In part 1 we discussed how to identify a trend and the importance of understanding the time horizon. Please start with that post so that you understand how I identify trends.
Rules of Thumb
The longer the time frame = the lower the risk
The shorter the time frame = the higher the risk
The higher the leverage = the higher the risk
The lower the leverage = the lower the risk
The stronger the market is trending the more comfortable I feel taking on risk, in terms of position size and time frame. When the market is trending and all of the time frames are lining up then I will make some day trades. However, this has not been the case in months and is not something I am actively looking for.
Risk:Reward
If Real Estate is ‘Location, location, location!’ then in trading it is ‘Risk:reward, risk:reward, risk:reward!’
For me it does not matter if it is shorting Bitcoin' (my favorite asset) or longing a US financial stock (one of my least favorite), if the risk:reward is unbalanced enough towards my favor then I will take a position. If it isn’t a 4:1 bet then I have to be very, very certain in the position.
In order to understand this ratio I must write down my stop loss, and profit target(s) beforehand. The stop loss and profit targets are gospel! Changing them ruins the entire position. Lacking the discipline to stick to the stop loss/profit target in the heat of the moment = lacking the ability to actively trade.
Stop Losses & Profit Targets
Stop losses are usually straightforward. In parabolic markets they can change, but they shouldn’t be much more difficult. One thing that may separate me from other traders is that I like to give my position plenty of room to develop.
I hate getting whipsawed on my trades! It is my least favorite feeling and one that has taught me many lessons.
I am extremely patient and cautious with my entries. I wait until I am very confident in my position and therefore I am comfortable giving it plenty of room to develop. I set it at a level where I know I will not want to adjust it if the market is moving against me. In fact I would probably do well taking the other side of the trade, a/k/a ‘flipping my position’ as soon as my stop loss is triggered. However I have a strict no re entry rule for a minimum of 24 hours after getting stopped out.
In bull markets I set it slightly under the prior low. I will use the weekly chart by default and then zoom in to see if I feel comfortable setting it a little tighter. In bear markets I set it slightly above the prior high. This is usually illustrated by ‘Bill Williams Fractals’.
I will trail my stop loss once a new high/low is established.
If the market has entered a phase 3 hyperwave, as defined by Tyler Jenks, then I will use the Parabolic SAR' instead of Bill Williams Fractals. On the weekly chart I will use the previous SAR' as my stop and trail it as soon as a new one is printed. Or if I am using the daily chart I will set it two SAR’s behind and move it up one each time a new SAR is printed.
In the part 3 we will delve into profit taking.
Rules of Thumb
The longer the time frame = the lower the risk
The shorter the time frame = the higher the risk
The higher the leverage = the higher the risk
The lower the leverage = the lower the risk
The stronger the market is trending the more comfortable I feel taking on risk, in terms of position size and time frame. When the market is trending and all of the time frames are lining up then I will make some day trades. However, this has not been the case in months and is not something I am actively looking for.
Risk:Reward
If Real Estate is ‘Location, location, location!’ then in trading it is ‘Risk:reward, risk:reward, risk:reward!’
For me it does not matter if it is shorting Bitcoin' (my favorite asset) or longing a US financial stock (one of my least favorite), if the risk:reward is unbalanced enough towards my favor then I will take a position. If it isn’t a 4:1 bet then I have to be very, very certain in the position.
In order to understand this ratio I must write down my stop loss, and profit target(s) beforehand. The stop loss and profit targets are gospel! Changing them ruins the entire position. Lacking the discipline to stick to the stop loss/profit target in the heat of the moment = lacking the ability to actively trade.
Stop Losses & Profit Targets
Stop losses are usually straightforward. In parabolic markets they can change, but they shouldn’t be much more difficult. One thing that may separate me from other traders is that I like to give my position plenty of room to develop.
I hate getting whipsawed on my trades! It is my least favorite feeling and one that has taught me many lessons.
I am extremely patient and cautious with my entries. I wait until I am very confident in my position and therefore I am comfortable giving it plenty of room to develop. I set it at a level where I know I will not want to adjust it if the market is moving against me. In fact I would probably do well taking the other side of the trade, a/k/a ‘flipping my position’ as soon as my stop loss is triggered. However I have a strict no re entry rule for a minimum of 24 hours after getting stopped out.
In bull markets I set it slightly under the prior low. I will use the weekly chart by default and then zoom in to see if I feel comfortable setting it a little tighter. In bear markets I set it slightly above the prior high. This is usually illustrated by ‘Bill Williams Fractals’.
I will trail my stop loss once a new high/low is established.
If the market has entered a phase 3 hyperwave, as defined by Tyler Jenks, then I will use the Parabolic SAR' instead of Bill Williams Fractals. On the weekly chart I will use the previous SAR' as my stop and trail it as soon as a new one is printed. Or if I am using the daily chart I will set it two SAR’s behind and move it up one each time a new SAR is printed.
In the part 3 we will delve into profit taking.
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