Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
How I’m Becoming More Patient with My Trading
12/09/2009 12:01 am EST
Patience is a core skill for any trader, and for a momentum/scalp trader like myself, adding some more patience to my game has been a hard challenge to tackle. One of the major adjustments I have made to my trading is that I am being far more selective with my setups, and I am holding positions for longer periods of time. Instead of making dozens of trades in one stock throughout the day, I am searching for one or two good risk/reward plays across a basket of stocks and ETFs and making just one or two trades in each.
As I continue to follow the market and adjust my trading to new market conditions, I am finding that being patient is just as much about waiting for your entry point as it about waiting for your exit point. “No one ever went broke taking profits” is one of the more overused clichés in trading and investing. It might be true, but I can assure you that having a solid plan for each trade, one that matches a high-probability setup with a good risk/reward ratio, is far more important than simply always booking small profits. As you are trading and holding a position, you will often have to resist the urge to take your profits out of the market if it is not in accordance with your plan and your stock has not yet reached your planned target. If you are always booking small profits, you may find it difficult to make money in the long run, as your many small wins may simply not be enough to cover your losses.
As traders, it is our job to adapt to changing markets. No strategy or system works forever. And while there are certain trading fundamentals that will always be relevant (i.e.: discipline, patience, proper preparation), we always to need to be cultivating our edge and looking for new ways to make money. Below is a quick rundown of three shifts I am making in my general trading approach as I adapt to the current market:
1) Follow More Stocks
I know this hasn’t been the easiest market to trade, but like in any market, opportunities are abound if you are well prepared and focus your energy in the right places. For the past several months, every day, several of the 50+ stocks I usually follow present at least one good trading opportunity, and in order to capitalize on them, I need to be constantly preparing to trade off of information I have collected in previous days/weeks. This is a bit of a diversion from how I would previously trade, where I might make dozens of trades in one stock or ETF, trying to milk it for all it was worth. Spreads are tighter, and moves are smaller, and I think it is paying off to try to be involved in several stocks during any given day as opposed to focusing on a single stock. The exception to this is if a stock is displaying exploding volatility on a major news story. Usually, those plays will demand all of my attention.
2) Look for Fewer Setups/Trades in Each Stock
In each of the stocks I am following, I am trying to limit my trading to just one or two levels/setups that I am going to trade each day. Whereas in a higher-volatility market, it may be more profitable to scalp all day and make dozens of trades in one single stock (as you might expect several large moves or reversals), I am finding most stocks I follow will have only one or two good moves a day (if at all), and I need to be much pickier about the prices and setups I am looking for.
3) Use Longer Holding Periods for my Trades
Yeah, it’s nice to catch two points in 30 seconds, flip the position, and catch a point the other way, but it’s just not happening like that right now. Stocks are moving less intraday, and they are taking a longer time to make their moves, so the average holding periods for my trades has increased drastically. Sometimes in order to do this I have to filter out a lot of the noise that occurs in a stock as it trends its way in a certain direction. If I am in from a good price and the trade is working out, why mess with it as it zigzags toward my target?
This is just a very basic rundown of some of the adjustments I am attempting to make in my trading. So far, I believe they are working pretty well. As a professional trader, I am always working on my skills and looking for new edges and opportunities in the market.
A solid example of a setup many traders on our desk were able to capitalize on last week was AIG above 30.50. On Monday, after breaking down below 32, AIG made a feeble attempt to bounce off 30, only to fail several times in the 30.40 area before it went down another two points to 28. On Tuesday morning, there were a handful of positive news stories out on AIG, and the stock was gapping up. After selling off right on the open, AIG bounced off of 29, made a powerful up move towards 30.50, failed there the first time, but then broke above. I was long above 30.50. My target was 31.50. I held my core position to just below that price before I sold. Yes, the stock went up another 30 cents, but it’s much more important to me that I was patient and disciplined, and stuck to the plan to hold AIG long for a point. The easy thing to do would be to dump the stock at 30.70 or 31 when it slowed down, take the 20 cents or half a point of profit, pat myself on the back, and go grab an early lunch. No one ever went broke taking profits, right?
Well, based on the chart setup, the recent history of the stock, and the confirmation we received from reading the tape when the stock broke above 30.50, I decided that I was going to hold a core position to my target of 31.50, and that’s exactly what I and some of the other traders on the desk were able to do.
Another example was a recent day’s setup in Amazon, which has been one of the strongest stocks in the market. One of the better traders on our desk was able to catch about two points as AMZN was making new all-time highs. This trader had a well-prepared plan, understood the potential for the stock to move, had the patience to hold the stock for several points, and the discipline not to sell through some of the downticks and take his profits too early. Nice job!
When you have your fingers on the keys, and the stock is ticking up and down, it can be easy to overtrade and not hold positions long enough. Having patience and being able to hold a position for a longer move stems from having a solid, detailed plan, and having the discipline and determination to stick to that plan.
When you get into a good play and the stock starts moving in your favor, add a little dose of patient thinking to your plan when the setup calls for it and you may find yourself taking larger bites out of the market than you previously thought possible.
I am interested to hear from other traders out there about some of the adjustments they have made in the past few months or are currently making. Please feel free to leave a comment below.
By Dov Quint, trader, SMB Capital
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