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The Anatomy of a Trade: Trading Analysis and Risk Control
11/16/2007 12:00 am EST
In his workshop sponsored by the Charles Schwab Corporation, expert trader Robert Deel cautioned traders that interpreting the data—not the news—will help them become a better trader. He added that traders must realize they are competing against professionals—some of the best traders in the world—and continuing education is crucial to honing their skills.
Robert shared his favorite trading methodology—the tops-down approach which first focuses on the sector, then the market, then the stock. He noted that as much as 80% of a stock’s trend is due to sector influence.
He then gave traders some of his basic tenets. Successful trading requires a thorough understanding of the concept of extremely overbought and oversold. Often, extremely bullish is actually bearish and vice versa. But he advised that you never want to take a trade from an extreme position unless you have had a reversal from that position. Just because it’s overbought doesn’t mean it’s time to go short.
Traders must also remember that markets are dynamic, not static, and your method for trading has to adapt to the dynamics of the market itself. Robert cautioned traders that no cookie cutter approach will work all the time, so if you are using mechanical trading system, be very careful, as in a market like the current one, rote systems will blow up 95% of the time.
Robert noted that there have been 21 major changes in the marketplace from 1996-2006. And on the NASDAQ, back to 1971, there has typically been a trend change in the middle of the year, from May to October. Usually if trend is up and going into the midpoint of the year, you can expect a potential reversal of the trend, and vice-versa. This can be very important for the beginning of a trade or long-term. Having said that however, Robert suggested that traders keep a short-term focus.
He said that long-term exposure to the market is hazardous to your health and the best risk control is at the short end, as there are many factors that can compound risk in the long-term. His sweet spot for trading is three-to-five days, with a maximum of 14 days.
Robert advised to trade only when volume is there, not premarket or aftermarket.
Robert commented that less than 2% of the American public shorts stock in their lifetimes. But it is crucial in order to trade professionally. Otherwise, you’re only trading 33-1/3% of the time. If you go short, you have the opportunity to make money 66.6% of the time.
He also cautioned traders to stay away from negative return, or dead zones when there is just a choppy market and no evidence of a trend. His mantra: no trend, no trade.
Robert emphasized managing risk, and suggested using volatility stops, not percentage or dollar stops. He also recommended that traders place three different stops—outside and inside the standard deviation, as well as very close to the lows of the stock itself. He commented that a big mistake often made by traders is conditioning yourself to accept larger and larger losses. He advised that you must be an absolute draconian risk manager or you’ll blow your account out.
In the latter half of his presentation, Robert delved into the nitty-gritty of trading, expounding on his favorite indicators, including:
- Change in price/time, direction, strength, and acceleration
- 12-, 20-, and 50-day exponential moving averages
- 12-period Bollinger Bands
He then discussed the application of sophisticated statistical analysis to obtain a probability distribution, deviation and variance, which will show you that reversals typically take place from 2-2.5 standard deviation levels. He also shared specific trade set-ups based on various findings.
Robert summed up his program by listing the steps in his methodology:
- Tops-down analysis
- Momentum strategy
- Available trading vehicles
After reviewing these concepts, he then applies multiple time frame analysis to help him determine you how much money is in there over different periods of times.
In closing, Robert advised traders to use the best technology, but warning that technology alone will not make you money. You need education, experience, and time.
He gave a brief view of how to successfully use Charles Schwab’s Street Smart pro trading software and also offered a preview of coming updates.
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