This market is tough. The daily range of the S&P is wide and volatile. This is not a market for the weak at heart. It is not the time to be a hero, many have lost their collective shirt by believing they had it pegged.
So what do we do - how do we play it?
Monetary Stop Loss:
Over the years I have written a lot of trading systems and monetary stop loss is by far the simplest to determine and execute.
One method is to use a flat percentage of the position as a stop loss value. 2.5% is a very common stop loss. Meaning if you buy a 100 shares of C @ 26.70 - 2.5% would be $0.67 a share. If the stock goes below $26, you are out.
Another approach would be to use $1 per share or some other flat figure.
Monetary Profit Target:
Unfortunately profit targets are far more art than science. As a trader i would be looking for at least 2x of my stop loss or risk. So, I would be looking at $1.25 minimum. As a longer term investor, I would rather exit portions of the postion and move the stop loss to just above breakeven.
Today's market is about capital preservation and managing risk. While there are many approaches, the point is to pick a method and use it consistently. Will this approach take you out of winners too soon? Sometimes. It will also take you out or losers quicker. Right now that is far more important.
For further reading check out any boook written by Alexander Elder. He has a great book called "Entries and Exits". In it he talks to variety of traders about how they trade. How and when they enter and exit. It is a great read for anyone that frequently moves in and out of positions.
So what do we do - how do we play it?
- Have patience.
- Preserve capital.
- If you are going to get into new postions, have an exit plan.
Exit plans are not only for traders!
Exit plans can be technical - breaking of a key support or resistance, monetary - loss of a specific dollar value or %, or fundamental - reporting a bad quarter. Many others have talked about technical support and resistance as well as fundamentals. I think the easiest to focus and implement is monetary.
Hers are my rules for new positions:
- Rule #1 - Every position needs a stop loss.
- Rule #2 - Every position needs a profit target.
- Rule #3 - Rules 1 & 2 need to be calculated before entering the position.
Monetary Stop Loss:
Over the years I have written a lot of trading systems and monetary stop loss is by far the simplest to determine and execute.
One method is to use a flat percentage of the position as a stop loss value. 2.5% is a very common stop loss. Meaning if you buy a 100 shares of C @ 26.70 - 2.5% would be $0.67 a share. If the stock goes below $26, you are out.
Another approach would be to use $1 per share or some other flat figure.
Monetary Profit Target:
Unfortunately profit targets are far more art than science. As a trader i would be looking for at least 2x of my stop loss or risk. So, I would be looking at $1.25 minimum. As a longer term investor, I would rather exit portions of the postion and move the stop loss to just above breakeven.
Today's market is about capital preservation and managing risk. While there are many approaches, the point is to pick a method and use it consistently. Will this approach take you out of winners too soon? Sometimes. It will also take you out or losers quicker. Right now that is far more important.
For further reading check out any boook written by Alexander Elder. He has a great book called "Entries and Exits". In it he talks to variety of traders about how they trade. How and when they enter and exit. It is a great read for anyone that frequently moves in and out of positions.
5 Comments:
you can use any exit mechanics as long as your system has positive expectancy. However, I would have to argue that the one you chose is the least optimal.
Ideally you would need to size your position based on your stop-loss and not size your stop-loss based on your position.
The other consideration is the risk of ruin. Position sizing does not work solely to provide positive expectancy but it also provide a mechanism to protect your account from blowing up in a black-swan type event.
I'm a bit confused by "Exit plans are not only for traders!" Is that meant to suggest this post is aimed at "investors". If so, I'd like to know your definition of the difference between the two as this post seems to be all about trading.
While I wholeheartedly agree with the idea that each position you enter requires a well thought out exit strategy, the things you propose for stops and targets are entirely too simplistic.
Firstly, profit targets are completely inapproriate for some types of methodologies. Trend following is one such as you'd almost certainly cut off the big gainers before they got going, effectively ruining the performance of the system.
Second, a fixed stop loss is a dangerous thing. You cite 2.5% as very common, which is certainly news to me, but let's go with that. What if the normal volatility of your anticipated holding period is 3%? That means you would almost certainly be stopped out.
Thirdly, your target should take into account your win%. If it's not high enough for you winner/loser ratio you'll end up losing money.
"Your entry should be a functio of your exit strategy" - Mark Douglass
Meditate on that, commit it to memory. I did 15 yrs ago or whenever he wrote his book,
only thing I remember of value othere than if the the risk parameters are beyond your acceptable loss level do not take tha trade - Kaput.
on a personal note, I did all my buying in Dec and Jan, and being more of a position trader investor with the idea of holding for a year or longer (maybe not in a severe recession though) since late Jan I am done buying for awhile.
I bought everything small, and only had to pitch one for being a total LOSER(and mistake on my part not to check margin squeeze into the red on SIRF)
No price stops are placed, but there will be a time stop of two months. In short, everything will be under review around March 18 FOMC meeting. In between that time, I may not add to or buy anything new, but an adjustment or two will not surprise.
I have got to give the trades I put on a time to breathe, dust themselves off for being such losers in Dec/Jan, it takes time to burn off negative mojo like we had in the past 6 weeks. Think of it as a fine wine, that tastes better after letting in breathe.
That was some serious steam. I for one am giving the market lots of room, and in doing that each position size is very small, and I am giving them two months short of disastrous announcements (like SIRF)
That is just one way to play the game, skin the cat, and god knows theres 100's of wasy to skin a cat
Dean,
Congrats to you and Corey for the mention in WSJ! :)
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