is 70% of $200 = $140 bucks. If the position really has a ton of momentum I usually catch most of the move. If I get stopped out “There is always the next one!”
My second method is to set the stop at the low of the previous bar and keep adjusting it up until I get stopped out. Much simpler.
December 22nd, 2007 at 2:17 am
Maoxian,
You always display such a passion for the markets. Why did you stop trading?
December 22nd, 2007 at 2:30 am
i think, the profit goal “should” dictate the trade managment…in this case, the method (trendfollowing) aims for the occasional “homerun”, cause those are the trades that make the money in the end…so, pulling up the stop to b/e on the first occasion will eventually cost you a homerun trade and you cannot tolerate this…
December 22nd, 2007 at 2:34 am
CM, in my humble opinion i think you are slightly barking up the wrong tree.
If you are discretionary trader then the mental part comes into play and you can (should) do what ever makes you more comfortable including taking partial profits and moving your stops.
However, if you are a system trader (and you are using a system to generate those ideas) then you need positive expectancy and risk management. You cannot achieve positive expectancy by moving your stops around based on your emotions.
Assuming the system does have a positive expectancy, you have to stick to the system and over the long run it will consistently make money. You will also need to manage blow-up risk by managing total risk per each position (or hedging with options, or the like).
December 22nd, 2007 at 8:57 am
@b: Thanks for your thoughts.
@KC: Day trading is a full-time job and I’m involved with other stuff here which makes it impossible… plus I’m getting too old to deal with the 12 hour time difference.
@peter: Your point is a good one and I’m still giving a lot of thought to the B/E routine.
@Born2: Yes, very good point … I’m an old purely discretionary guy who has always been most concerned with the mental aspect of the game. All of these ideas have positive expectancy, the tricky “discretionary” part is the risk management, and that’s what we’ll work on together as a group.
December 22nd, 2007 at 4:53 pm
i think, its not a q of mechanic/automated versus discretionary…in daytrading, your profit potential is limited, therefore minimizing losses is the key…with (trendfolllowing) swingtrading or positiontrading, your profit potential is unlimited (richard denis said, 5% of his trades count for nearly all profits), therefore you have to avoid “micro-managing” trades…just my eyes
December 22nd, 2007 at 6:49 pm
peter: Yes, that is a difference with day trading … I would say that I was obsessed with minimizing and covering my initial risk, and then I was totally hands-off into the end of the day … a combination of “micro-managing” (at first) followed by letting it go. I’m not sure this is the way to go with the swing trades, but I’m applying my old instincts to this new area.
December 24th, 2007 at 10:29 am
CM are you also following data with regards to entering black box trades a few days late on a pull back between the stop and entry price? Of course, this would only apply if the trade triggered, but it now applies to the Friday Dec 21 trade idea.
December 24th, 2007 at 11:13 am
Eric: No, because then I have too many things to watch and try to keep in mind. PPDI had an extremely unusual Friday with that massive opening gap. Price came back to our entry zone where a fill was possible then price immediately jumped to the 1x initial risk level (move stops to breakeven?), finally price came back down, and without hitting the original stop went sideways the rest of the day. So I’m marking it as an open position in the record, not yet stopped out. Long entries are always taken above daily highs, and that’s way up there on PPDI now. :-)
December 24th, 2007 at 11:16 am
just curious what set up do you use to trigger the black-box trades?
you have referred to IB before. what brokerage and trading platforms do you use?
(i’m always curious about other trader’s equipment setup)
:)
December 24th, 2007 at 11:28 am
hove: I don’t give specifics about the black box since I will probably try to turn it into a subscribers-only service at some point — if people can replicate its results then they don’t need me. :-)
I used IB when I was day trading. For charting I mainly use Metastock but also Bloomberg. An awful lot of the readers of this site use Quotetracker and Tradestation for charting/trade execution as far as I can tell.
The most important thing to keep in mind is that when I was trading off an old ThinkPad with a cracked screen and crummy internet connection, I made more money than God. Give Tiger Woods warped clubs and he’ll still beat anybody by a dozen strokes. :-)
December 24th, 2007 at 1:38 pm
“… more money than God.”
That sounds awefully tempting. But I think if you give some pitch and putter the best set of clubs - he will still suck the same way he did before.
Hence, my foray into day trading the dummy style was not so impressive. I don’t know if you traded in a better time, or maybe you had some indicators that screened out lower percentage plays for the Dummy Trades?
At any rate, I’d be interested to see if having the same $ value for R for these new black box trades compared to R for a dummy day trade could make you some good money too.
The advantage? There is no guess work in the trades. While the dummy lessons are straight forward, the guesswork is in selecting which stocks to trade since there are always gappers, volatile movements etc. In the black box there are your strict criteria.
EC
December 24th, 2007 at 5:15 pm
Eric: It’s true that screening for unusual suspects is key to the Dummy strategy … if you try to apply it to stuff that has less pace then you’re not going to succeed … the box set-ups are very different from the day trading dummy set-ups and we’ll see once we get 30 or so trades out of it what the stats look like.
December 24th, 2007 at 5:42 pm
Chairman - what were you doing right when you made “more money than God”?
December 24th, 2007 at 5:45 pm
Rod: I was being a total Dummy.