Active trading must appear very complicated to the uninitiated. All the new terms, complex looking charts, and a barrage of data just seems overwhelming to the new active trader.
It is true that trading can be complicated. In fact, it can be extremely complicated if you want to make it that way.
However, the truth is, successful trading can also be a very simple task.
There is no need to add the complicated things to find outsized success in the financial markets. Many new traders make the mistake of taking in too much information at the start of their trading business.
Trying to understand too much information at the start of your foray into active trading is a recipe for failure. I have seen countless traders enter the market with their brain bursting from information overload.
These traders often suffer from a malady called “paralysis from over analysis”. This malady is the death blow for success in the financial markets. Its end result is indecision and indecision is the enemy of every active trader. Traders actually become paralyzed and just sit there watching the market rather than making critical decisions.
Now that we understand the critical nature of keeping things simple in the stock market, what’s the next step for success?
The next step for trading success is to break down the seemingly complex process of active trading into its crucial parts.
The primary parts of every trade are the entry and the exit. This is how money is made in the stock market. The trade is entered in an optimal manner and then exited with precision.
Over the years, I have learned a variety of technical tricks to make the entry and exit of trades in the most optimal manner. Note, I am not saying profitable as not all trades will be winners. We have no control over this, but traders can make certain they are consistently doing the right thing when it comes to entries and exits.
It is from this consistency that profits will be earned over time.
First, let’s take a look at my three favorite technical stock entry techniques.
The 3 broad active trading entry triggers are The Trend Entry, The Reversal Entry and The Pattern Entry.
Each one of these entry methods should have a place in your trading arsenal.
It’s important to note that none of them are fool proof and knowing how to exit is another key to success. We will look at technical exit tricks next.
- The Trend Entry
This entry is also known as the break out or new high entry method.
The way this entry works is to pre-set a price criteria for entering the trade. The criteria can be many things. One example is to buy the stock when it is making a new monthly or yearly high.
This new high is specific to the time frame you intend to trade. The shorter the time frame, the less time for the high. Day traders can enter on hourly highs for example.
The winning theory behind the trend entry is that the momentum will continue after your trade is entered in the same direction.
This method has its adherents and there is an entire group of traders (some ultra-successful) known as the “turtles” who live and die by the trend trigger entry method.
Trading researcher Michael Covel has written an excellent book on Turtle Trading called The Complete Turtle Trader for those who would like to dig deeper into this entry techniquOther Trend Triggers include, when price is in an uptrend as evidenced by the 20 period Simple Moving Average, and breaks above the 20 SMA by a full bar on the chart.
2. The Pattern Entry
This entry is a subset of the trend/break out entry. There are countless patterns that can signify entry points in the daily gyrations stocks.
Let’s take a look at the triple top pattern. The trader simply draws a line across the chart where the triple top is evident and enters the trade long when this line is broken on the upside.
Once the trade is entered, this line acts as technical support and stops should be placed not far below this support line.
Other patterns entries can include a wide variety of pattern break outs.
- The Reversal Entry
The reversal entry is the polar opposite of the trend entry. Traders who use this method are believers that stocks have a tendency to reverse rather than trend in the same direction.
It is better suited for short time frames when many studies have revealed that the odds are better for a reversal than a trend continuation.
Studies, such as the ones outlined in Larry Connor’s seminal book “How Markets Really Work” appear to confirm the veracity of this method. This book lays out the reasoning behind the short term reversal entry method.
A common Reversal Trigger would be buying a 5 day low in stocks in anticipation of a bounce.
There are many other methods that work on this same idea, overbought and oversold indicators, Bollinger Band pull backs to the SMA used to determine trend are all Reversal Triggers. Reversal Triggers are also known as Fade Trading.
Now that we have taken a look at my three favorite trade entry methods, let’s review the second half of the successful trading equation—the exits.
There are the 3 basic exit strategies that we are going to talk about for this article, stops—both hard and soft, trailing stops, and averaging out.
Let’s start with the most basic exit method,
1. The Hard Stop.
A hard stop is an order to close the trade, placed immediately with your broker after or at the same time as entry.
This is the fixed increment that you are willing to lose on the trade should it not behave as expected. For example, if you enter a stock at $15.00 and are willing to lose $0.50 cents per share before admitting that the trade is wrong, the stop order would be placed at $14.50.
Should the shares drop to $14.50, the trade will automatically be closed protecting you from additional downside.
Some skilled traders prefer soft stops, often called mental stops. These work on the same principle but they are not actually placed in the market; forcing the trader to relay on discipline and market reading skills to close an adverse performing entry. Soft stops make sense for traders who are skilled and disciplined enough to close the trade with a loss.
The distance you set the hard stop depends on your tolerance for risk, market volatility, and overall trading plan.
Many traders set a one percent loss rule per trade, stops are set to produce no more than a one percent loss of the allocated trading capital for any one trade.
- The Trailing Stop
Trailing stops is my favorite trade exiting method.
A trailing stop is an exit method designed to lock in profits while giving the trade a chance to keep profiting.
It is basically a hard stop that follows price at a certain increment as it moves in a profitable direction.
Don’t worry, most active trading platforms automate trailing stops. You don’t have to physical move the stop loss order, the platform does it for you.
- The Average Out
The averaging out exit method is used by many professional traders who are trading large numbers of shares. It’s incrementally scaling out of a position. This serves to lock in profits, while allowing a lesser number of contracts to ride on the trade. There are many methods to determine optimal size and exit points.
Now you know six technical trading tricks to optimize entries and exit to help increase your profits!