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Welcome to our  EDUCATIONAL TIDBITS  page...   

   This page will offer, from time to time, new educational bits, concepts and ideas for our members...

WARNING !
If you are NOT one of our ACTIVE MEMBERS, you should absolutely NOT use the following information in any way
as it does not detail our whole trading philosophy and techniques as taught in our PRIVATE COURSE or at our LIVE SEMINARS and also it will contain terms and concepts which you do not know.

 

    All the material included in this page as well as on all of our Website are Copyright © 1997, 1998, 1999 by PM Traders, Inc.. All rights reserved.This material is for personal use of our MEMBERS only. Republication and redissemination, is expressly prohibited without the prior written consent of PM Traders, Inc.. Those using this information for trading purposes are entirely responsible for their own actions. No guarantee is made that those techniques will be profitable or will not result in losses. Anyone using part or all of this material agrees not to hold P. MONMOINE or PM Traders, Inc. responsible in any way and by any means for any of the monetary or non monetary (stress, emotional suffering and others) losses resulting from that use. Under no circumstances does the information in these pages represent a recommendation to buy or sell stocks.

 

List of the EDUCATIONAL BITS on this page...   (to go to any of them, simply click on their title)

How to use a "SMART TRAILING STOP PROFIT TAKER" ...

Example of WHEN to IGNORE a P2™ …

TIME & SALE Window

EPE - EMERGENCY PARACHUTE Exit

 


How to use a "SMART TRAILING STOP PROFIT TAKER" ...

    What I call a "Smart Trailing Stop Profit Taker™"(S TS PT™) is actually the PROGRESSIVE use of a STOP order to AUTOMATICALLY TAKE YOUR PROFIT at some stage of its move.

As the price keeps moving, the EXISTING STOP is CANCELED and a NEW ONE ENTERED, at a HIGHER PRICE(or LOWER price on a SHORT position).

The whole philosophy of a S TS PT™ is to allow you to RIDE YOUR STOCK AS FAR AS POSSIBLE WITHOUT SUBJECTIVELY EXITING AT A RANDOM POINT.

So when you keep adjusting your STOPS that way, either one of your S TS PT™ will be hit on a REVERSAL or you will simply close that trade right before the close of the market for that day.

If you decide to trade as a PIG, you will encounter some days where you will be in on a RUNNING stock which will, that day, run much more than its ADR™. Now, if you exit that trade at any point to take your profits, whether it is based on the ADR of that stock being reached, on the market reversing, or for any other reason … you will obviously never be able to "milk" any of those winners/runners on those extraordinary and unusual days. And you won’t be able to "ride" them very far as, by definition, you will be OUT of that trade.

So, a great tool and technique to allow us to take full advantage of those days, is to use those S TS PT™.

They will let you "stay as far as possible in those trades" instead of deciding ON YOUR OWN of some exit point and therefore, deciding where that stock is actually going to STOP running when YOU get out of it.

By now, you very well know that we just cannot pick tops or bottoms on a consistent basis as, saying that we could, would simply be stating that we can predict the future … which is of course impossible.

So, with a S TS PT™, as the stock runs UP (we will consider that we are LONG on it for this 1st example), instead of "getting out somewhere", we are going to "TRAIL" that run up by progressively canceling our previous "SELL STOP" and replacing it with a new one at a higher price.

By SMART, I mean that we do not enter those STOPS at RANDOM… We NEVER enter ANY of our STOPS at RANDOM (whether for a P1™, a P2™ or any other technique).

We position them right UNDER the previous bottom on the charts and we never enter them on whole numbers (as explained in all of my previous description of the various kinds of "SMART" orders). We look at previous "resistance" and "support" and at ANYTHING that "makes sense", that makes the price selected for our STOP to be "SMART" and not random, subjective and emotional.

The goal being of course that, WHENEVER the stock will SUDDENLY REVERSE, your S TS PT™ will be HIT, you will be OUT OF THE TRADE and you will have an almost GUARANTEED PROFIT on that trade.

So for example, in the first chart below, I started by entering, as we would on any trade, a first STOP at the price shown by arrow #0 (this was of course a traditional SSL™ (SSL 0) as, if hit, I would take a loss on that trade … and not yet a profit), right under the previous bottom of my entry price. If I had wanted to use of the widest STOP, I would have had to enter it under the LOW of that day (bottom of the P2 ™) around 112 3/8, but as my entry was already pretty far away from that low, I decided on that trade not to risk that much. If that stock was going to go against me I decided that I would bail out pretty quickly and only accept a small loss.

Now, around 11 a.m., as soon as the price reaches almost 117 and starts to be at a reasonable "distance"(your own experience in your own married stocks will allow you to define that) from my entry price, I decided to adjust my initial SSL0 for the first time and move it to the arrow #1, which is right under the previous bottom created by that stock. So I did CANCEL my first SSL0 and entered a new one, SSL1 at arrow #1 at 115 3/8. If this STOP gets hit, it will still be for a small loss. We are not yet in the "PROFIT ONLY" zone.

Around 11:30 a.m., the price starts to run again and is now over 117 ½. Therefore, I decide to adjust my SSL #1 to the position showed by arrow #2, which is again, right under the previous bottom(the bottom which was formed between 11am and 11:30am). We are now, for the 1st time, in a situation where, if our STOP is hit, we will be at a PROFIT anyway…

With the same reasoning, at 11:45 a.m., I adjust again my S TS PT to the position shown by arrow #3.

Now, on that specific trade, I decided to get out around 118 1/2 as it was already a very nice trade and a very sweet profit.

If I had not used the technique of the S TS PT™, I would certainly have gotten out much earlier than that price but, with the S TS PT™, I had the peace of mind of knowing that my "worse case scenario", if my stop was being hit, would still be a nice profit.

Of course, I could have also decided to push it to the extreme and not get out that price, stay in the trade, and keep adjusting in my S TS PT™ to the positions shown by arrows #4 and #5. This was a very valid option as well.

The concept, when you keep pushing in that way, is that either one of your S TS PT will be hit or you will simply close to trade right before the close of the market for that day.

The kind of STOP which you should use for that technique would be a SELL STOP MARKET (once you feel confident and knowledgeable enough you can also use a SMART SELL STOP LIMIT, but that of course expose you to the risk of missing your exit if the price runs too fast through your LIMIT order and you are not hit!)

 

SHORT:

If you are trading a SHORT position, everything is simply REVERSED and you work with BUY STOP MARKET orders (instead of SELL STOP orders).

You will find here after a chart showing an example of using a SHORT "S TS PT™"…

So the real BEAUTY of that exit technique is that YOU REALLY LET THE STOCK GO AS FAR AS IT WANTS… and as soon as one of your STOPS is hit on a reversal, then be it… but at least you DID NOT GET OUT "AT RANDOM" or emotionally…

You might be surprised by how much you can "milk" out of some stocks if you get on them on one of those running days. It is excessively frustrating to get in on a trade very efficiently, get out after 2 points thinking that you nailed the trade of the month … only to see it running 10 more points … without you! That technique can help you solve that problem.

As for everything else in our trading World, we have LOTS OF INTELLIGENT CHOICES FOR OUR EXITS … and it is always ultimately your choice to use one or the other.

 

PS: if this chart is not clear enough on your screen and/or is hard to read, try to PRINT IT ... it should come out much better.

 

Example of possible use of a S TS PT on a SHORT POSITION… Example of possible use of a S TS PT on a SHORT POSITION… Example of possible use of a S TS PT on a SHORT POSITION… Example of possible use of a S TS PT on a SHORT POSITION…

Please also always remember the very valid and wise option to CLOSE ONLY PART(1/2 for example) OF YOUR POSITION as you get close to the ADR™ or for any other intelligent reason and keeping a S TS PT™ for the OTHER PART (the other 1/2 in our example) of your position. That way, you guarantee yourself some profit and you also "give a chance" to some of your shares to run even further…

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    You should never forget to look at and use the "Time & Sale" window which is displayed on most of my QCharts’ workspaces…

 Example of what that window it will look like on your Qcharts …

Looking at it during the trading day will help you to develop a "feel" for what kind of "volume" (SIZE of the trades passing by) is considered unusual or not for each of your married stocks. Is that stock suddenly reversing but the VOLUME OF THOSE TRADES or the SPEED AT WHICH THEY ARE PASSING BY is VERY LOW (weak move) or did both of those just PICKED UP AT AN ABNORMAL SIZE AND SPEED (strong move)? Etc.

ASK, BID...

"Ask" and "Bid" are simply the CURRENT ASK (price at which YOU can buy the stock) or the CURRENT BID (price at which YOU can SELL the stock).

TRADE…
When you see the word "TRADE", it simply means that an ACTUAL TRADE JUST HAPPENED at THAT PRICE and for the SIZE DISPLAYED.

BEST ASK, BEST BID…
Also, you will see the "Best Ask" and "Best Bid" passing by. Those are not actual trades but they are "offers" by the Specialist (NYSE stocks) or the Market Makers (NASDAQ stocks) with a HIGHER ASK or a LOWER BID than the current one. They are "offering" those new prices, hoping that someone will grab them and therefore push the CURRENT Bid or the Ask to that new price.

You will learn very quickly how to "read" and "feel" that … meaning that when you will see that "BEST ASK" passing by and observe that it is being snapped very quickly by someone, becomes the CURRENT ASK, you see a LOT of trades passing by at that price and very quickly again a NEW "BEST ASK" being displayed then, the next move will often be an UPTICK (the price will go HIGHER) etc. Vice versa for the BEST BID and on the downside.

You will soon recognize patterns and how all this actually work and can be interpreted.

HIGH / LOW of the day…
You will notice that every time that a stock is trading at its HIGH OF THE DAY, the trades will be displayed in GREEN. SO if you are LONG, you will live to see those times where the GREEN keeps flashing and running while the stock keeps making NEW HIGHS.

You will notice that every time that a stock is trading at its LOW OF THE DAY, the trades will be displayed in RED. SO if you are SHORT, you will live to see those times where the RED keeps flashing and running while the stock keeps making NEW LOWS.

I call it the "Christmas Tree" effect and, when you are on the right side of those trades, you might end up being happier with this Christmas Tree than with the real one!

Time & Sale GREEN.gif (6047 bytes)     Time & Sale RED.gif (6315 bytes)

 

DOWNTICK, UPTICK …
You will also notice the words "DOWNTICK" or "UPTICK" being displayed…

"UPTICK" will means that you currently are in an UPTICK move meaning that "the last time the price changed, the ASK became HIGHER than its PREVIOUS VALUE". Also, when you will see a "BEST ASK" being displayed, for example at 40 ¼, while the CURRENT ASK ("Ask") is 40 1/8, AS SOON AS SOMEONE WILL DO A TRADE AT that 401/4, then the word UPTICK will also be DISPLAYED as the "Ask" MOVES TO A HIGHER PRICE.

"DOWNTICK" will mean that you currently are in a DOWNTICK move meaning that "the last time the price changed, the BID became LOWER than its PREVIOUS VALUE". Also, when you will see a "BEST BID" being displayed, for example at 40, while the CURRENT BID ("BID") is 40 1/8, AS SOON AS SOMEONE WILL DO A TRADE AT that 40, then the word DOWNTICK will also be DISPLAYED as the "BID" MOVES TO A LOWER PRICE.

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- The " EMERGENCY PARACHUTE EXIT™" rule… EPE™

The rule is as follow…
 You should GET OUT RIGHT AWAY of ANY position as soon as a $X or %Y LOSS is reached  
(whichever comes FIRST)

    This is different from the SSL™ in the sense that you should apply that rule to ANY POSITION, OF ANY SIZE, AT ANY TIME. NO EXCEPTIONS!

    The concept of that rule is that it should prevent you from getting emotionally sucked into losses which could become so big that it would take you a LONG TIME to recover from them … or which could even totally RUIN YOU!

    To give you a personal example to illustrate this concept, at some stage of my own trading journey and based on my experience, my trading capital and my risk tolerance at that time, I used the figures of $200 and 1% as my triggers for that rule. 
   
I knew, at that time, that those levels would trigger "painful" losses for me … but also would keep them at a level where I could usually recover pretty quickly from them. So they were, at that time, my "acceptable level".

 But YOU SHOULD OF COURSE USE FIGURES which MAKES SENSE TO YOU! 
PLEASE DO NOT USE THOSE FROM THIS EXAMPLE!

    I just want to share with you this concept so that you can adapt it to your own situation.

    So please pick your own $ and % LEVELS for it, whatever makes sense to you based on your personal experience, your trading capital, your risk acceptance etc.
    And you should of course ADJUST those 2 numbers every few months, as your experience increases and you can define them more efficiently.

    So I designed this rule to be like an "EMERGENCY HANDLE on a PARACHUTE"…

    As soon as you SEE and/or FEEL things going WRONG with any trade, all that you really have to do is to REMEMBER THAT RULE and JUST STOP THINKING and REASONNING!
JUST "PULL THE HANDLE", SAVE YOUR LIFE and you will have plenty of time to assess the situation later.
But YOU MUST SAVE YOURSELF FIRST!!!

    If you don’t have that EMERGENCY handle, many losing trades will SUCK YOU IN emotionally and financially and you will lose all control and objectivity of the situation.

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    We hope that this will help you...  Enjoy!

 

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