Saturday, 20 January 2018

Placing Stops While You Learn ETF Trend Trading

Most traders have had the painful experience of setting their stops only to have the price retrace to their stop before continuing in the trend. Although some traders swear that other traders are "running the stops," actually what happened is the trader placed the stop too tight.

You must remember that stops are there for one simple reason; to reserve your capital in case the market goes against you. If you are placing your stops too close, chances are you are consistently being stopped out and not consistently taking money out of the market. For example, a tight stop would have taken you out multiple times within the three separate trends. However, with the ETF Trend Trading stops, Channel Exits and Swing Trailing Stop Strategies; most of the time you actually stay in the trend, enabling you to take your profits near the end of the trend.

By allowing your stops to breathe with the market, you stay in your trade longer, thereby profiting from the bigger moves. Because we combine technical stops with a percentage risk stop it does not matter if some of the stops are larger to give it more breathing room because it's still the same percentage risk.

I also teach a threshold level where the trade is not to be taken because the stop would be too far away. The great thing is that when the stop is tight we get to load up on the number of shares with still only risking the same amount.

For example if I was to sell the SPY at $ 100.00 and the technical stop in this case was tight at only $ 101.00 I would only be risking $ 1 per share. If I had a $ 20,000 account and wanted to risk only 1% that would be a total risk of $ 200. So I divided 200 by $ 1 RPS (risk per share) = 200 shares. So if price drops to a target of $ 95.00 I would make $ 5 per share times 200 = $ 1,000. That is a 5% rate of return while risking only 1%.

On the other end if my technical stop had to be $ 110.00 I would be risking $ 10 per share (past the threshold of too high) and still be risking 1%. I would only be able to sell 20 shares ($ 200 divided by $ 10). So if I exited at the same target of $ 95.00 I would still make $ 5 per share, but only times it by 20 shares = $ 100. A 0.5% rate of return for the same risk of 1%. This is a bad risk reward ratio and why this trade would not be taken in the first place.

That is why if the RPS (risk per share) is too high we do not take the trade. I share that threshold with my members (clue; it has to do with the risk vs. reward ratio). That is why many times on my daily videos I say "we were able to load up on the shares in this trade because the RPS was so low!" Those are my favorite trades.

Yes we still get stopped out from time to time, but a lot fewer times than traders who are scared and place their stops way too tight.

The other end of the spectrum which many average investors are doing right now with their mutual funds is to trade with no stops at all. This is the dumbest investment strategy around. Only financial advisors who only care about their management fee recommend this strategy. I call it the buy, hold and pray method.

The sad thing is that many average investors have fallen for it. Yes the market might turn around, but you've got to admit, it also might not! If your mutual funds are down 20-30% how much more can you take? The financial advisors are hiding the fact from you that you can learn to trade for yourself and do it better than them with proper training.

There is an easy way to become a superior trader or investor "working" only 5-10 minutes per night. I am a former fund manager and used to trade 50 million plus at a time. After leaving the money management business and trading only for myself, I got disgusted with the pathetic trading strategies being being pushed on the internet.

Most of them have no idea how to place proper technical stops let alone how to combine it with a low risk percentage stop. Most of them have purely discretionary systems leaving you open to a gambit of contradictory trading decisions. To succeed long term you need to use technical stops combined with a max percentage stop stop.

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