SETTING PROFIT TARGETS
1. After the trigger has been hit and you have entered a trade, find the highest high and the lowest low between points A and D.
2. Calculate the difference between these two prices.
3. Calculate 50 percent of the difference. You now have the first profit target (PT1).
4. If you have a long position, add the price of the market on the trigger date to PT1 to get your exact profit target.
5. If you have a short position, subtract the price of the market on the trigger date from PT1 to get your exact profit target.
6. The full profit target (PT2) is the full range of the difference you calculated.
7. Depending on the number of contracts or shares you have entered, the exit strategy will vary.
There are two types of losing tradesthe unavoidable loss and the dumb loss. The unavoidable loss occurs when a method loses money simply because not all methods are right all the time. The dumb loss occurs when you make a mistake in applying the method. The dumb loss is a loss that you made due to your own ignorance, lack of discipline, or lack of organization. The dumb loss is unacceptable. The only way you can learn how and when you took a dumb loss is by looking over your procedures. Here are the specific procedures:
1. Find the BUY/SELL setup.
2. Determine the buy or sell trigger point.
3. Enter the trade once it has triggered.
4. A trigger can only occur at the end of a price bardo not sit and watch the trigger within the time frame of the price barit is a waste of time and will drive you nuts.
5. If you are certain that a trade has triggered at the end of a price bar, then enter on the close of the bar. If you are not certain (i.e., the Momentum value is
too close to the trigger point), then wait for the bar to close and if there is a trigger then enter on the OPEN of the next bar.
The exact procedure from this point forward depends on your position size. There are three levels of position size, each of which depends on your degree of risk tolerance and account size.
CONSERVATIVE STRATEGY
The conservative strategy is simple. For the futures trader, it involves trading in one contract of the given market or 100 shares (round lot) of a stock. The problem with options to apply this strategy is that the price executions are often very poor, liquidity is often what accounts for poor price executions, and they lose time value. Instead, trade this strategy for futures and/or stocks.
The conservative trader has three choices when using this method.
Here are the choices and their pros and cons:
Place a profit taking order at PT1. The good news is that you often make a profit because PT1 is frequently hit. The bad news is that if the market keeps moving in the given direction, you will leave a lot of money on the table. The worse news is that you may make as many as 10 small profits in a row but, you could give it all back plus more on one losing trade. It is not recommended to use this strategy.
When PT1 is hit, change your stop-loss to breakeven (i.e., the price at which you entered). See the seasonal Lessons 2 and 3 or a more thorough description of the breakeven stop. The good news is that you are giving the market plenty of room to reach PT2 or even better levels. The bad news is that you may get stopped out at breakeven many times.
And this will make you mad. Unfortunately, as a one-contract trader, you do not have a choice. If you trade this strategy in stocks, you could split your
100 shares into three units and use the aggressive strategy described below.
The best strategy for conservative traders is to place a stop-loss at breakeven when PT1 is hit and then to use the TS (trailing stop) procedure when PT2 has been hit (see trailing stop procedures below).
MODERATE STRATEGY
This follow-through method requires you to trade in units of two. If you trade futures, then you will trade either 2, 4, 6, 8, . . . contracts. If you trade stocks, then you will trade 200, 400, 600, 800, . . . shares. You will exit your positions as follows:
1. After entering your position, you will place a profit taking order at PT1 to exit ∼HF (high frequency) of your position.
2. When PT1 is hit, you raise your stop-loss breakeven on the remaining ∼HF of your position.
3. When PT2 is hit you will begin to trail a stop at 50 percent.
4. If a trade produces an open profit of twice PT2 implement a 75 percent trailing stop.
AGGRESSIVE STRATEGY
This follow-through method requires you to trade in units of three. If you trade futures youll trade either 3, 6, 9, . . . contracts. If you trade stocks, then you will trade 300, 600, 900, . . . shares. You will exit your positions as follows:
1. After entering your position, you will place a profit-taking order at PT1 on one-third of your position.
2. When PT1 is hit, you will raise your stop-loss breakeven on one-third of your position with a stop-loss that locks in 50 percent of your profit on another one-third of your position.
3. When PT2 is hit you will exit another one-third of your position unless stopped out.
4. When PT2 is hit and you have closed out one-third of your position, you will trail a stop on the remaining one-third of the position.
5. If a trade produces an open profit of twice PT2, implement a 75 percent trailing stop.
The aggressive strategy allows you to take a profit, to trail a stop, and to hold a position for the bigger move should it occur. The moderate strategy also allows for this possibility. The conservative strategy can also allow youto ride a trade past PT1 and PT2; however, you will not be able to enjoy the
benefits of taking some profits. It would be an all or nothing strategy for the conservative trader. As you can imagine, this is anathema to the small
trader who is intent on taking profits as often as possible. If you use the conservative strategy, you fare better in the long run than if you trade for
the bigger moves.
Naturally, the decision is yours. But you substantially increase your odds of success by going after the big moves rather than the small moves.
STOP-LOSSES AND THE DANGER ZONE
Now let us look at the stop-loss. Most traders tell you that your stoploss should be placed at a level that you can afford. This is nonsense. The market does not give a darn about what you can afford to risk. Stop-losses must be dynamic and system related. Your stop-loss should be a function of the market and/or the system.
The initial stop-loss procedure is simple:
1. Stop-loss on long position is based on Momentum. If Momentum closes below point C, then you exit the trade.
2. Stop-loss on short position is based on Momentum. If Momentum closes above point C, then you exit your position.
3. You can get an estimate of what your stop-loss should be initially by working the Momentum formula backwards. In other words, determine what price would be required for point C to be penetrated.
4. You are in the danger zone (i.e., risk of being stopped out at a loss) until PT1 is hit.
5. Another more precise stop loss is to use the PT2 amount as your stoploss.
Happy Trading
1. After the trigger has been hit and you have entered a trade, find the highest high and the lowest low between points A and D.
2. Calculate the difference between these two prices.
3. Calculate 50 percent of the difference. You now have the first profit target (PT1).
4. If you have a long position, add the price of the market on the trigger date to PT1 to get your exact profit target.
5. If you have a short position, subtract the price of the market on the trigger date from PT1 to get your exact profit target.
6. The full profit target (PT2) is the full range of the difference you calculated.
7. Depending on the number of contracts or shares you have entered, the exit strategy will vary.
There are two types of losing tradesthe unavoidable loss and the dumb loss. The unavoidable loss occurs when a method loses money simply because not all methods are right all the time. The dumb loss occurs when you make a mistake in applying the method. The dumb loss is a loss that you made due to your own ignorance, lack of discipline, or lack of organization. The dumb loss is unacceptable. The only way you can learn how and when you took a dumb loss is by looking over your procedures. Here are the specific procedures:
1. Find the BUY/SELL setup.
2. Determine the buy or sell trigger point.
3. Enter the trade once it has triggered.
4. A trigger can only occur at the end of a price bardo not sit and watch the trigger within the time frame of the price barit is a waste of time and will drive you nuts.
5. If you are certain that a trade has triggered at the end of a price bar, then enter on the close of the bar. If you are not certain (i.e., the Momentum value is
too close to the trigger point), then wait for the bar to close and if there is a trigger then enter on the OPEN of the next bar.
The exact procedure from this point forward depends on your position size. There are three levels of position size, each of which depends on your degree of risk tolerance and account size.
CONSERVATIVE STRATEGY
The conservative strategy is simple. For the futures trader, it involves trading in one contract of the given market or 100 shares (round lot) of a stock. The problem with options to apply this strategy is that the price executions are often very poor, liquidity is often what accounts for poor price executions, and they lose time value. Instead, trade this strategy for futures and/or stocks.
The conservative trader has three choices when using this method.
Here are the choices and their pros and cons:
Place a profit taking order at PT1. The good news is that you often make a profit because PT1 is frequently hit. The bad news is that if the market keeps moving in the given direction, you will leave a lot of money on the table. The worse news is that you may make as many as 10 small profits in a row but, you could give it all back plus more on one losing trade. It is not recommended to use this strategy.
When PT1 is hit, change your stop-loss to breakeven (i.e., the price at which you entered). See the seasonal Lessons 2 and 3 or a more thorough description of the breakeven stop. The good news is that you are giving the market plenty of room to reach PT2 or even better levels. The bad news is that you may get stopped out at breakeven many times.
And this will make you mad. Unfortunately, as a one-contract trader, you do not have a choice. If you trade this strategy in stocks, you could split your
100 shares into three units and use the aggressive strategy described below.
The best strategy for conservative traders is to place a stop-loss at breakeven when PT1 is hit and then to use the TS (trailing stop) procedure when PT2 has been hit (see trailing stop procedures below).
MODERATE STRATEGY
This follow-through method requires you to trade in units of two. If you trade futures, then you will trade either 2, 4, 6, 8, . . . contracts. If you trade stocks, then you will trade 200, 400, 600, 800, . . . shares. You will exit your positions as follows:
1. After entering your position, you will place a profit taking order at PT1 to exit ∼HF (high frequency) of your position.
2. When PT1 is hit, you raise your stop-loss breakeven on the remaining ∼HF of your position.
3. When PT2 is hit you will begin to trail a stop at 50 percent.
4. If a trade produces an open profit of twice PT2 implement a 75 percent trailing stop.
AGGRESSIVE STRATEGY
This follow-through method requires you to trade in units of three. If you trade futures youll trade either 3, 6, 9, . . . contracts. If you trade stocks, then you will trade 300, 600, 900, . . . shares. You will exit your positions as follows:
1. After entering your position, you will place a profit-taking order at PT1 on one-third of your position.
2. When PT1 is hit, you will raise your stop-loss breakeven on one-third of your position with a stop-loss that locks in 50 percent of your profit on another one-third of your position.
3. When PT2 is hit you will exit another one-third of your position unless stopped out.
4. When PT2 is hit and you have closed out one-third of your position, you will trail a stop on the remaining one-third of the position.
5. If a trade produces an open profit of twice PT2, implement a 75 percent trailing stop.
The aggressive strategy allows you to take a profit, to trail a stop, and to hold a position for the bigger move should it occur. The moderate strategy also allows for this possibility. The conservative strategy can also allow youto ride a trade past PT1 and PT2; however, you will not be able to enjoy the
benefits of taking some profits. It would be an all or nothing strategy for the conservative trader. As you can imagine, this is anathema to the small
trader who is intent on taking profits as often as possible. If you use the conservative strategy, you fare better in the long run than if you trade for
the bigger moves.
Naturally, the decision is yours. But you substantially increase your odds of success by going after the big moves rather than the small moves.
STOP-LOSSES AND THE DANGER ZONE
Now let us look at the stop-loss. Most traders tell you that your stoploss should be placed at a level that you can afford. This is nonsense. The market does not give a darn about what you can afford to risk. Stop-losses must be dynamic and system related. Your stop-loss should be a function of the market and/or the system.
The initial stop-loss procedure is simple:
1. Stop-loss on long position is based on Momentum. If Momentum closes below point C, then you exit the trade.
2. Stop-loss on short position is based on Momentum. If Momentum closes above point C, then you exit your position.
3. You can get an estimate of what your stop-loss should be initially by working the Momentum formula backwards. In other words, determine what price would be required for point C to be penetrated.
4. You are in the danger zone (i.e., risk of being stopped out at a loss) until PT1 is hit.
5. Another more precise stop loss is to use the PT2 amount as your stoploss.
Happy Trading
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