2. With most swing trades, we are trying to pick the point where the price turns around and goes in the other direction. This is because reversals tend to move the price more quickly in a short space of time than longer term trends.
Example: AREX 9/26/2011 - 1 day chart
Trend = strong down trend.
The trend on this graph would normally signal a short trade, however RSI-7 is way down at 10, which indicates a very high probability of the trend turning around. The price has also penetrated the lower bollinger band in two successive candles, indicating there will be a strong tendancy to 'spring back' if the trend does not continue downwards. Going long in such an aggressive downtrend is a risky trade as if the downtrend continues, we'll be stopped out within a day or less.
4. Fill in the Plan section of the trading spreadsheet with the reason for the trade and the planned position. Our target is to make 3% per trading day, with this being a short fast bounce trade.
3. Determine how much to trade. It's best to stick with the same amount of shares in one stock, so you are comfortable with the win and stop lost amounts related to that amount. Only trade bigger positions when you are comfortable with you record with that amount.
5. Once you had decided to commit to the trade, determine the exact entry point based on the 5-minute chart. This is where patience comes in.
AREX 9/26/2011 5 minute chart. This chart shows the entry point. The stock appears to have found support at $16 after the aggressive 5 day downtrend visible on the 1 day chart. Such an agressive downtrend is perfect conditions for a bounce to occur with the RSI so low. We'll enter at 16.25, just as it starts to tick up and the EMA-8 flattened out then rapidly started to climb. Notice the MACD cross, which signals the start of an uptrend.
6. Fill in the Execute section of the trading spreadsheet with the exact trade entry price once the opening order has been filled. At this point the Last price is the entry price. The Income at Last Price show an $18 loss, which is the commission.
7. Now calculate the "Take Profit Price" and the "Stop Price" for this trade, and enter these into your broker as triggers to close the position automatically - both high (income) and low (expense).
The Take Profit Price is where we will sell the position regardless of what the stock is doing. This is take decision making out of the equation in the heat of the moment. Even if it is going up, we will sell this position at that price using an automated trigger to close the position. This is to ensure that gains are actually converted to cash. The other reason is to capture gains if the price spikes up to this price, even for only minutes while you are not there to hit the sell button. This price should be set at a level where you would be entirely happy just walking away with money in the bank, thinking "that was easy money".
The stop price is the amount that you are willing to lose if the trend does not do what you want. This is also automated using a stop market order. You want a stop market order, not a stop limit. If the stock dives fast and is thinly traded, you want to sell immediately to limit further losses. A stop limit order may not achieve this if your order cannot be filled.
For our AREX bounce trade, we are setting the Stop Price at $15.75, which would result in a loss (expense) of $168. Our Take Profit price is $18.25 which would result in an income of $582.
8. At the end of the trading day, update the Last Price in the spreadsheet based on the closing price for the day. Adjust your Take Profit Price and Stop Price if required.
Wow, our AREX bounce happened as intended! We made 5.97%, or $291 on $4875 capital in a single session. To lock in some of this profit, we will raise the stop price to $16.90, which still gives the stock some room to move, but means our guaranteed profit for this trade will be $177, so we can relax. Our Take Profit Price will stay the same.
Here is the five minute chart to show how the day went. Our initial $15.75 stop price was not triggered, even though the stock did dip back down to $16.20 before climbing fast in the afternoon.
8. Day 2 Begins. As we have an automated 'Take Profit Price, and the automated 'Stop Price' in place that will both make us money if triggered, there is no rush to be at your computer when the market opens. In fact, trading the open is something that is usually just not worth while unless you are specifically a day trader, and very experienced. Trends are rarely visible, and if the market or a stock 'gaps up', the gap is often closed with the first 30minutes of trading, and the real trend for the day only comes obvious later. I usually start looking to see what has happen at between 10:00 and 10:30 am. This is a good time to make decisions, and adjust Stop Price or Take Profit Price triggers based on where things appear to be heading.
Our AREX trade is spectactular! It gapped up to start trading at $17.8, then shot up and triggered our Take Profit price trigger within the first five minutes of trading. Our Take Profit trigger closed the position at $18.25 before we even had a change to check what the markets were doing. In other words, we started the day with real cash in our trading account, not just stocks at a higher value. This trade took advantage of a highly volatile situation to make $582 profit on capital of $4,875, which is 11.9% gain within 24 hrs. A day trader would have missed much of this profit by closing out their position at the end of the day. This trade way exceeded our expectations of 3% profit per trading day so we self-scored a perfect 10. The expense we were willing to occur in this risky trade was moderate at $168.
9. Fill in the Actual area of the trading worksheet to record the details of the trade
The 5 minute chart.
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