Description

My basic trading philosophy can be summed up by one simple quote:

"Trade the ticker, not the company" - Nate Michaud


Tuesday, February 11, 2014

Question: "What technical indicators do you use and how do you judge risk?"

As far as technical indicators go, I like to keep it simple. Moving averages, trend lines, and advanced metrics have never been of interest to me. I really do think they just over-complicate things. When I'm reading a chart, I'm just using the very basic support and resistance levels. See the chart below of CVM for an example:


CVM had its morning spike up to a high of $1.25, a level that held as a top for the next three and a half hours. The red line I drew on the chart represents this resistance level. The yellow line represents the level that I believed to be support. Just as $1.25 acted as a top for most of the day, $1.18 was acting as the bottom. $1.18 had several more tests than the $1.25 level did, but it held every time. As the stock was channeling between this $1.25 and $1.18 range, I was prepared to buy if the stock broke past $1.25 or perhaps even short-sell if the stock cracked below $1.18.

Once the $1.25 breakout occurred, I bought CVM and decided to use the previous $1.18 support level as my mental stop loss. A lot of people would use $1.25 as their risk level, expecting the breakout level to hold. I don't do this, as I have seen plenty of successful breakouts that are choppy at first. In my mind, I could give my position a little extra wiggle room, because I believed I would only need to be concerned if that previous $1.18 support level failed.

Let's use this example to talk a little more about how I manage my risk. I frequently am asked "At what % do you cut your loss?" The point I want to make clear is that I don't think like that! I want to play off of the CHART, not some preconceived notion of what a good % stop loss is. So then how do I keep my risk under control? I think in terms of dollars, not percentage.

In this case, I knew the support on the chart that I wanted to risk off of was $1.18. My buy was at exactly $1.25. That meant I was risking $0.07/share. But what if support had been lower? What if I had needed to risk $0.15/share instead? I control my risk by taking different position sizes in each of these situations. If I'm not comfortable taking more than a $1000 loss, then I shouldn't buy more than approximately 14,000 shares when I'm risking $0.07/share. In the hypothetical example where I have to use a wider stop-loss, I must decrease my position size so that I don't lose more than $1000. In this example, I can only buy approximately 6500 shares. See the math below:

$1000 (max loss) / $0.07 (risk) = 14,286 (# of shares you can buy)

$1000 (max loss) / $0.15 (risk) = 6667 (# of shares you can buy)

By thinking in terms of dollars instead of percentages, I allow myself to focus on the chart and use that to guide my decisions. Check out the chart, assess your risk based off of key price levels, and then size in accordingly. Please contact me with any questions!

36 comments:

  1. One your best article yet Tim. Immensely helpful. Thanks for posting this.

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  2. Great blog post. I love the way you explain everything. Very easy to understand.

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  3. Tim - How do you decide from how out to choose your resistance and support? Surely if you looked a week (or several months) out, the resistance and support may have looked a little bit different?

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    1. In this case I was going pretty much entirely off the intraday chart. I did a bad job of clarifying in the post but going into new day I would have basically started "fresh" and not considered those 1.18 and 1.25 marks quite as religiously. You're right though, it's good to keep big picture in mind too

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  4. Very useful information Tim. Thanks for sharing. Hopefully this will help me from selling to early at the first sign of weakness

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  5. Quite helpful in assessing how to handle the risk!!..Thanks!!!

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  6. Very nice! In this example, what is your exit strategy when taking a gain? When do you prepare to sell?

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    1. In this example, I was just taking off into spiking. I wound up selling 3/4 in the low 1.30s and then swung my last 1/4 which i got out high 1.20s when the stock couldn't gap up and hold green

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  7. Hi Tim, I'm really enjoying the posts that your doing lately. They've clarified a lot of things for me and it's good to get a feel for how you think when you're assessing a stock.

    Keep it up!

    -ZTM

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  8. Immensely helpful, i dont know if its just me but i feel ive learn more in reading your few blog posts than watching Tim Sykes repetitive DVD collection, no offense

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  9. Thanks Tim. You explain everything in plain English for me. I value your entries.

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  10. Hi Tim,
    Thanks for your quick response to my email. One more quick question. How often do you trade intraday breakouts even if the stock already broke a key resistance level already that day (as in CVM breaking previous high of $1.18 the day you executed your trade at $1.25)? Do you trade intraday breakouts on stocks that are not near a support/resistance level on a daily chart if they are still volatile and liquid? Thanks again for all your help it is GREATLY appreciated!

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  11. Well unless the stock was breaking through a key resistance level, it wouldn't be a breakout. $1.18 wasn't really an important resistance level on CVM, but it did turn into important support that day as the chart developed. It was the 1.25 top from that morning that had held all day, and thus was the key resistance in my mind. Since it was an afternoon breakout, I decided to trade it, even though the stock wasn't incredibly volatile.

    I'll do a followup post soon explaining how I use intraday charts in relation to daily charts since I haven't done a great job of explaining that so far

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    1. First of all thanks for the webinar today, it was very helpful!

      One last CVM question. So just so I understand, you don't necessarily consider recent high's a key resistance level? CVM spiked up to a high of $1.17 on January 23, then consolidated for several days before topping out at $1.16 on Jan 29th, before eventually breaking it the day you traded it at $1.25. Do you consider intraday highs to be more important than previous highs? Hope my question makes sense. Thanks again!

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  12. Your question makes plenty of sense. CVM I did like the fact that it was above that previous high, the reason I hadn't bought it earlier in the day was because I simply don't trust early day breakouts. Once the chart held up all day and we broke through the 1.25 intraday high, I took that as confirmation of the move. I also liked that move because it happened in the afternoon, when breakouts are supposed to be stronger. Unfortunately, there was no follow through the next day, but there still was a small profit opportunity

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  13. This is very helpful..... The % was not working for me, I would end up selling before the stock b/o. This forces me to play the chart... Thank you

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  14. Tim, thanks for the answers! Looking forward to your upcoming intraday vs daily blog post. Take care

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  15. Hey Tim, again cannot tell you how much your expertise is appreciated. Don't know if you have a set time during the day that you trade? Do you stay out from 11-1 or anything specific or just focus on the chart? Unless long do you have a time frame like example stock is consolidating for several hours, would you pull th eplug and possibly re enter later? Thanks again!

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    1. I definitely do the majority of my trading early in the morning, however most of the time I stay in front of the computer all day and track different setups. I don't limit myself to a time of day when I will or won't act, I'm really just going completely off of each stock's unique chart. In the case of your example, I do that very often! I'm in and out of the same stock many times in a day usually, because I want to avoid holding through consolidation

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    2. Hi Tim,

      I was wondering if you studied any material on reading or analysing candlestick charts ? If so, what would you recommend ? My whole point is did you get any candlestick charts course or smth...or just the dvds and videolessons from Sykes.

      Thanks,

      Ditri

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  16. Tim, you say you don't trust morning breakouts but you also say you do most of your trades in the morning. I'm guessing most of those early trades are shorts? I want to focus on buying intraday dips in uptrending daily charts and am constantly tempted to buy in the morning when they're going up very quick. Wouldn't you agree that the biggest moves happen in the morning? Or in the long term this srategy has low odds of succeding?
    Thanks!

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  18. when/how do you decide to take a profit?

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  19. This is one of most important aspects of trading, stop/loss. Thank you for covering this topicTIm. It really helps.

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  20. Could you talk about your experiences with the filling your orders. I am new to this and my fear is in the placing of the order: getting passed by for a fill or getting out to minimize a loss. With electronic trading being so specific, I am not comfortable and I want to be on top of this when I start trading.

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  21. hey time. quick question about risk. I know you like to scale in and out of stocks. My question is. How do you scale in and out of a stock without ruining your risk and accidently being in with too much size, if every time you scale in more shares. your average changes. Also . is it ever a good idea to average up rather than averaging down meaning. Is it a bad idea to scale in. see that the stock is possibly going in your direction, so you scale in higher while anticipating a rip?. hope you can answer this question. been stuck on this question for months now! thanks

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  22. This is incredible. Thanks Tim :)
    .

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  23. amazing examples Tim, thanks again.

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  24. Nice! thats exactly what I was thinking, using previous support as my risk and controlling my size based on risk, happy to see that you confirm this !
    thanks alot for sharing, if you have time check out my blog tell me what you think! its all from studying from you and sykes.

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  25. Tim, thank you for this post! I think this is what I needed to keep my losses small. Great content, thank you!

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  27. Hello Tim,

    Thank you for this great post !

    You said in this example your max loss is $1000 with a $0.07 risk so you can buy 14,286 shares. But if you buy 14,286 shares at $1.25, your total investment would be $17,857.50, right? So it is roughly 5% of your investment.

    So my question is, how could I judge the risk according to the amount of $ that I want to put in?

    If I had only $1000 but I don't want to lose more than $100.

    Should I do $100 / $0.07 = 1428 shares ?

    but 1428 shares at $1.25 = $1785 and I only got $1000

    I'm pretty sure that I'm wrong...

    Hope you still update your blog :)

    Thank you !

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  28. I like the way you think, it makes more since to me!

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