"PULLING THE TRIGGER" - THE STRATEGY OF ENTRY AND EXIT
(c)2000 TLC may not be reproduced without permission
When and how do you "pull the trigger" and actually enter or exit a trade? There are many factors involved. I look at four indicators. All four have to tell me that I will not be making a mistake if I execute the trade. I've already formed my opinion; I want to do something. Now, I look for reasons why I might be right or wrong.
1. Market Direction – As a general rule, I want to trade in the same direction as the overall market. This is not as simple as it sounds. There are several markets, and there are several potential ways of observing the direction on the market. I can look at an index, or I can look at a sector. You'll have to do your own homework on what you need to watch for market direction.
If I have gone long and the market then turns and goes down, I need to be aware of that fact. If I am trading GE, for example, I will use the DJIA as the index to give me clues for the direction of the market. If I am trading CSCO, I will pay more attention to the NASDAQ Composite. I will also watch the S&P 500. I am looking for two things - what is the existing trend, and is there any reason to suspect that the existing trend will change? I use a proprietary signal that I invented on the index I am watching for overall market direction, and I very seldom enter a trade against the overall market direction; but I was successful at reading market direction before I discovered my proprietary signal.
2. Pattern Formation – I trade mostly short-term, so I trade mostly on TA. Therefore, I am looking for TA patterns that will show me potential trades. If the market direction is up or changing from down to up, I want to go long. If the market direction is down or changing from up to down, I want to go short. I look for a chart pattern for a potential trade in the same direction as the market. I then form an opinion on a specific trade, and prepare to execute the trade.
3. Signals and Red Flags – Once I have established the direction of the market and found a potential trade from study of the individual chart patterns on that individual stock, I look for signals that will tell me that my opinion is either correct or incorrect. A signal (something that says "go for it" or "don't do it") right where I think it should be is a confirmation of the validity of the opinion I have already formed. A red flag is a warning sign that my opinion could be wrong. I always go with my opinion, and then I look for anything that will give me a clue as to whether or not I am right. I constantly study winning and losing trades to give me clues as to what I did right and what I did wrong.
4. Reward/Risk Ratio – I never execute a trade without first determining the reward/risk ratio for the trade. I always form an opinion about what I will do if things go right, and what I will do if things go wrong. I do this because I personally have a bad habit of changing my reward/risk parameters after I have entered a trade. This is my personal weak point – if I am down for the day, I have a hard time not changing my reward/risk parameters due to the fact that I need to get back to even. To correct this bad habit, I instituted a policy of having my reward/risk ratio set before I make the trade.
My solution for my personal problem of getting out of a winning trade too early (which is extremely annoying) is this: I exit half. If I am long 600 shares, I sell 300 when I first want out. If the stock then does a retracement from that point, I sell the other half. If it goes up, I sit back and relax and who cares where I get out, I have a guaranteed winning trade.
Also, I usually try to leave room for the guy that is buying my stock when I want to get out of a long position, and I try leave room for the guy who is selling to me when I exit a short position. Give him some money too! You WANT him to take your position away from you. If you have ever been a little late on an exit and watched the stock turn, you know what I am talking about. I like it when I put out my sell order and somebody jumps on it fast. That's just fine with me, thank you very much.
I decide where I want out before I get there, and I get out. Over, done, on to the next trade. Some people use trailing stops - that's fine too. The important thing is that you have to form an opinion beforehand, and you have to act on your opinion. If you vascillate on entry or exit, you're sitting in the back of the car and there is nobody at the wheel. Somebody who knows what they are doing will take your money, guaranteed.
You'll notice here that my primary indicator is my own personal opinion. There's a reason for that. It's my money. I learned a long time ago that using somebody else's opinion as the basis of a trade is good for one thing only - giving up control of the trade before I even make it. I'm not saying I don't listen to someone else, that's how I learned, and that's how everyone else learns.
What I am saying is I NEVER ask anyone else what I should do. I decide for myself, and I control it. How does that other person know what's right for me? They could not possibly know for sure! If it is someone I respect, I will ask them what THEY would do, and why, and I will pay attention. But in the final analysis, I control the trade from start to finish. That's the only way I have ever found to be successful consistently. If I don't control it, then I need to put my money in a good mutual fund. |
