Trading Guide - Chapter 3
Real Time Charts
- Great for finding local support areas and to fine tune trailing stops or stops on entry. Using the 10 day real time chart above the minimum price action range is 26.96 and below this area is a possible place for stops.
Real Time Chart Overlay
Real time overlay chart (8 month chart)
- Detect fast opening breakouts
- Investigate the daily candlestick formation with intraday price action and the buying and selling volume.
Stops And Trailing Stops
- The best stop price is one that is just below support, and if hit invalidates the trade.
- To fine tune/adjust the stop use the 5 (or 10) day intraday chart to guage the short term intraday support area.
- In the above 10 day chart (a continuation breakout watch) the 25.5-25.6 area would be considered support area, with a stop placement just below at 24.4 or lower.
- A trailing stop price should only move higher.
- On trade entries the StockConsultant will keep stops wider initially, and then start to tighten the trailing stop as the stock rallies. After a good rally, a stock may form a narrow resistance area, which allows a tight stop to be placed just below it.
- Tighten stops once a day in the morning unless it is a very active stock that has a large move during the day.
- Try to keep a stock profit/loss ratio (P/L) of 3:1 or greater. If a stock has a price Target 1 (or T2) at 12% profit, then max stop loss (stop) would be 4% for P/L ratio of 3:1. If a tighter 3% stop is available, then the P/L ratio would be 4:1. With an 10 position diversified stock portfolio and P/L ratio of 3:1 or greater, you only need to be correct 33% of the time to break even.
- Look for stocks with a target profit of at least 5% or greater.
- The sweet spot for profit on medium capitalization stocks is 9 to 15%.
- Price and breakout targets can be conservative at times especially if the stock has had only one or two big rallies or pullbacks over the past year (low volatility/movement). The more rallies and pullbacks (volatility/movement) over the past year, the more accurate the price and breakout targets.
- Use the 3, 5 or 10 day real time chart to fine tune the entry and trailing stops.
- There is a narrow price area for optimal trades. High trade quality areas happen at support with tight stops and maximum T1 and T2 target profits.
- Do not chase stocks, use support and get in before the crowd, stay consistent for each trade with a well defined setup.
- Be aware of false breakouts, some studies suggest taking the 2nd breakout attempt has more success.
- After a large price gap down (or many large down days, ie falling knife) it is best to wait for some stability and double or triple support areas to form before looking for trade setups. This may take one to three months.
- Trade cycle: Entry on bullish indicators with an initial stop; Stock rallies higher with less then bullish indicators use a trailing stop; Exit or tighten stops near T1/T2 targets or at a short term overbought resistance area.
- Larger capitalization and higher priced stocks will normally have target profits around 5%, while riskier stocks (under $10) have targets with up to 30% profit. For a 30% profit and P/L ratio of 3:1, the stop could run as high as 10%. In this case, to keep a constant maximum loss amount (risk), use 1/3 of the typical position size.
Example: For a $100k portfolio, with up to 10 stock positions of $10k, a 10% profit target and 3.3% stop loss for P/L ratio of 3:1 would return either a $1000 profit or a $330 loss. For a stock under $10, with 30% profit target and 10% stop loss, the potential loss could run 3x higher, or $1000 loss on a $10k position . This is an unacceptable sized loss. To limit the higher risk, adjust the stock position size to $3.3k. This normalizes the loss to be the same ($330) as a standard trade (and gain the same). This adjustment can be done using the StockConsultant ReCalc tool.
Trade Clean Looking Charts
- Many price gaps (seen on low price, low volume or foreign stocks trading on US exchanges)
- Hard to read price action
- Few price gaps
- Easy to spot support and resistance
- Easy to read price action
- Find a service or brokerage that can save stock price alerts and send an email or text message when the stock rises above or drops to that price.
- Set up alerts to trigger just before a stock breakout or when a stock reaches a support level.
- Use options, instead of buying stock to avoid the "I got stopped out," and then the stock goes your way because of a noisy price action or a temporary overnight/open gap down in price.
- Stock Option Basics
- Call Options
- For example: if you have a stock stop loss of $300 (3% of a $10k position), then you would buy a call option worth the same amount. No matter how far the stock drops, your maximum loss (risk) would be $300.
- On a good breakout (or momentum/bottom long rally), you may profit 70% ($210) to 400%+ ($1200+).
- Options have an expiration date a week, 1, 2, or 3+ months out. If the stock does not rise above your option strike price by expiration, then it will expire worthless and you will have a $300 loss. You are switching from a level based loss to a time based loss.
- Options let you worry less about very short term stock movements. Expiration dates 1.5 to 3 months out (vs. a month or less) leave more time for cases when the breakout or momentum/bottom trade takes longer to develop, or fails and then makes a comeback (2nd breakout success).
- With options, you cannot stop out with a large loss. If bad news happens overnight and the stock gaps down on open, in our example the maximum you can lose is $300, but for owning a $10k stock position this could be much greater (up to $10k loss).
- Screen for stocks that can hit the breakout or price target 1 or 2, with good option profits, within the expiration timeframe (make sure to pad a little extra time to option expiration).
- Best to avoid options near upcoming news, and earnings since they are more expensive at these times and result in low option profit at target and a low profit/loss ratio.
- Stay away from low volume stocks with wide option buy(ask)/sell(bid) spreads (these will have low option volume). Buying an option at the ask, you immediately lose 30% selling at the bid. Larger stocks and ETF/indexes have better pricing on options with higher option volume and narrow spreads.
- The same stock profit/loss principles (minimum 3:1 option profit/loss) should be applied to options.
This is NOT investment advice, just general help and opinions. Please check with a registered investment
advisor before making any investment decisions. This
document may contain errors. Chapman Advisory Group LLC employees are not investment advisors. Please review: https://www.stockconsultant.com/disclaimerpage.html