Hi,
Can anyone recommend a book/article of when to enter a trade?
I'm having trouble timing my trades, invariably I buy and then the price dips and my stop loss gets hit. It then does a 180 degree turn, only to go above what I paid.
Very frustrating, but an area where I definitely need more knowledge.
Many thanks in advance for any recommendations.
Optician, trying to study and make additional income on the stockmarket.
if you are repeatedly stopped out of longer term good trades, it sounds like your stop loss may be too tight for the type of share you are buying?
if you are looking for long term / income investments then it perhaps matters a little less exactly what time of day / which day you buy.
eg - I want the massive dividend from X share as regular income for the next 15 years - so buy the share 'now' (or before the next ex-dividend date at least). The capital appreciation is maybe less material than the continued income stream it generates as over a longer period of time the income generated could be greater than the original investment cost.
apply a stop loss if you like, at a level that helps protect you from the unpredictable but at a suitable distance to not get hit in general day to day trading.
If you are looking for for capital appreciation and are looking at short or medium term investments - eg swing trading, then timing in and out is much more crucial - various technical indicators can help here (MACD, RSI, price movements, volume, candlestick sizes - etc etc).
Invest a small amount to start with, with no stop loss. Watch what happens. If it falls, consider topping up and levelling down. If it rises, continue to add - and put in place an appropriate stop loss.
The ATR indicator is also very useful when determining where to place a stop. Worth looking into.
Does ATR show dips down and then quick recoveries or is it based the closing prices? I got caught out on XP Power (LON:XPP) recently when it fell about 8% in the early morning and then recovered within a few hours, so I got stopped out at a bad price, as stop losses are not guaranteed. The same could have happened on Ergomed (LON:ERGO) if I had a stop loss in place. Not sure stop losses work that well in this market. Just because you don't have a stop loss, does not mean you can't sell, but some people prefer the mechanical selling rather than making a decision, the problem is you can get stopped on a quick dip down.
ATR - Average True Range, it is a volatility indicator based on daily price ranges. Using a multiple of the daily ATR should distinguish between daily noise and something more serious occurring. Maybe best to determine based on the beta rating provided by Stocko to optimise further?
It is a tricky subject, if your stops are tight you will get stopped out often. If loose then you will lose considerable amount if stopped out. Note your broker may not get anywhere near your stop price, mine even on XP Power (LON:XPP) was about 5% lower than my price. There seemed to be no reason for this fall, maybe a large seller in thin trading? But within an hour is was almost back to the starting price.
Now I don't usually bother with stop losses, I have been stopped out of decent shares too many times only to see them bounce back up.
Not sure of the ATR range for XP Power (LON:XPP).
I make it around 5% currently, around 6% last week on the daily.
On the weekly, it's about 10% Herbie.
Well I would have got stopped out, even setting it at 20% would have got stopped out as it fell to about 3500. If bought at around 4500, I set my stop at 3900, I got 3700.
Some books which may help:
The Art of Execution by Lee Freeman-Shor
The Naked Trader by Robbie Burns.
It should be set based on your timeframe for the trade/investment. If you were looking to hold for a longer period would it not be better to base on weekly charts?
With ATR of 10% at a multiple of 2.5/3.5 you may not have been stopped out.
Typical ATR time periods used vary between 5 and 21 days. Wilder originally suggested using 7 days, short-term traders use 5, and longer term traders 21 days. Multiples between 2.5 and 3.5 x ATR are normally applied for trailing stops, with lower multiples more prone to whipsaws.
https://www.investopedia.com/a...
Each to their own, I only use occasionally myself but the OP was asking about entries and stop placement.
Mark Minervini's 'Trade like a Stock Market Wizard' is one I've read recently after seeing recommendations here which was excellent too.
He uses a method called: 'Specific Entry Point Analysis' which may be what you're looking for?
A good simple entry point is often when the MACD crosses under the line (or when the histogram turns positive from negative). This requires some patience and often a couple of months tracking selected stocks.
Either that or use Minervini's SEPA as has been suggested (it seems to work better with US shares than the FTSE).
If you buy good quality stocks (say a stock rank of over 80) that have a rising 200 day EMA it increases the chances of a win.
Set your physical stop loss at 25% guaranteed to protect against a black swan. (Or don't bother with a stop loss at all.)
Set your mental stop loss at 2% below the lowest price over the preceding 2 weeks.
Sell when the MACD histogram stops rising or starts falling.
I'm currently reading Technical Analysis for Dummies 4th Edition by Barbara Rockefeller and it's surprisingly good despite the title.
Good luck.
I have not used the MACD before but won't that cause a lot of trading? Even shares such as Games Workshop (LON:GAW) which has done very well this you would have been in and out several times.
Minervini SEPA, even in the US markets it is only about 50:50 win ratio, in the UK it is probably lower and the spreads and costs are higher here. It is something to consider in the future but I don't think it's for beginners.
Buy quality shares and hold unless fundamentals change for he worse. You can look at the top QM shares on here: https://www.stockopedia.com/stockranks/?field=ratios._QMScore_zz
I believe top QM shares has been the best performing shares this year, that won't be the case all the time though, but should help to pick Quality companies that also are doing well but some I would regard as too expensive now. Value shares have been among the worst performing in recent years.
Hi Herbie47.
Yes. It certainly can lead to overtrading. And I guess this is where judgement comes in. Games Workshop (LON:GAW) is a great example. I bought this as a 'buy and hold' and I've held on to it regardless of the MACD because I think it's a good long term prospect (and may well be a take over target for a large US company - Disney was suggested recently on here). But, at the other end of the scale, I've just bought Ocado (LON:OCDO) purely on the MACD and will either take a quick 5% profit or wait for the MACD to turn - because it's a 'trade' and not a 'buy and hold'. (For 'buy and hold' read 'long term trade'.)
Basically I agree with what you say - I just don't get on with Minervini's SEPA and it doesn't suit me psychologically. I prefer solid fundamentals and simple TA indicators like MACD. Yes, QM is statistically better than SR, but both are pretty blunt instruments and can probably be tweaked to do a little better by extra research like directors' dealings, institutional buying etc.
As we all know, there is no right or wrong approach to trading, but there are some methods that give better results than others. And what works for one trader / investor won't necessarily work for another. The trick is to identify one's psychological strengths and weaknesses and find an approach that's consistent with sleeping at night - and making a profit.
