How Can You Improve Your Trading Results?

Successful short-term trading comes from paying close attention to the details and following a set of rules that have worked consistently in the past. Increasing your average returns, even if you already are a successful trader, may be possible if you pay attention to an even wider set of details – probability, statistics, and seasonals, in what is really a Moneyball approach to trading.

You don’t have to remember high school/college math for this. Using basic common sense and some available tools (or your own research) you can likely increase the success rates and net results of your trades.

Do the odds actually increase? You’re not dealing with a slot machine here where the casino can set the payout rate. It is all about increasing the apparent odds of success of each and every trade. Nothing is guaranteed, especially where human nature is a factor. We just want to select trades that appear to have as much going for them as possible, in the hopes they will move in our favor because thousands of other traders are likely coming to similar conclusions.

Having a trading system that gives impressive results on theoretical trades is nice. But the only way a stock will move in your favor is if buying overwhelms selling (or selling overwhelms buying), and this happens because the real volume, the big traders, see certain characteristics that they feel will lead to profitable trades. We want to ride their coattails by identifying the same characteristics and the likelihood of their participation.

Bringing dozens of these little details that can help you select better trades to your attention doesn’t mean you have to remember them all, use every one for every trade, and pass a test on them at the end of the semester.

I will cover many tools, techniques, and higher-probability trade setups and will keep going over them with example after example. Bear with me and it will become second nature to you. When you start mumbling these in your sleep, then my job will be done.

Trim down that trading plan

If you are realtively new to active trading, the very first thing you can do to increase your chances of success is to get the bottle of white-out and trim down your watchlist(s), your trading plan, and your overall focus (you do have a trading plan, don’t you?).

Focus on one trade strategy to start, then add more over time

Pick one trade strategy from your trading plan, ignore everything else for a while, and concentrate on learning that trading technique inside out. It’s best to paper-trade it until you have experienced how it works in a variety of market environments, what adjustments work and should be applied when things don’t go according to plan, and begin to understand many of the finer details of implementation.

Then, and only then do you begin to actually trade it, and start the progress again for a second trade strategy. For example, it can take six months to really get up to speed on just covered calls, which are a simpler stock/option strategy. It may take a year to become proficient in calendar trades, but black-belt status won’t likely be achieved until much later.

You can’t learn how to trade at an increased level of success by merely reading about it. It takes experience, and trying to get the experience in too many approaches at the same time decreases your chances of success.

Know your stocks as well as your kids

Select a small, diverse set of stocks. You need to get to the point where you know every one of yours stocks intimately – what cycles, if any, they typically follow, how they react to news and earnings reports (good and bad), their typical daily movements, their typical trends, their historical volatility ranges, how liquid their options are, you get the idea.

Start with larger, well-known companies that have been around a while and are among the top companies in their sectors. You may start with a larger watchlist of candidates, but you eventually want to narrow that down to a small list. Anywhere from six to twelve, but no more, and they should be appropriate for the types of trades you’ve specified in your trading plan.

For example, if you want to make covered calls one of your specialties, a high priced, high volatility stock like Research in Motion may not be a good choice. McDonalds or Yamana Gold would be better choices. Conversely, if you are interested in trading Bull Call Spreads, Proctor and Gamble may not be a good watchlist choice.

Don’t pick all high tech or resource stocks. Pick one or two major stocks from several different industries. I’ll offer some possibilities in the stocks I use for examples. Make note of the stocks often mentioned by your MarketTamer webinar hosts.

Investor’s Business Daily is one of the best sources. Their IBD 50 list, their Big Cap 20, and their numerous other lists and articles can help you build your small ‘select’ list of stocks.

Personalize your list. Call it “my Rambo list”, or something like that. Tell your dog about the stocks on the list and why you chose each one. Write their symbols in the dirt on the back of your car with your finger. Whisper them in your sleep. Make them a part of your life.

The two best success-increasing techniques you’ll ever learn

Seeing the big picture

Run your favorite charting program. Select a stock you’re convinced is unpredictable or erratic. Look closely at its chart. You still feel that way, right?

Now, stand up. Yes, stand up. Take a couple steps backwards so you’re 6 feet away (or 3-4 feet if you’re getting older and not seeing like a 20-yr old anymore).

Now look at the chart. As simple as it sounds, you will now see things you didn’t see before. Notice that trend you didn’t see before. Notice the cyclical patterns. They’re pretty obvious now, aren’t they? Why look, that stock has been setting regular highs and lows for several months now – what’s that, maybe a month apart or so? And look – it’s had a good run-up recently.

It’s been about a month since the last short-term high. Well gee, what if it did the same thing again and turned down to form a cycle low? Maybe this isn’t a good time to buy. On the chance the cycle will reoccur, maybe it’s best to wait a couple weeks. If you’re wrong, then you didn’t get into THIS opportunity, but there’s always hundreds of others. If you’re right, then you may have saved yourself from a loss or at least a significant draw-down, and ended up with a higher profit.

Avoiding the big mistakes

No clear ‘the planets are aligned on this trade’ opportunities jumping out at you? And the rest of the market is not showing clear direction?

OK, once again stand up. But this time, put your hands behind your back, palms facing outwards. Move the back of your hands down over your buttocks. Then, sit down.

Continue your nightly chart review/trade opportunities evaluation in this position. Keep looking at the stocks in your watchlist, night after night, doing nothing, until you see a chart pattern that is so obvious, provides such a clear higher-probability, lower-risk trade that you suddenly hear Beethoven’s Ode to Joy mysteriously playing in the background.

This is the hardest technique to learn. More than likely, after commissions, slippage, and taxes, you’ll find that trading less and waiting around for higher-probability trades actually leaves your account balance higher at the end of the year. But you won’t have to wait that long – you should quickly see a difference in your monthly trade statements.

You DON’T have to trade every day. If a clear, strong-odds-in-favor-of trade isn’t jumping out at you, then sit on your hands!

Increasing your odds need not be complicated

Over the next several articles I’ll be diving into chart patterns, seasonals, cycles, trade entry strategies, exit strategies, indicators, and more ways to increase your chances on each and every trade. I’ll come back and get into more detail on how to create a good watchlist of stocks, money management, and more.

But let’s finish with one simple example. If you limit all your trading to looking for just this one type of pattern, and religiously implementing the ‘Avoiding the big mistakes’ suggestion above, you will likely be a very successful trader.

Take a look at this chart. Where is this stock going? What probabilities do you assign to the different possible directions? Is it forming a bottom, to eventually start another up-trend? If so, when is that likely to happen. Or, will another gap-down start a further decline?

Stock chart showing uncertain direction.
chart courtesy of Worden − www.Worden.com

This stock is one that is actively traded by short-term and intraday traders. It is frequently discussed on chat groups and webinars, or at least it used to be. It is Research in Motion, RIMM.

Now look at this stock.

This stock has been in a clear trading range for 1 year
chart courtesy of Worden − www.Worden.com

This stock has clearly been in a trading range for the past year. It is so obvious you don’t need to stand back and look at this chart. Assuming this is December 19th, 2011, you should be looking at this chart (if it was on your watchlist), noticing that the stock has bounced off that upper 550 level about 6 times. It has bounced off that lower level about 6 times as well. There have been some volume spikes on up-move days (the green volume bars), and there have been some volume spikes on down-move days as well (red bars).

But overall, there’s little indication it is ready at this time to break out of that trading range. It eventually will, but right now, it has just bounced off the lower level again. Volume popped up on the reversal day three days ago, a sign that there is buying interest in the stock at that 450 level.

Suppose you play a move back up towards the upper part of the trading range. Also, consider a stop-loss just below that low three days ago. Planning to exit the trade if it gets within maybe 15% of that upper level, and closing out the trade if it falls below the 3-days ago low, gives a Reward-to-Risk on this trade of maybe 4-to-1 or higher (generally, try for at least a 3:1 R/R ratio for stock trades).

That has the characteristics of a higher-probability trade. You may find only a handful of setups like this a year, especially with a smaller watchlist. But when you do, these will be your bread-and-butter trades, the trades you will make most of your profits on. So why not concentrate on looking and waiting for these setups?

By the way, what happened with this stock? It is Priceline.com (PCLN), another favorite of short-term traders. Within seven weeks it marched up to the upper level, closing at 547 this past Friday.

PCLN has again bounced off the support level and moved to upper resistance.
chart courtesy of Worden − www.Worden.com

This stock is expensive, which makes trading just the stock, or even covered calls, difficult for many traders. But the trading range pattern, with its higher probabilities and lower-risk characteristics allows a variety of option strategies, such as you’ve been learning with MarketTamer, to be considered and successfully used.

If PCLN does finally breakout of the trading range, and you had a bearish trade in place, you would be quickly stopped out by your stop-loss. But, as I go through other patterns in the future, you’ll see how to play such breakouts, with similarly good Reward-to-Risk ratios. Let’s go back to RIMM again to see if it has had higher-probability setups in the past.

It’s August, 2006. You’ve noticed RIMM has been in a trading range for a year and a half.

RIMM was in a trading range in 9/06
chart courtesy of Worden − www.Worden.com

The support level seems to be holding once again. RIMM is not showing any sign of wanting to break down below the support line. So you consider a bullish stock or option trade with a stop-loss a little below the support level. It is reasonable to expect RIMM to hit the upper level again within a couple months.

Here’s what happened over the next 7 weeks – what a nice gain, especially if you used an option strategy to play it:

RIMM moved back to the top of the trading range in 10/06
chart courtesy of Worden − www.Worden.com

At this point, with the stock back at the upper resistance level, you could consider a bearish trade for a move back towards the support level. A stop-loss just above the upper resistance level would make it another high Reward-to-Risk trade. If it breaks out on the high side, your stop-loss limits your bearish trade losses and you can initiate a bullish momentum trade using another high Reward-to-Risk setup.

How did RIMM turn out?

RIMM had a jailbreak from the trading range.
chart courtesy of Worden − www.Worden.com

RIMM had a jailbreak, with sirens blaring, and the stock running as fast as it could go. What do you think was the profit potential here, especially if you used an options-based trade (giving good leverage and limited-risk)?

More to come

I’ll cover a lot more like this in subsequent articles, and I will try highlight current setups and examples as often as possible. For many techniques I will mention specific stocks that have worked well with that strategy in the past.

You’ve got homework to do – practice the sit-on-your hands technique. It is the hardest one, and few traders ever become proficient in it. But those who do,…

See you next article.

MarketTamer.com is delighted to introduce Gregg Harris, founder of StockQuirks.com, a site dedicated to helping professional traders increase their odds of success.

Article below submitted by Gregg Harris, of StockQuirks.com

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