On days like we had yesterday, when action heats up and we see larger climbs in the market, I always hear the same complaints from daytraders. „Why didn‘t I hold my long position a bit longer?“ „Look at that big climb I missed!“ „How could I be so stupid?“ „Why can‘t I ever catch the bigger gains instead of being shaken into settling for the smaller ones?“. We tend to beat ourselves up with regret, when what we should be doing is asking ourselves whether or not we reacted rationally to the information we had at the time. So let me share a few observations I have made about traders, and tips for knowing when to stay in the trade, and when to take the early gain.
First of all, there are two types of trades - those with the trend, and those against the trend. To determine the trend, I look at the daily chart and a 5 day 15 minute chart. If the general market is making a series of higher highs and higher lows from one day to the next, and closed the previous day mid to upper range, I consider the trend to be up. If the general market is making a series of lower lows and lower highs from one day to the next, and closed the previous day mid to lower range, I consider the trend to be down. If the market closed upper range in a downtrending market however, or lower range in an uptrending market, I would consider the trend to be uncertain, and possibly changing. The open gap also needs to be taken into consideration.
If a trade is against the trend, I will be taking the most conservative exit, at the very first indication of a topping or bounce. Shorting a stock in an uptrending market, for example, will hold higher risk. So I would consider that trade a smaller scalp with unknown potential, and I would exit at the very first sign of bouncing, with a conservative target. If the trend is uncertain, I will be conservative with any trade I make. It is always better to error on the conservative side. If a trade is with the trend however, then I feel more comfortable giving it some room. Once you have determined that you are with the trend, you need to learn to let it go.
Learning to give a trade some working room can be very difficult. I watch people trade every day, and I see they are very jumpy. The reason they are jumpy is usually because they are focused on the money. They aren‘t thinking about the trade, they are thinking about what the trade means in terms of dollars. When a trade is going their way, they quickly add the money up in their mind. They worry about commission fees and the bills they have to pay. They worry about how close they are to the 25K daytrading limit. And when they take a stop, they immediately think about what they could have spent that money on. It‘s all about the money. And I know its hard not to think about the money, but as long as they are focused on that money, they will never learn to trade freely and properly.
I recognize this as an issue because I see how people are trading – very jumpy. Even if their trade is with the trend, they will often take the more conservative exit, getting out at the first sign of a bounce or at the very first resistance level. They want three things: They want a psychological success, they want the money, and they want to escape from the anxiety of being in the trade. They want to end the torment of the possibility of being stopped. They just want out. „Whewww.. glad that’s over“. But that is not playing the game correctly. That is letting emotion take over your trade. And this is the number one reason, I believe, why people take little tiny scraps and leave big ones on the table.
Now let‘s talk about some indicators that will help keep you in longer.
One thing that often helps, is to back off and look at the trade from a slightly broader perspective. For the trades in my chatroom we are either watching a 15 tick chart, a 120 tick chart, or a one minute chart to time entries and exits. That gives you the very immediate perspective that you need to time a daytrade. As a reminder though of the general trend, it helps to refer back to a 5 day 15 minute chart as well, so you don‘t lose that broader perspective and get shaken out too early.
Another thing I see people do is exit whenever their trade gets to a support or resistance barrier. They won‘t really wait for indications of whether or not that barrier will hold, they just get out. Part of the reason is, they either don‘t trust, or don‘t understand their indicators. A lot of times a stock will move up to a resistance barrier, stall and retrace a bit, but we will see strong stochastic indications for example, that tell us the trade will likely head back up again. If you have no trust in those indicators, you will find yourself in a panic trying to get out of the trade, and wind up leaving a lot on the table. It takes time to track indicators and build confidence in them.
Another part of the reason is again, emotional. They feel anxious in a trade, so they will look for reasons to justify an exit and end that anxiety. Subconsciously they just want the trade to be over as soon as possible and end in a success. So even if a trade is with the trend, they will take the conservative exit, telling themselves it’s the prudent choice. But its important to distinguish, am I taking a conservative exit because the trade is against the trend, there is additional risk, and its the right thing to do? Or am I taking the conservative exit because I am chicken %$§!?
Ask yourself, „Am I playing the game as well as I can?“ Because that is all that matters, and that is how to catch the bigger gains instead of being shaken into settling for the smaller ones.