When it comes to stock trading, it is always important to keep a firm grip on your greed. This is because though it is the wish to earn some easy money that allures you towards stock exchange, excess of anything is bad, so is the case with greed. You can't kill it, for it is a normal human nature, but you can and have to control it, for the sake of its own satisfaction. If you have a good patience and control on greed, you are ultimately going to make some good bucks, which gratify your greed only. But the points to remember is never let your greed blindfold you.
This is where setting limits discover their significance. The point is:
?Whenever you trade stocks, you have to set an upper limit and a lower limit for the price of the stock where you would sell the stocks you hold.?
SETTING AN UPPER LIMIT
Most of the times when you buy a stock, you expect to retain it until the price rises, at least to a limit that gives you some profit even after paying your stock broker his fees. But this seldom happens with the new chaps, who are kind of over-enthusiastic and over-expectant from the stock trade. Even when the stock price rises sufficiently, they expect it to rise more and this greed driven expectation goes up and up. And they don't sell the stock, holding it with them for longer in a hope to earn more. However, there is a good chance that the traded stock price falls, and once it is so, they lose, instead of winning profits, which could have been the case if they had let the stock traded out when its price had risen. See, how greed plays its adverse role.
SETTING A LOWER LIMIT
On the other hand there is a similar cause for why you should set a lower limit for the stock. Since expectation always sparks in mind, you cannot believe that you have lost even when there is a good depreciation in the value of the stock in the stock exchange. You expect the stock price to rise and even if your stock broker suggests so, you don't want to trade the stocks away. What might happen is the stock value falls further down, causing a greater loss. If you would have sold the stocks when you see it falling up to the lower price limit you have set, you would have lost, in deed, but a planned and affordable loss in the stock trade. But now you have lost greatly to the stock exchange. To avoid such great losses, you have to set a lower limit and stick to it.
So, you must learn to make wise decisions regarding the lower and upper limits for price; when the stock price touches either of these points, you have to trade away the stock even though you expect the stock price to rise in the next few minutes.
This strategy protects you from bigger losses and you can do the stock trade safely in the stock exchange. Some good stock brokers also use this strategy to play it safe.
One of the most common questions is: "How do you set up your charts when looking for a trade?" First, you have to know the basic timeframe of the trade you are about to make. Is this going to be a 30-200 minute trade? A 1-2 day trade? A 3-4 week trade? Having at least a vague idea of the expected hold time of your trade is important in knowing what length of past history is relevant to your trade.
As a basic rule, I believe the most important chart is going to be one that shows approximately 8-10 times the length of time that you expect to hold the position. Example---if you are looking at a 30 minute trade, you should be looking at a chart that shows the last 300 minutes of trading activity on that stock (5 hours). If you are looking for a 3-4 day swing trade, look for a one month (30 day) chart--this is the setup we have used to get the huge profits that we have seen in our Small Cap Trading System.
Second, I almost always use candlestick charts, and we like to set the candlesticks at a duration that is about 1/20 (very approximate---the point is to have each candlestick as a small part of your trade when it is completed) of the estimated hold time of my position. If I am looking for a 30 minute trade, I will use a one minute candlestick. If I am looking for a 5 day swing trade, I will set the candlesticks at every 2 hours or so. This gives you a chance to see patterns in the sticks while still keeping enough of them on the screen to see the trend from stick to stick.
Now you need to set up your indicators. At first, the only thing other than the price that I want charted is volume. Don't worry about putting any other indicators up until you are working to DISPROVE your theory. I always set up volume as a separate panel below the chart, but I know plenty of traders who like to overlay---it is personal preference.
Just so you know, we may look through 200-500 charts before ever spotting a big-profit trading opportunity in some cases, and other times I may see 3 in a row. By looking at price and volume alone, I can usually tell if we want to trade the stock within 3 seconds of looking at the chart. Of course when you first get started it won't be as quick for you, but YOU SHOULD NEVER HAVE TO LOOK HARD FOR A REASON TO TRADE A STOCK. As a trader, your job is to find the chart, the stock, the position that jumps out at you as a real opportunity--not to convince yourself why you should buy XYZ.
Once I see a chart that looks like it has real potential (solid trendline on increasing volume, nearing a triple top, exaggerated gaps, etc.) I will then try to DISPROVE my theory. That is when it is time to bring out all the indicators that you like to use (moving averages, Stochs, RSI, etc) and use them to try to prove your theory wrong. Look for reasons not to make the trade. Most traders see a chart they like and then bring out the indicators to support themselves. YOU WILL ALWAYS SEE WHAT YOU WANT TO SEE! Look for ways to dismiss the trade, and if you still can't find any big holes in your case, execute!
Here is a quick review of the important points:
1. Determine your projected hold period
2. Look at chart that is 8-10 times as long as projected hold period
3. Use candlesticks of approx 1/20-1/40 of projected hold period
4. Filter out all the charts that don't have clear pattern or trend that you like
Disprove your analysis with indicators---DO NOT look for reasons to support your original thought.
Both Vijay & Robs are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Vijay has sinced written about articles on various topics from Investing and Trading, Painting and Investing and Trading. Why Choose Sogoinvest:Contact sogoinvest:. Vijay's top article generates over 49500 views. to your Favourites.
Robs has sinced written about articles on various topics from Finances, Forex Trading Forex and Penny Stocks. Mouser57 of stockhideout.com Stock Message Board. Robs's top article generates over 18100 views. to your Favourites.