When it comes to trading and investing there is no “one size fits all” approach. People have different account sizes, timeframes and lifestyles.
The amount of time one has to devote to the markets varies significantly. Some traders spend most of the day in front of the screens watching the stock market while others work full-time jobs and devote a little time in the evenings to managing their investments.
One of the most important aspects to being involved in the markets is “timeframe” and it’s definitely one of the least discussed. Trading is not the same as investing and there’s a vast middle ground. Over the years I’ve talked to hundreds of traders and investors and most seem to identify their preferred timeframe into one of several categories:
1) I don’t hold anything overnight.
2) I’m looking for stocks I can trade from “a few days to a few weeks”.
3) I like to hold stocks for “a couple of weeks to a couple of months”.
4) I’m a long-term investor and will stay with a stock as long as the story is intact.
Number 2 and 3 seem to be the most common and are a good middle ground. When all is said and done, most traders just want to buy a stock that goes up and makes them money and they aren’t as concerned about how long that takes.
You’ve heard the old saying about how buying a stock is easy – but deciding when to sell is the hard part.
This is where identifying your preferred timeframe gets more difficult.
We’ve found that using a mechanical approach to selling a stock works best. It removes emotions from the equation and eliminates the difficulty of making decisions on the fly. Our strategy uses a trailing stop to make the selling decision for us. There’s no guesswork involved and it lets the individual stocks behavior tell us when the upward momentum is shifting back down.
The first thing we do when taking a new position is to set an “initial stop-loss” which is calculated by our system. Typically the initial stop will be somewhere in the vicinity of the most recent swing low. The benefits and pitfalls of using stop-loss orders is a topic for a different post – but the longer you’ve been involved in the markets and the more you learn about trading – you’ll understand that using stops is a necessary evil. Using stop-loss orders prevents a catastrophic loss on any one position.
The Key Benefit of our Swing Trading System is that it Calculates A Stop-Loss Order so We Always Know EXACTLY When to Sell.
An important aspect to using stops involves actively managing them and adjusting them over time – based on the behavior of the stock after we’ve purchased it.
The first goal of using stops is to not get knocked-out by normal price fluctuation. In other words the stop has to give us enough wiggle-room to let the trade work. Once the price moves away from the Entry in our favor enough, the next step is to raise the stop up. Our first goal is to raise the initial stop up to or around breakeven.
Getting Our Stop Raised Up to Breakeven Eliminates All the Stress – and Means that We Can’t Lose Money on the Trade. That’s a Good Feeling.
As a stock we’re in continues to rise, we want to ratchet-up the stop and ride the momentum for as long as it persists. Once the momentum peaks out and the stock starts to reverse, we want to get out and lock-in our profits. The trick is to have the stop far enough away that a small pullback and normal price fluctuation doesn’t take us out prematurely – only to see the stock continue to run higher.
Our Brand-New Automated Stock Trading System employs a complex set of algorithms to calculate EXACTLY where the stop-loss should be at all times. Determining a proper stop-loss level is no easy task and we’ve programed 7 different sets of logic to accomplish what we set out to do – determine the optimal stop-loss level at any given point in time based on that individual stocks own behavior and certain technical levels.
Getting back to the original concept of this post, since we know there’s no “one size fits all” strategy or timeframe, we’ve come up with 3 effective swing trading strategies for trading along with our system. Each strategy uses a mechanical approach and they can be mixed and matched – or you can choose the one that fits your style best and stick with it.
In this section we will review 3 systematic approaches to using our stock pick tables and describe the basic rules for each strategy. Each strategy can be traded on a stock by stock basis, i.e. one at a time, or as a diversified basket approach where you maintain multiple (3-6) smaller positions at the same time.
Swing Trading Strategy #1:
The Short Term Delta Target Exit Approach.
This first method is a short term, take no prisoners swing trader scalper approach. When a stock triggers you will compute your position size and buy that day. You place orders for your stop and target and let the trade work. The advantage of this strategy is that you have well defined high-probability fixed targets that are computed to get you out with quick profits and free up your capital to go on to the next trade. The disadvantage is that you limit the trade’s further profit potential by closing out the entire trade at the system target. This strategy uses “A bird in the hand is worth two in the bush” logic.
Here are the rules for the Short Term Delta Target Exit:
Note: Some trades can run and hit the system Delta Target quickly before the trailing stop even has a chance to begin moving. Other trades you may take longer to follow through and you may see the trailing stop tighten. There are occasions where you will see stock price close near the system target price as well as generate a Parabolic Stop (pstop column). You should move your stop to the pstop level. This will sandwich your trade between a the target and a tight stop with a gain. This puts you in a Win/Win situation.
Swing Trading Strategy #2:
The Buy and Hold Trailing Stop Exit Approach.
The second method is a strategy designed to keep you in trades for as long as they want to run in your favor. Once you trigger into a trade you place an order for your stop loss only (no target) and let the trade work. The idea is to let stock price movement and the system trailing stop make your exit decision for you.
The advantage to this approach is that you can stay in and ride big winners for increased profits above and beyond the system delta target. The disadvantage is that you can see some of your trades hit the system target price but then quickly turn against you and you either give it all back or incur a small loss. This strategy uses “Let your winners run and cut your losers quick” logic. This strategy requires Patience.
Note: Even though this strategy is designed to let the normal system trailing stop auto-exit you from a trade that runs you can also utilize the system parabolic stop. For example, lets say that your trade over a several week period runs 2-3 times greater distance than the system delta target and you notice in the Open Trades Table a system pstop gets generated. This signifies your stock is making an extreme and potentially unsustainable price move in your favor. You can tighten your stop to the pstop level and protect those increased gains. At this point it is likely your stock is in need of a pull back anyway and you may see it show up on the Pending List again in the near term future as price cycles back down.
Swing Trading Strategy #3:
The Delta Target/Runner Combo Approach.
The third method is a combo approach that merges the previous two strategies. After you trigger into a trade you will play half your position for the quick delta target and let the other half run with the trailing stop in an attempt to catch even bigger gains. The advantage to this method is that you open the trade up to the positive aspects of taking quick profits while at the same time allowing your winner to run. You can also tighten your stop to your entry at the point the Delta target gets hit and lock in a small gain as well as prevent any further potential loss on the remainder. The disadvantage to this method is that is slightly more complex and slightly more costly in commissions.
Here are the rules for Delta Target/Runner Combo:
Note: The Parabolic stop (pstop column – Open/Triggered Trades) can be incorporated as a final stop tightening move on stage two of your combo trade as described above in Strategy #2
As I mentioned earlier, these strategies can be mixed and matched and it’s important to keep in mind that none is actually better then the other. There will be cases where using strategy #1 keeps you in a stock for an extended move over a long period if time – because the stock blew past the Target and just kept going.
The 2nd and 3rd strategies are more hands-on and proactive and honestly locking in partial profits when a trade hits the Target isn’t a bad idea. There is no rule that says you have to buy or sell a stock in a lump-sum and exiting a position in multiple tranches has a psychological benefit.
Which strategy you decide to use goes back to the original concept of how much time you have to devote to trading and how active you want to be as far as managing your portfolio and adjusting stops. Whichever one you use you can be confident that employing a systematic mechanical approach eliminates most of the difficult aspects of trading.
Keeping it simple is the best strategy of all. Using Dynamic Trailing Stops to know “when to sell” is the best approach we’ve found in all our years of research.