Trend, swing trading question

Discussion in 'Trading' started by grtrader, Jan 27, 2010.

  1. grtrader



    I am a beginner and have the following question.

    Let's say you short a stock on a negative MACD divergence, catch a new trend and then add to the short position on a pullback to the moving average. Let's assume that the stock continues to decline.

    1. Where would one normally put their stops: just above the most recent peak or above the upper channel line or any other point.

    2. Should partial profits be taken? If yes when?

    3. What is the criteria for exiting the trade (i.e. how to recognize that the trend is over).

    4. Any other ideas.

    Would appreciate any advice.

  2. MACD is not profitable over time, so you're essentially wasting your time by taking signals from it.

    Everyone will have a different answer. There isn't a "normal" or "regular" way to trade. Everyone does it different and everyone has their own rules. For example, some people go with the trend and take profits when they think the trend is over. Some people go against the trend and take profits when price retraces. Some people enter at other points and take profits after a certain number of points/ticks/cents increase in price.

    Depends on the style and who is trading it and what they like to do.

    There are 100 page threads based around "how to know when the trend is over." The truth is that no matter what anyone here tells you, or what shitty software or indicators vendors try to sell you (or even people here try to sell you over PM), no one knows for sure when the trend is over.

    There are some ways to guess when the trend might be over based on price action, but an indicator certainly will not tell you when a trend is over.

    Yes. Since you're a beginner, you are still thinking that indicators are going to be helpful. Don't worry, all traders go through this stage. I was there for over two years. It will go like this:

    First you look at all the commercial indicators (like MACD, Stoch, RSI, ADX, all the other ones you are reading about online and in books). Each one looks cooler than the last one, because they are shown in situations where they would have actually worked. But the more you play with them, the more you realize they are not profitable over time.

    Then you go looking for the secret combination of indicators. "if MACD doesn't work maybe MACD and stochs will work together!!!" Then you'll realize that's not the case.

    Then you go looking for the super secret indicator that works! You find some vendors selling "super secret indicators" but hopefully you don't pay the hundreds to thousands of dollars they want for them, because they don't work, either.

    Then, if you haven't blown out your account yet, you program your own indicators that probably work better than the commercial ones you were looking at, yet they still aren't consistently profitable over time.

    Finally... if you make it this far you begin to take the indicators OFF your charts and begin looking at other things, such as price action, price patterns, statistical aspects, correlations, quant stuff, etc., and then, maybe then, you might start to understand how to make money.
  3. spindr0


    OP... I second this. MACD is a lagging indicator that can also be misleading. Buy signals below zero and sell signals above zero may be totally false since a lessening of the daily ROC causes the indicator to reverse (the diff b/t the 2 MA's narrows).

    And don't ask me what indicators are relaiable... As IronFist stated, they're not.
  4. spindr0


  5. Listen to those who have posted here!
  6. Indicators = money redistribution mechanism
  7. TGpop


    ugh, forget indicators, imo indicators are actually good for trends ( buying OS in downtrend and vice versa) .

    the best strategy i found was find a trend, buy support if it's an uptrend, sell resistance in a downtrend (S/R could be a MA, horiz level etc) : buy the dips sell the rips.

    of course its better to find a trend which is fundamentally strong, hence why i prefer forex. as of now im studying economics so that i can better understand the trends and execute more confidently in currencies (swing trading this is). My day trading approach is using multiple timeframes for trend aligment-i.e. if the hourly trend is down and the daily has just hit some resistance then....

    in other words i recommend:trend trading
  8. What the hell is the wrong with you folks? What the OP wants to know is how to deal with the contingencies and not MACD. If the MACD bothers you so much then replace it with the "lower low" on prices for crying out loud.
  9. Marcel Link, in his High Probability Trading" (2003), makes no bones about the importance of utilizing exits and stops in ure trading arsenal, which I echo for ure benefit.



    Many traders expend too much effort finding entry signal and patterns and not nearly as much time as they should exiting a position. Anyone can enter a trade, but one of the keys to success is knowing when and how to exit it. I would venture to say that most trades are profitable at some point, even those made randomly; by having good exit strategy one can learn to capture more profits and lose less.

    Getting into a position is only one piece of the trading equation. Knowing when to get out on both the losing and winning sides is another and probably the more important aspect of trading. Most losing traders lose because their winners are too small compared with their losers. A lack of good profitable trades can hurt a trader as much as all his losing trades will.

    Probably the most quoted rule of trading is "cut your losses and let your profits ride." Surprisingly, many traders do just the opposite. They quickly dispose of the winner while holding on to their losers, praying for a reversal as they watch them sink even lower. Until a trader can learn to get out of a losing trade, place a stop properly, hold on to a good position, and know when to take a profit, s/he will find it hard to be successful.

    1) Getting Out Too Soon

    There is no feeling worse than missing a great trade because you erred on the side of safety and exited prematurely. Some traders are so concerned about taking profits and having a high winning percentage that they take many small winners because they are scared to lose. Taking too many small profits without letting good trades develop is a bad practice that may keep you from becoming a big trader, as you never allow a potentially powerful trade to get going. Sure, you will have more winning trades and a higher win/loss percentage, but this may come at the expense of total profits in the long run. There are traders who do quite well by repeatedly taking small profits, but what is key for them is that "they take even smaller losses".

    2) Letting Profits Ride

    Nobody can ever accuse me of getting out of winning trades too soon; I always hold on if something is working. My problem has always been holding losers longer than I should, not letting profits ride.

    When a trade is going your way, you want to hold it as long as possible without giving back profits. It takes only 1 or 2 good trades to make up for 10 small losing trades, and so if you are in a good trend, stay with it. Have a trailing stop or retracement level you are willing to let a profit retreat to, and if it doesn't hit it and you see no other reason to exit, hold on for the ride.

    One way to hold on longer is to have a plan in advance that keeps you in the market until a certain target or condition is met, unless of course you get stopped out. By having a target or condition you will avoid the temptation of getting out with a quick profit.

    There will be time when you feel that it is time to exit a trade with a winner, such as after a big buying climax, where the market makes a big move on increased volatility. This is normally the time to get out with a winner instead of giving it the opportunity to come back. After a big move the odds are strong that the market will retrace a bit, and so it is smart to take some profits. You can always get back in when the market stabilizes.

    3) Losses are More Important than Winners

    Just as every real estate investor knows that the three most important things are location, location, location, a trader should know that cutting losses, cutting losses, and cutting losses are the three keys to successful trading. Even more important than how much you make on a trade is how little you lose on the losses. When you are considering exit conditions, the first thing you want to know is where you will be getting out with a loss that will not do much damage.

    Only after you know what your worst-case scenario risk is should you even bother thinking about how much you can make. Losing positions must be closed as soon as possible. Staying in a bad position because one doesn't want to take a loss is not how a trader makes money. LEARNING HOW TO LOSE PROPERLY IS ONE OF THE MOST IMPORTANT ATTRIBUTES OF A SUCCESSFUL TRADER. Though holding on to a good trade that is working is critical, unless you know how to exit bad positions, you won't get very far as a trader.

    One thing you should try to get into your head is that a loss is different from losing. Every trader will have lots of losses; they are part of trading. Losing, in contrast, is the result of letting little losses become large losses. The more quickly you understand that losses are normal and are expected half the time, the sooner you will be able to exit bad trades immediately. A WINNING TRADER IS ONE WHO KNOWS HOW TO LOSE PROPERLY.

    There is also a fine line between cutting losses short and taking loser too quickly without giving trades a chance to work. You need to let trades develop, but you also need to be quick to get out when you know you are wrong. A good exit strategy will be a mixture of letting trades work to their best potential and not letting any trades hurt you.

    4) Exit Strategies

    The problem many traders face is that they don't know what to do when they have a gain in position. The right choice will ultimately hinge on the market condition, your target goals, and your risk levels, but some of the strategies you may use are outlined below.

    ● Exiting in Stages

    As part of a good exit strategy one should learn how to scale out of a trade in stages. One may do better by scaling out of a trade by taking profits on a portion of the position and hold the rest in case the market continues its move. By doing this, at the worst you should make some money. If the market starts to go back up, you can always take advantage of the strong move by adding to the position you have left. But while the market consolidates and runs a risk of coming off, you are at least cutting your exposure and booking some profits.

    You have to be strict with the exits on the losing side as well. If it doesn't work immediately, you want to exit a third of your position quickly; with the other two-thirds you may use your normal stop area or exit when you know the trade is hopeless.

    ● Getting Out When It's Time (Namely, Getting Out When You Want to, Not When You Have To)

    Everyone has experienced a trade that started off great only to turn out to be a loser or a trade that went from a small loser to a real big loser. Many times you know you should be getting out, but for some reason or another you miss the chance and get stuck in the position. FAILING TO EXIT A TRADE WHEN IT IS TIME TO DO SO WILL BE COSTLY. Once an exit is missed, a trader has two choices: wait for the next opportunity to get out or get out no matter what the price is. Waiting for the next chance or hoping to get bailed out is how a trader can wind up in a deep trouble. Once you know you're wrong, you should exit the trade without looking back.

    ● Exiting When the Resons Why You Entered Have Changed

    Once the reasons you got into a trade have changed, you should get out of the trade. Accepting the fact that you were wrong and exiting the trade is very important. It doesn't matter if you are up or down; once the reason you made the trade is no longer there, you should be thinking about getting out. For example, if you bought a stock because it was strong relative to the market but it no longer seems strong, exit the trade. If you get into a trade because of a support level or some indicator and it fails to do what it should do, don't wait to get stopped out; as soon as you know you are wrong, get out. If you buy because the market is near a trendline and you think it will continue to trend, but once it breaks that line, don't hesitate to get out at a moment's notice.

    5) The Goal of the Stop

    The first and most important goal of a stop is to control losses. This is what keeps trader in the game for the long run, giving him a chance to succeed. Without stops a trader can let bad trades get really out of hand and could lose track of his game plan. To be a successful trader one needs to know how to preserve capital. This is done with good money management skills, risk control, and knowing where to place stops. Knowing where you will get out before trade is made is important so that you can manage risk and determine if the risk/reward ratio makes the trade worthwhile.

    Stops should be an important tool in any trader's arsenal of weapons, but many traders don't know how to use or place stops. They may place stops randomly, not basing them on what the market suggests a good place may be. Instead they have a dollar amount they are willing to lose and use that for a stop. In placing stops, it's critical to place them where the market suggests is a good place to put them, instead of basing them on how much a trader can afford to lose. Otherwise, stops can become too close and trades that could have been good may be stopped out as losers because they were never allowed to work. Even worse is the situation where stops are too far away and a trader loses more than he has to.

    On the other hand, you never need to wait to get stopped out. If the trade feels wrong, just exit it even if it's barely against you or slightly in your favor. This can save you a lot of money in the long run. Say you got into the market because of a breakout and it fails to follow through as planned; instead it just lingers. There is no need to wait until the market hits your stop level to get out. If it isn't working as it should, odds are that eventually it will hit your stop so why not take the small loss now and try again later?
    #10     Jan 30, 2010