3 Ways to Increase Your Trading Profits
In This Week’s Issue:
- Stockscores’ Market Minutes Video – How to Measure Trade Performance
- Stockscores Trader Training – 3 Ways to Increase Your Trading Profits
- Stock Features of the Week – Morning Movers
Stockscores Market Minutes – How to Measure Trade Performance
Most traders measure performance using percentage or dollar gain. This leaves out an important component in judging the effectiveness of a trade - risk. This week, I explain how I measure trading risk and performance. Then I provide my analysis of the overall markets and look at a few stocks to consider. Finally, the trade of the week on SE.
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Commentary of the Week – 3 Ways to Increase Your Trading Profits
Traders are faced with a lot of information and one of the great challenges is knowing what techniques and skills are most important for trading success. This week, I share with you 3 things that I think every trader must do to maximize their trading profits.
Focus on Abnormality
Almost every stock that outperforms the market starts is upward trend with abnormal price and volume behavior. The Stockscores Market Scan tool has been built around this fact, offering specialized filters to find the stocks behaving abnormally.
However, not all stocks trading abnormally make market beating upward trends in the future. It is important to know how to qualify what are the best trading opportunities. Don’t consider stocks that are rallying in to resistance because they will usually get stuck at that resistance level. Be cautious with stocks making abnormal moves on low volume because the market activity is less trustworthy when there are fewer people trading the stock.
Keep it simple. If a stock starts to attract a crowd of traders, do your homework to find out what is going on and analyze the chart to see what the reward for risk tradeoff is.
Limit the Size of Your Losses
No matter how good your analysis, you will be wrong and lose money on some of your trades. With good risk management, you can be very profitable even if you are wrong more often than you are right. The key is to not suffer from big, portfolio crushing losses.
You can limit your losses by using a stop loss order with your broker or manually execute an exit when the stock falls to threshold that you determine to be the signal that the trade is not working.
I recommend only using a stop loss order when trading very liquid stocks in the very short term. I only use them when I am day trading.
Otherwise, I establish where support is and plan to exit if the stock closes below that threshold. This requires checking my holdings daily to see if there is a sell signal on any of them.
To determine the ideal stop loss point, I collect a lot of data from trades I have found and do what if analysis to find the ideal stop loss point. The method tends to be different for each of my strategies. For example, my day trading strategy has been most profitable using a wide stop of -5 Reward for Risk element. A reward for risk element is based on the height of the entry signal candle, typically the difference between the closing price and low of that candle.
For a longer-term strategy based on the daily charts, the ideal stop may be at -1.3 or -2 RR. I use large data sets to find the ideal but also constantly collect and check the data to see what is working the best. There is nothing wrong with changing your approach when the data tells you to.
Add to Your Winners (and NEVER add to your Losers)
Finally, I add to my winners, using the profits from an earlier position to mitigate the risk of a later one.
This is called scaling in and, simplified, this is how it works.
Suppose I buy a stock at $10 with a stop at $9. Later, the stock moves up and gives another buy signal at $12 with new support at $11. I can buy more at the point because my new stop loss point at $11 actually makes my first position profitable since I bought it at $10.
As the stock continues to move higher, I continue to add every time there is a new buy signal that has a stop loss point that is higher than my previous entry.
These 3 concepts are simple but take some time to learn. For more in-depth discussion of them, consider one of the Stockscores trader training options found here.