There are many theories that propose to offer good stock market trading directions.
The principal questions are: When is your position considered to be a losing position? On what fundamental do you determine that you be compelled to cut your loss? When do you take a profit? When is the stock suitable to buy? Unfortunately, many people spend most of their time trying to foreordain how much profit they will make when the stock goes up.
The appropriate time to make this determination is BEFORE you put the position on.
Make your decisions when you are clear-minded and logical.
You can most accurately and objectively decide upon your parameters then.
Whatever rules you assign, you must not define them after you are in the trade.
Why? It is essential to separate the emotional side of your brain from the analytical side.
When you are in a trade that is going against you, you feelings of pride, fear, and helplessness overtake you.
You don't want to be "hoping and wishing" that the trade turns around.
If you start to deem yourself a loser, your future trading execution will suffer too.
It is impossible to make an disinterested judgment about a losing trade while you are in the trade.
Here is a trading method, or trading system that you might consider utilizing.
1) The Correct Chart Pattern When you are examining your prospective trade, execute these tasks for a bullish trade: 1) Have your trading software, furnished by your broker, draw the 8, 21 and 30 Exponential Moving Averages.
Look for a stock that has pulled back in such a way that the 8 and 21 EMA lines are beneath the 30 EMA line.
In fact, the 8 EMA should be lower than the 21 EMA which is lower than the 30 EMA line.
This should look somewhat like a bow-tie.
If you use some imagination, you can see how these exponential moving average curves describe a bow-tie formation.
2) Use Bollinger bands Within the software provided to you by your broker, display Bollinger bands on the chart.
Look for the stock to have its closing price outside the lower Bollinger band.
That means it closes outside the lower band.
You might have to adjust the length of the Bollinger band setting from the default of 20 to something like 12.
Look at how the stock has pierced the bands in recent history to come to this setting.
Historically, the stock should close outside the lower band from time to time.
3) Look For The Reversal To conclude that the stock has reversed, and is going up, wait for the stock to close over the high of this lowest trading day, i.
e.
, the closing price of today is higher than the high of the lowest day.
The lowest trading day is probably the day before today, yesterday, but it might be a couple of days earlier.
The stock is now appropriate to buy.
4) Draw Support and Resistance Lines You are not done yet...
Draw your support and resistance lines on the chart for a higher quality understanding of where the stock is apt to go.
Use these lines in this example to set the lowest level it is likely to retrace to.
Set your stop loss there.
(Drawing the support and resistance lines is outside the scope of this article.
) Another trading method is to just decide upon a stop loss at a 7% loss point.
You will also want to set your profit taking point, too.
A good trading method is to sell 25% of your shares when you have a 15% profit.
When you have a total of 50% profit, sell all or almost all of your shares.
You might want to leave some shares in the trade if the stock is performing well.
Stocks don't usually move up this far without a pull back, but it does occur.
By the way, you can enter your limit orders for taking profits, and your stop loss order right after you have successfully purchased the position.
5) Print A Copy Of The Chart Take the time to copy the chart by printing it out on your pringer.
Document your profit taking points.
Write down your "get out of Dodge" stop loss point.
Also, write down an explanation of why you are getting into this trade.
These points are essential, if you want to learn to trade by a system and not make the same mistakes over and over again.
6) Store The Printout In Your Journal Date the paper and 3-ring punch it.
Put it in your trading journal.
You now are using a trading system that you can document.
You have a trading method rather than merely a "feeling" about a stock.
Summary You have documented why you purchased this stock.
You have recorded the logic as to why to make the buy now.
You have a profit taking point and a stop loss point.
You have added your immutable data to your trading journal.
Most importantly, you have done this in an unemotional, analytical, and intelligent manner.
Now get out there.
Stop losing, and start winning.
The principal questions are: When is your position considered to be a losing position? On what fundamental do you determine that you be compelled to cut your loss? When do you take a profit? When is the stock suitable to buy? Unfortunately, many people spend most of their time trying to foreordain how much profit they will make when the stock goes up.
The appropriate time to make this determination is BEFORE you put the position on.
Make your decisions when you are clear-minded and logical.
You can most accurately and objectively decide upon your parameters then.
Whatever rules you assign, you must not define them after you are in the trade.
Why? It is essential to separate the emotional side of your brain from the analytical side.
When you are in a trade that is going against you, you feelings of pride, fear, and helplessness overtake you.
You don't want to be "hoping and wishing" that the trade turns around.
If you start to deem yourself a loser, your future trading execution will suffer too.
It is impossible to make an disinterested judgment about a losing trade while you are in the trade.
Here is a trading method, or trading system that you might consider utilizing.
1) The Correct Chart Pattern When you are examining your prospective trade, execute these tasks for a bullish trade: 1) Have your trading software, furnished by your broker, draw the 8, 21 and 30 Exponential Moving Averages.
Look for a stock that has pulled back in such a way that the 8 and 21 EMA lines are beneath the 30 EMA line.
In fact, the 8 EMA should be lower than the 21 EMA which is lower than the 30 EMA line.
This should look somewhat like a bow-tie.
If you use some imagination, you can see how these exponential moving average curves describe a bow-tie formation.
2) Use Bollinger bands Within the software provided to you by your broker, display Bollinger bands on the chart.
Look for the stock to have its closing price outside the lower Bollinger band.
That means it closes outside the lower band.
You might have to adjust the length of the Bollinger band setting from the default of 20 to something like 12.
Look at how the stock has pierced the bands in recent history to come to this setting.
Historically, the stock should close outside the lower band from time to time.
3) Look For The Reversal To conclude that the stock has reversed, and is going up, wait for the stock to close over the high of this lowest trading day, i.
e.
, the closing price of today is higher than the high of the lowest day.
The lowest trading day is probably the day before today, yesterday, but it might be a couple of days earlier.
The stock is now appropriate to buy.
4) Draw Support and Resistance Lines You are not done yet...
Draw your support and resistance lines on the chart for a higher quality understanding of where the stock is apt to go.
Use these lines in this example to set the lowest level it is likely to retrace to.
Set your stop loss there.
(Drawing the support and resistance lines is outside the scope of this article.
) Another trading method is to just decide upon a stop loss at a 7% loss point.
You will also want to set your profit taking point, too.
A good trading method is to sell 25% of your shares when you have a 15% profit.
When you have a total of 50% profit, sell all or almost all of your shares.
You might want to leave some shares in the trade if the stock is performing well.
Stocks don't usually move up this far without a pull back, but it does occur.
By the way, you can enter your limit orders for taking profits, and your stop loss order right after you have successfully purchased the position.
5) Print A Copy Of The Chart Take the time to copy the chart by printing it out on your pringer.
Document your profit taking points.
Write down your "get out of Dodge" stop loss point.
Also, write down an explanation of why you are getting into this trade.
These points are essential, if you want to learn to trade by a system and not make the same mistakes over and over again.
6) Store The Printout In Your Journal Date the paper and 3-ring punch it.
Put it in your trading journal.
You now are using a trading system that you can document.
You have a trading method rather than merely a "feeling" about a stock.
Summary You have documented why you purchased this stock.
You have recorded the logic as to why to make the buy now.
You have a profit taking point and a stop loss point.
You have added your immutable data to your trading journal.
Most importantly, you have done this in an unemotional, analytical, and intelligent manner.
Now get out there.
Stop losing, and start winning.
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