Introduction
You are about to be taken on an educational journey that we feel has the potential to change your entire trading life. Far too many existing traders today are throwing caution to the winds, and their hard-earned money is going right along with it. Because they lack guidance, discipline and a well thought out trading plan, they are left to the uncertainties of guessing, wishing, hoping and of course, gambling. As one of our member, you will never be a part of that sad group again. Trading is a business. And like all businesses, it requires a plan, a Master Trader approach, if you will. And as a new member of our growing family, you are about to be given that approach. While we could never guarantee your success as a trader, there is one thing we can guarantee. That once you finish reading The Master Trading Plan, you will never trade the same way again. Each point you read and understand will move you that much closer to thinking and acting like a professional trader. With that being said, we'd now like to say "welcome!" For you have just taken your first step onto Master Trader's Path to trading mastery.
The Master Trading Plan
Most traders, lacking consistency, try to substitute a high batting average with size (obviously going for the grand slam). I say lower your lot size, and go for the higher batting average. When you are wrong and lose, it will be easily dealt with. When you're right (consistently) you'll laugh all the way to the bank. "Small" is a very good thing at times. Try it!
Do not believe that trading big size (10,000 share lots) is necessary to make big money in the stock market, because it is not. This was one of my greatest discoveries and it literally marked the beginning of an unbelievably profitable era for me. Some traders simply don't have the mental wherewithal to trade in sizes in which each up and down tick dramatically affects their financial well-being (I know I don't). The large size often causes them to "dollar count" with each tick (a dangerous practice) to make premature decisions out of sheer greed and fear. What's more, large sizes will make the most meaningless move emotionally and financially dramatic, a fact that will certainly evoke frequently "stupid" decisions. Trading with smaller lots eliminates many of these concerns by evoking a calm that produces a high level of mental clarity. It is only in the state of this calm that sound decisions and responses can be made. I dare you to try using 100 to 1000 shares. Stop being greedy and start being consistent.
PART I - GETTING IN
The Entry - It's 85% of the Trading Equation
The most critical part of every trade is the entry. There is no doubt about it. Traders who enter stocks properly will enjoy a much higher winning percentage than those who enter stocks poorly. We will even go as far as to say that if you get the entry right, you have taken care of 85% of the entire trading equation. The other 15% is nothing more than trade management, which is what we get into in part 2. But let's discuss the entry right now.
Each Master Trader's pick will provide you with a very detailed trading strategy. You will be given an entry price and two exit prices. The two exit prices will be the initial stop and the profit objective. Every sound trading strategy has one entry, and two exits. However, if you get the entry wrong, you run the risk of ruining the entire trade. This calls for adhering to strict rules that ensure that we are handling the entry properly.
We are going to introduce these all-too-important entry rules by looking at an example. Let's say that XYZ closed on Monday at $19.58. On Tuesday, you are advised in our Live Trading Room) to buy XYZ above $19.78 with a stop at $19.25 (more about stops later). Your profit objective is $1.75 to $2. Now, these parameters set the stage. You now know precisely what to buy, when to buy, and where to buy it. But more clarification is needed. In order to buy XYZ, it has to trade above $19.78. If it fails to trade above $19.78 on Tuesday, it should not be bought. If XYZ does trade above $19.78, it has met our strict entry criteria, and is worthy of being bought. This brings us to:
Entry Rule Number 1. Never, never anticipate! If you are advised to buy a stock "above" a certain price, do not buy it below that price or even at that price, with the idea of picking the stock up cheaper. We pick these entry points very carefully and will consider a stock only after it has demonstrated its ability to rise above a certain price. The idea here is to be smart, not cheap!
But where do you buy it? In the above example, do you buy at $20, at $20.25, or at $20.75? Exactly what price do you buy it? Well, to be truthful, there is no exact price. But there is an exact range in which you are to buy. This brings us to:
Entry Rule Number 2. You must never buy a stock more than .25 above the ideal entry price. In the above example, $19.79 is the ideal entry. But in the real world of fast moving markets, it is not always possible to buy right at the ideal entry price. As a Master Trader subscriber, you are allowed to pay up a bit. But as a Master Trader trader you don't want to pay up by much. You will only allow yourself the luxury of a .25 premium, and that's it. Continuing with the above example, the top price you would pay to get into XYZ would be $20.03 ($19.78 + .25 = $20.03).
Now, what if the stock in the above example skips by us, but subsequently moves back down into our .25 buy zone? Is it a buy then? This question brings us to:
Entry Rule Number 3. Never buy a stock that falls back into your .25 buy zone after rising .50 or more above your ideal entry price. In other words, you don't want stocks that have run up decently, and then fallen back into your buy zone. These could turn into what we call Fallen Stars (stocks that run out of steam and never come back). If you did not miss the first move up and got in, then that's a different matter. Your trade management will come into effect. More about that in part 2. But if you were not able to enter the stock properly at first, then it must not be played, especially if it manages to overshoot your ideal entry price by .50 or more. Remember, as a Master Trader subscriber, you will get new stock picks each trading day. If you miss one train, you will always have the chance to catch the next one or the one after that. Be strict, be disciplined and be patient. Each time you take a trade, you are putting your hard-earned capital on the line. You will want to make sure that you put that money of yours on the line in the proper way.
Now, a word about gaps. If the stock gaps up (or down in the case of a short) excessively, you are to enter the stock using our special Gap Buy or Gap Sell rules. These gap entry rules are detailed below. We will now move to educating you on the proper way to handle stocks that gap up or down at the open. Keep in mind that in today's volatile markets, the gap is a very common occurrence. And the trader who lacks the ability to deal with them is playing with a distinct disadvantage. Your ability to play gaps like a professional will make gaps a good friend, not an enemy. You are about to learn just how to handle them.
Master Trader's 30-Minute Gap Buy Rule
The first 20 to 30 minutes of trading is perhaps the trickiest time period of the day, particularly when the market is poised to open up very strong. Why? Because, buy orders that have accumulated over night and just before the open provide professional market makers and specialists with an extra advantage that they simply don't enjoy during any other part of the trading day. These accumulated market orders provide them with advanced, or shall we say, inside information on the abundant demand for a stock, which gives them a much greater ability to open the stock higher. This is what causes stocks to gap up, large numbers of accumulated buy orders placed before the market opens.
But here is the key, a very important key. In many cases, the amount which the professional market maker or specialist opens the stock up is often excessive, setting up what we call a Bull Trap. In other words, the stock is opened up artificially high to sucker in novice buyers (those who buy simply because a stock looks strong) so that they, the pros, can get out. Remember, for every buy order, there is someone on the other side with a matching sell order. The question is who's smarter in this case? The buyer or the seller? Well, when a stock gaps up excessively, it is usually the seller who is the smart one. This is why many stocks that gap up tend to pullback rather sharply after the first 10 to 20 minutes of trading. Once the abundant pre-market buy orders have all been satisfied, the demand is gone, and the stock tends to give way to "professional" selling.
But there is an exception, and it is this exception that sets the stage for one of our most powerful trading tactics. Our studies have shown that if a stock that has gapped up is able to trade to a new daily high after 30-minutes of trading, the strength demonstrated at the open was not artificial, but real. The strength in this case is real because it's being confirmed by continued buying after the early a.m. rush (the first 20 minutes or so of trading). This one simple discovery encouraged us to design a simple yet powerful way for the Master Trader to capitalize on the stocks that are truly strong. It's called Master Trader's 30-Minute Gap Buy Rule. Here's how it works.
The Setup
· The stock must gap up at the open excessively. (The definition of "excessive" will vary depending upon the price of the stock.) In most cases, a gap up much greater than $1 will be news related (positive earnings, brokerage upgrade, etc.) which is fine.
· It is best if the stock gaps open above the previous day's high.
The Strategy
· Once the stock has gapped open, the trader must let it trade for a full 30 minutes. No action other than watching the stock is required during this time. Often the trader will be watching and monitoring several stocks that have met the above set-up criteria.
· Once 30 minutes has transpired, the trader sets an alert above the high of the day, which in many cases will not be too far away from the current price. Note: We, and all of our traders, use Direct Access Platforms (i.e. Trade station - IB – Cyber trader – Real Tick etc) as our professional trading systems. Not only do these complete trading system provide us with near instant executions and confirmations in less than 1 second, their alert mechanism is one of the very best we've ever seen. We would be lost without them. If you are truly a serious trader, I strongly recommend that you try them. There is no better trading vehicle in our minds.
· Once the alert is triggered (the stock breaks to a new daily high), the trader buys with a stop below the day's low. This often makes the play low risk. Note: The ideal situation occurs when the stock breaks to a new daily high an hour or so after the first ½ hour of trading. But don't let the lack of the ideal situation hinder your action. The play can be taken anytime the stock breaks to a new daily high after 30 minutes of trading.
· Once in, the Master Trader would use the trade management and profit taking steps explained below to work the rest of the play.
Summary
There you have it. A simply yet powerful way to capitalize on gaps. This strategy has above average profit potential, as well as an inherent safety measure, better known as a protective stop. It also automatically helps the trader to distinguish between those stocks that open up artificially strong, and those that are genuinely explosive. It is a powerful strategy, and as a Master Trader subscriber you will be guided well in its proper use. Once again, we welcome you into our circle of champions. You now have the ability to read and play gaps like a professional.
Master Trader's 30-Minute Gap Sell Rule
The first 20 to 30 minutes of trading is perhaps the trickiest time period of the day, particularly when the market is poised to open down very big. Why? Because, sell orders that have accumulated over night and just before the open provide professional market makers and specialists with an extra advantage that they simply don't have during any other part of the trading day. These accumulated (sell) market orders provide them with an advanced, or shall we say, inside view of the abundant supply in a stock, which in turn gives them the ability to open the stock lower. This is what causes stocks to gap down, large numbers of accumulated sell orders placed before the market opens.
But here is the key, a very important key. In many cases, the amount which the professional market maker or specialist opens the stock down is often excessive, setting up what we call a Bear Trap. In other words, the stock is opened down artificially low to panic novice sellers (those who sell simply because a stock looks weak) so that they, the pros, can get in. Remember, for every sell order, there is someone on the other side with a matching buy order. The question is who's smarter in this case? The seller or the buyer? Well, when a stock gaps down excessively, it is usually the buyer who is the smart one. This is why many stocks that gap down tend to rebound rather sharply after the first 10 to 20 minutes of trading. Once the abundant pre-market sell orders have all been satisfied, the distribution pressure (supply) is gone, and the stock tends to lift due to "professional" buying.
But there is an exception, and it is this exception that sets the stage for on of our most powerful trading tactics. Our studies have shown that if a stock that has gapped down is able to trade to a new daily low after 30-minutes of trading, the weakness demonstrated at the open was not artificial, but very real. The weakness in this case is real because it's being confirmed by continued selling after the early a.m. panic (the first 20 minutes or so of trading). This one simple discovery encouraged us to design a simple yet powerful way for the Master Trader to capitalize on the stocks that reveal themselves as truly weak. It's called Master Trader's 30-Minute Sell Rule. Here's how it works.
The Setup
· The stock must gap down at the open excessively. (The definition of "excessive" will vary depending upon the price of the stock. In most cases, a gap down much greater than $1 will be news related (negative earnings, brokerage downgrade, etc.) which is fine.
· It is best if the stock gaps down below the previous day's low.
The Strategy
· Once the stock has gapped down, the trader must let it trade for a full 30 minutes. No action other than watching the stock is required at this time. Often the trader will be watching and monitoring several stocks that have met the above set-up criteria.
· Once 30 minutes has transpired, the trader sets an alert below the low of the day, which in many cases will not be too far away from the current price. Note: We, and all of our traders, use Direct Access Platforms (i.e. Trade station - IB – Cyber trader – Real Tick etc) as our professional trading systems. Not only does these complete trading systems provide us with near instant executions and 1 second confirmations, their alert mechanism is one of the very best we've ever seen. We would be lost without them. If you are truly a serious trader, I strongly recommend that you try them. There is no better trading vehicles in our minds.
· If and when the alert is triggered (the stock breaks to a new daily low), the trader sells short with a stop above the day's high. This often makes the play low risk. Note: The ideal situation occurs when the stock breaks to a new daily low an hour or so after the first ½ hour of trading. But don't let the lack of the ideal situation hinder your action. The play can be taken anytime the stock breaks to a new daily low after 30-minutes of trading.
Summary
There you have it. A simply yet powerful way to capitalize on gaps. The strategy has above average profit potential, as well as an inherent safety measure, better known as a protective stop. It also automatically helps the trader to distinguish between those stocks that are only artificially weak, and those that are genuinely weak. It is a powerful strategy, and as a Master Trader subscriber you will be guided well in its proper use. We welcome you into our circle of champions. You now have the rare ability to read and play gaps like a true professional.
The Initial Stop – Your Insurance Policy
We would love to be able to say that life is perfect and every single trade you make will work out. We'd also like to be able to say that you'll never have to experience the pain of loss, only the joys of filling out bank deposit slips. But needless to say, this is not the case. Loss is, and always will be, a permanent part of every trader's life. One of the key differences between a winning trader and a losing trader is that the winner knows how to manage his losses, to keep them small and contained. The losing trader allows his losses to fester and grow, until they start to manage and control him. Trading is a business. And like every other business concern, it needs insurance, to protect itself from unexpected catastrophe. The trader's insurance is none other than the initial stop. We call it the Insurance Policy. Before you enter each trade, you will be given a price at which to place your initial (protective) stop. This price represents where you will draw the line in the sand. It is point at which you will eliminate the stock from your life. This protective stop can be an actual automated stop or it can be a mental one. The manner in which it is placed does not matter, as long as you act immediately. If and when a stock that you are in triggers your stop, we advise you to get out of the position immediately. No hesitation. No ifs, ands or buts. Just get out!
Sure there will be times when the stock will rebound shortly after your exit. And yes, those times will be frustrating. But over time, you will find that this strict course of action will save your financial life. Let's look at it another way. Each time you buy a stock, you are, in a sense, hiring an employee. This employee (the stock) has one job and one job only: to work hard at making you money. Like all employees, the stock should be given some time and some leeway to perform. That leeway, my friends, is the initial stop. This is the only insurance you have to protect yourself from a bad and/or destructive employee. And it must be adhered to religiously.
As mentioned above, there will be times when you will sell the stock (fire the employee) only to find out later that the stock (the employee) has regained its luster and earning ability. Nothing's perfect. But as mentioned earlier, trading is a business. And every smart businessman knows that he must draw the line in the sand somewhere. He knows that he must cut his losses short at some point.
To operate without insurance (an initial stop) is to flirt with disaster. And continued failure to adhere to your initial stops will eventually bring about your demise. Winning tends to take care of itself. It's losing properly that requires great skill, rigid discipline, and deep maturity. We at Master Trader can always spot a novice trader by how difficult it is for him to cut his losses short. The experienced trader has learned that his most precious commodity is his initial capital, and the only tool he has to keep it in tact is the initial stop. Therefore, the seasoned trader takes his stops at the speed of light and moves on; knowing that tomorrow is another day, and another trade. Life always goes on for the trader who adheres to his stops. But life can and often does end abruptly for those who are not disciplined enough to do so. Don't be cheap, my friends. Be smart. Pay your insurance premiums. In other words, adhere to your initial stops. One day, they will save your life, and you'll thank us.
The Break Even Stop - Playing with the Market's Money
Once you have entered a trade, your first goal is to get to the point at which you are not risking your money, but are playing with the market's money. In the first stage of each trade, it is your money that will be at risk. If something goes wrong with the trade immediately, your initial stop will be triggered resulting in a loss of capital, albeit a small one (see above). While this will happen at times, on many occasions your stock will rise enough (or fall enough if short) for you to move your stop to your entry price.
Let's look at an example. You buy XYZ at $20, with the objective of capturing a $1.75 to $2 gain. Your initial stop is at $19.25, making your risk 75 cents. That's what it may cost you for the right, the chance I should say, to go after the potential $1.75 to $2 gain. Not a bad ratio. If the trade goes sour right away, you'll lose 75 cents. However, if the stock rises enough, you will quickly want to raise your initial stop from $19.25 to your entry price of $20. Raising your stop to the price at which you entered the stock accomplishes two things.
First of all, it nearly eliminates your risk. At that point, you are playing with the market's money. Not your own. The worst that can happen barring any negative news item overnight is that you have to exit the trade at or near your entry price. Yes, you will lose the amount of your commissions, but that should be viewed as the cost of doing business as trader. Not as a loss. Commissions are like the supplies, rent and utilities paid for by other businesses. They are necessary in order to conduct business, and there is nothing we can do about them.
Secondly, raising your stop to break-even creates a psychological advantage. Because you are no longer in danger, you can figuratively sit back, put your feet on the coffee table and relax. At this point you know the stock has to either make you money, or get eliminated, at virtually no cost to you. It's all on the market. And you've got to like that. But here is the caveat. You must know when to raise your stop to break-even. Do it too prematurely, and you will be asking to get taken out of good trades. Do it too late and you will lose your hard earned gains unnecessarily? So when is the correct time? That's next.
The $1 Rule - Once a Winner, Always a Winner
Once a stock (your employee) has moved favorably by $1, you should immediately adjust your initial stop to your break-even price. Now note that we did not say, "Once you have a $1 gain…" No. You will move your stop to break-even once the stock has risen (fallen if short) $1 above the ideal entry price. It sounds the same, but there is a major difference. Continuing with the example above, you have bought XYZ at $20. Your initial stop is at $19.25, and you are looking for a $1.75 to $2 gain. The stock moves to $21, making for a $1 rise. If you were to sell at this point, you may not be able to get $21. A rise of $1 does not always equal a profit of $1. But that's not the point. Because it has risen $1, your action should be to raise your stop from $19.25 to $20, your break-even point. At this point, it's all smooth sailing. You can sit back, and relax in the comfort that you will make money at best or break-even at worst. Your trade is now being paid for by the market. And as we've mentioned above, you've got to like that. Special Note: Our traders will also often adjust to a break-even stop once the stock has moved halfway to its initial target, which often occurs before a $1 move with lower priced stocks. We encourage you to do the same.
Master Trader's Trailing Stop Method - Your Stairway to Profits
There is no doubt about it. Your most precious commodity is your starting capital. Your next most cherished commodity is your hard-earned profit. The Master Trader must never allow himself to lose his profit or give it back. It's hard enough earning consistent profits in the market. The last thing you want to do is earn a profit and let it slip away. This is why we have designed Master Trader's Trailing Stop Technique, a method that helps the trader ride a winning stock for huge gains, while safeguarding the profits he has already earned.
Its application is simple, yet powerful. Basic, yet effective. Here's how it works. You have bought XYZ at $20, with an initial stop at $19.25. The day you entered the stock is considered to be the stock's first day of employment. You have hired XYZ to do a job for you, and it had better work hard, or it will get eliminated. We know that if XYZ rises by $1, the $1 rule will have us move our stop to break-even. But let's say that at the end of the XYZ's first day, it rises by only .50, at the high, and closes at $20.38. If this is the case, our stop must stay at $19.25. On day two, let's say XYZ manages to reach a high of $20.58, but closes at the same $20.38 price. Now we start applying our Trailing Stop Technique. At the close of trading on day two, we must move our initial stop to .05 below the low (or above the high if short) of that trading day. So, in other words, if on day two XYZ had a high of $20.58, a low of $19.78 and a closing price of $20.38, your stop would be moved from $19.25 to $19.73 (.05 below the day's low). And, after the close of each subsequent day, the trader would simply repeat, raising his stop to .05 under the low of that day.
This is called tracking the lows. Let's continue the above example. On day one, your entry day, the initial stop is at $19.25. At the close of trading on day two your stop is moved up to $19.73 (see above). Now, let's say during day three, XYZ rises to $21. At this point, you would quickly move your stop to break-even or $20, based on the $1 Rule. You must not forget this. But let's say after the close of trading on that day (day three), XYZ had a high of $21.38, a low of $20.38 and a closing price of $21.25. You would then move your stop to $20.33, .05 under the current day's low. Now remember. During day three, you moved your stop to break-even based on the $1 Rule. That was a temporary measure that transferred the risk from you to the market. But now, with the market closed, you will want to continue utilizing our trailing stop method. You have a $1.38 profit ($21.38 close - $20 entry = $1.38 gain), and will want to start protecting some of it. On day four if XYZ reaches $21.75 to $22, you will sell, given the fact that it has worked hard enough to meet your $1.75 to $2 profit objective. If it has not reached your objective by the close of trading on day four, you will raise your stop to .05 under the low of that day. And on and on it goes until you get stopped out, or you reach your profit objective, or...... Yes. There is another consideration. Let's go over that.
Time is Money - Utilizing a Time Stop
Trading is a game of money. And time is the stuff money is made of, so it is crucial that we don't waste it. We teach all of our traders to utilize what we call time stops. Like all of our tactics, it is simple, yet very effective. The Time Stop prevents us from tying up our money too long in a non-performing stock. It keeps our money flowing, searching and seeking for opportunity. As a short-term trader, you never want your money lingering too long without getting rewarded. This is not investing. It's trading. And you are not Warren Buffet when trading. Your goal is to stick and jab. It is not to stick and stay.
So the rule goes like this. If a stock has neither reached your profit objective nor stopped you out by day five, sell it. Fire the stock and move on, no matter where it is or what your profit or loss is. Consider each stock as your employee that is hired to perform a specific job (hit a price target) within a specific time frame (5 days). If by day five, the employee has failed, fire it. Time is money. Our stock picks are designed to reach their price objectives in 1 to 3 days. If by the 5th day (your entry day counts as day one), the objective has not been reached, what we expected to happen has not happened, and the play should be eliminated. Again time is money. So don't waste it!
PART III - PROFIT TAKING
Taking profits is an art that once mastered represents the crowning jewel of professionalism. While getting into a play properly is critical to a trader's success, knowing when and how to take profits maximizes the benefits derived from knowing when to get in. Too many traders don't know when enough is enough, and through greed, invite disaster by over staying their welcome in a stock. One must never forget that the last .05 in a trade is the most expensive .05 of all, and the price one has to pay to get that .05 is often the entire, hard-earned gain.
Furthermore, the truly astute trader wants to be gone long before the stock reaches its climax. Why? Because the top of each short-term move is saturated with novice traders. It is where the wannabes are. It's where those who do not know hang out, and astute traders avoid the hangouts of novice players like the plague. Most astute traders fully understand that winning at the game of trading entails being a master at taking the middle out of each move. Attempts to grab the very bottom and top of a move are futile and unnecessary. The only traders who consistently buy the bottom and sell the top are liars, anyway.
Below, we will enter into the sparsely populated world of proper profit taking. I use the term "sparsely populated" because after 10 years of trading, I have fully realized that few market players have a trading plan, much less a profit taking plan. Long-term traders and investors, devoid of intelligent profit taking guidelines, hide behind the vague notion of retirement. Their assumption is that "time" will compensate for their lack of a game plan. But the length of one's trade is no excuse for a vague plan of action.
Short-term traders have their problems too. Many day-traders, preoccupied with trying to protect themselves from yet another loss, often snatch at anything even resembling a gain. With each passing second, the level of fear for these traders intensifies, preventing them from capitalizing on the very robust gains that are there at times just for the asking. Having a sound Entry game is critical. Knowing how to professionally manage your trade is also a key element of market success. We have covered these two important parts at length in parts I and II. Now, let us delve into the last part (Part III), which will complete The Master Trading Plan.
The Incremental Sale
Your Master Trader entry skills got you into a nice trade. Your well-developed ability to manage the trade has kept you cool, calm and most collected throughout the stock's entire move. Now, the merchandise you bought just a short while ago is worth significantly more than you paid for it. For a brief moment, you pity the uninformed person who gave up their stock to you, obviously too cheaply. But a quick look at the gain you now have cures any feelings of guilt and inadequacy. Now you realize that the third aspect of the trade must come into the play: Taking your profit or, Taking the Salad, as our Real-time Trading members call it.
When do you take it? Where do you take it? Here is an important key. The very best market players almost never sell all of their inventory (stock) in one spot or price. They realize that this would be akin to a sidewalk merchant selling his entire lot of wares on the very first offer without allowing other potential buyers a chance to bid higher. What if the your profitable stock (merchandise) can fetch a higher price? Sure the price right now is nice, but if and when you have the right stock, the price can get much nicer. And if the stock is up, isn't that proof enough that you have the right merchandise?
But then again, how many times have you tried to hold out for a sweeter, richer price, only to see the price you could have had with ease vanish like the wind? Is the urge to take the money right now nervousness, or is it prudence? Is the desire for a bigger gain greed, or is it intelligence? How is one to solve this dilemma? Enter the Incremental Sale.
We have always found selling a stock in two or more pieces to be the very best way to take profits. This not only solves the dilemma of whether the trader should take a profit, it also gives the trader a chance to capture even bigger gains. In short, the Incremental Sale is an answer to that civil war that is constantly being waged when the trader has a profit. To sell or not to sell is the minute by minute question. Tip: Our view is that the answer to this eternal question is almost always "to sell," but only part.
Here's an example. Let's assume a trader, let's call him Mr. Smith, has a $1 paper profit on 1000 shares. He has moved his initial stop to his break-even point, in accordance with our Break-even rule. Now, the $1 paper gain is starting to eat a whole in his pocket. Mr. Smith, knowing that a profit in hand is worth two on paper, decides to sell 1/2 his position, locking in a $500 gain. By doing this one simple thing, Mr. Smith has satisfied his urge to take the gain. The anxiety of losing all his paper profit has been completely eliminated, yet he has still left himself with the possibility of a bigger score.
A cool sense of power starts to re-emerge for Mr. Smith. Why? Because the psychological demons who were playing tug-of-war with his emotions have been beaten back. And once again, clarity and that ever-so-important sense of calm has returned. Mr. Smith is now ready for the next phase of his profitable trip: Maximizing his gains. Tip: Despite the importance of this subject, calming and dealing with the psychological demons that frequently plague the trader is an area that has gotten very little attention. Mark Douglas' book entitled The Disciplined Trader is the best work we've seen on this topic. Get more information on a book we regard as invaluable. There are not many good books that offer real meat for the active trader. This is one of them.
A Personal Note
I have always been plagued by the dilemma described above. During my developmental years as a trader, I'd find myself frequently missing the really big gains as a result of selling too quickly. Whenever I tried to correct this problem by holding on to my stocks longer, that's when they would invariably lose steam, and the gains I could have had vanished. This inconsistent whipsaw like action in my stocks and my performance kept me perpetually confused and constantly frustrated. That is, until I stopped fighting the two urges, and started trying to satisfy them both. That was the answer for me. That was the break-through.
For years I was trying to take sides, to force myself into one mode or the other. At first, it did not dawn on me that choosing one way or the other was not necessary. Then I quickly realized I could do both. I could satisfy both demons (the nervous one and the greedy one) and on balance come out better. That is when I started using the Incremental Sell approach. And let me tell you. It works. To this very day, I'm an ardent user of the Incremental Sell. Not only that, it remains a potent part of my training program.
All my traders are carefully schooled in its proper use, whether they be day-traders, swing-traders or core traders. Selling right is the last rung on the latter that leads to trading mastery, and when you've got more than one time to get it right, the odds of handling it like a professional increase exponentially. So use it. Practice this Incremental Sell approach. You won't be sorry. The very next time you find yourself in plus territory, and those two demons we just spoke about rear their ugly heads, shut both of them up by selling 1/2. In other words, toss them both a bone. Once you have taken some cheddar (profits) off the table, cast your full attention on maximizing your remaining gain to the fullest. How do you go about that? That is next. Let's move on.
Maximizing Your Gain
OK, you entered your trade just as smoothly and confidently as any seasoned Wall Street trader. After setting your insurance policy (initial stop), you start using your well-honed trade management skills. You begin trailing your stop, step by easy step with a calm precision that would evoke awe from even the most astute market player.
After a brief time, you find yourself boldly in profitable territory by $1.50. Your stop has been swiftly moved to your break-even point, eliminating any chance of a damaging loss. At this point, a wide smile slowly breaks open across your entire face as you ponder how difficult you once found these relatively simple but potent actions. Tip: The trader who knows what to do at every step acts with a confidence and certainty that evokes the winner's attitude. The smile, now at its widest point, gives birth to a baby-like drool. Your growing paper gain has evoked a familiar glandular response, and you begin to actively salivate. The more you monitor your open position, the more you salivate. After wiping your mouth, you decide to lock in some of your tasty gains.
In the time it takes to say Hello, you immediately offer out for sale 500 shares of your 1000 share lot. BANG! Someone who wasn't smart enough to spot the opportunity you did when it was almost being given away just took the bait. Ah! One half is now in the bag. Your chest begins to protrude. You find your shoulders being automatically forced back by a powerful sensation. You realize this sensation to be none other than pride. But not that foolish pride so often seen accompanying the slow and the ignorant. The pride, which you feel at this moment, is the result of pulling off a series of complex actions seamlessly and flawlessly. This pride is the mark of professionalism, the badge of excellence. And your veins are now pumped and saturated with it. After a brief pause, to experience the full ecstasy of our success, you direct your attention to maximizing the gain you have left. These are the steps you take:
Riding the Winning Wave
1) You maintain your break-even stop for the remainder of the trading session. Remember that you sold half your position during market hours. The day is not yet complete. You are relaxed, knowing that the worse case scenario is that you make money on the lot you sold, and break-even on the lot you hold. At this point, no one can take your gain or your serenity away from you.
2) The following day, you use the low of the prior day's bar as your new stop. Note: If this new stop is below your break-even stop, you will keep the break-even stop. If the new stop at the prior day's low is only slightly higher than your break-even point, you can also opt to keep the break-even stop. This is a matter of choice. Of course, if the prior day's low is significantly higher than your break-even point, you must go with it.
3) Each day after, you will use our Trailing Stop approach until any one of the sellable events occurs.
Knowing the Sellable Events
1) You will sell the remainder of your position if the stock gaps up significantly at the open. Remember that market makers and specialists gap stocks up to sell, not to buy. They also gap stocks down to buy, not to sell.
2) You will sell the reminder of your position if in the last 30 minutes of the day the stock is trading at or near the day's low. This is the first warning sign (in a rising stock) that sellers have started to overpower the buyers.
3) You will sell the remainder of your position if, after being up significantly on the day, the stock drops back below its opening price. Tip: The opening price is like the starting line of a race. As long as the stock is above its opening price, the bulls (buyers) are winning the race. If the stock is trading below its open, the bears (sellers) are winning that day's race. Don't get events 2 and 3 confused. There is a difference.
4) You will sell the remainder of your position if the stock gaps down significantly, then proceeds to break the low of the day after 30 minutes have transpired. A new daily low 30 minutes after a gap down is bearish.
When Disaster Strikes
I have spent a great deal of time talking about how to handle winning trades. But as we all know, the life of a trader is not always full of roses. The active trader, more so than any other type of market player, has got to know how to handle the times when disaster strikes. When a trader finds that the most unimaginable nightmare has become a hard cold reality, he must know precisely what to do. He can't know in 5 minutes or 10 minutes. He's got to know precisely what steps to take now, in an instant.
Keep in mind that today's active trader is totally devoid of that luxury we call time. He cannot afford to freeze up, fall apart or wimp out when stormy clouds start to hover. An angry market allows not even a moment of weakness. If there ever was a time when victory or survival goes to the swift, it is when the market has hand delivered you a ticking bomb. Only a well thought out contingency plan can evoke the type of immediate action and professional handling I speak of.
There is nothing more beautiful than watching a seasoned trader trapped in the jaws of a furious stock. This true professional becomes even more astute when danger strikes. Like the lion tamer who sticks his head in the mouth of a lion, his senses become more acute, his nerves more sensitive, and his actions more deliberate and certain. When you look closely, you will notice that the trader's awareness, already sharpened through years of grueling experience, actually heightens. Each thought and action he has exudes a confidence that would seem more appropriately matched with a winning situation. But all the great traders know that it is that type of control that the trader must maintain in the face of adversity. Otherwise, that great white shark we call the market will completely rip you to shreds. You see, the market is both friend and foe. Those who have mastered the game simply know how to deal with the market in both states. With only a few simple yet powerful actions, which I will detail below, you will too. I want every one of my followers to know what greatness is. And one cannot be considered great until he knows beyond a shadow of a doubt how to handle himself in the face of major disasters. Here's how.
The Monster Gap Down
The truth of the matter is, we live in a news-driven world. As traders, we do our very best to take advantage of this fact, to use it for our benefit. But every now and then, an unexpected news item announced after the closing bell or shortly before the opening bell, will cause a stock that we are in to open down significantly below our purchase price. The only course of action the trader has is to try to minimize the damage, to control it as best he can. Ideas of getting the money back by holding the stock long-term don't even come close to the true trader's mind. This occasional disaster is considered the cost of being a player and is dealt with in the most professional manner possible. Should you find yourself in this unwelcome scene, the steps you should take are as follows:
Steps to take when Disaster Strikes
1) When the stock opens, monitor its trading activity for a full 5 minutes. During this time, you are to do nothing. You are not to sell. You are not to buy more. Your only action is the watch your sad stock trade. Tip: Because market makers and specialists tend to gap stocks down too excessively so that they can buy cheap stock, giving your shares up during the first 5 minutes of trading is statistically unwise.
Now this is not say that the stock can't or won't trade lower. This action simply prevents the trader from jumping on the sell side with the rest of the herd. Panic, which is typically at its peak in the first 5 minutes of trading, is not the state of mind in which a trader wants to do anything, much less give up in. Never give up your shares in a state of panic. There are times when giving up is the right thing to do. We simply can't and won't win them all. But you must only give up while thinking clearly and while in a calm, controlled state. Waiting for 5 minutes to transpire before you act will help accomplish this. Look at it this way. You are already crushed. Unless you are trading a high priced Internet stock, an extra 5 minutes won't make or break you much more.
2) After 5 minutes have gone by, mark off the day's low (the lowest price the stock traded during the first 5 minutes). This will be the most important price of your life for the next 30 minutes.
3) Sell at least 1/2 of your stock if and when the stock breaks below the 5-minute low (the day's low established after the first 5-minutes). Why is selling only 1/2 acceptable at times? Because the 30 minute low (not the 5 minute low) is the really significant one. Until we let the stock trade for a full 30 minutes, we have not really given it a full chance to rebound. Then why sell 1/2 on the break of the 5 minute low? Just in case the stock continues to drop furiously during the first 30 minutes of trading. Keep in mind that these are just guidelines. We don't want to be stupid.
The truth of the matter is that we have a problem, and our actions are nothing more than damage control. Selling half your problem always provides for more clarity. The less burdened we are the better. This is why giving up half of our headache is the best course of action, if the stock breaks to a new daily low after 5 minutes have passed. Note: It should not be missed that many traders will be best served selling the whole lot at this point. The half option should only appeal to those gap downs that are not overly monstrous.
4) After 30 minutes of trading, mark the day's low again. Now keep in mind that this 30 minute low will either be lower than the 5-minute low, or the same. If the stock breaks below its 5-minute low before 30 minutes have gone by, the low the trader will use after the 30-minute mark will be lower. If the 5-minute lower is never violated during the first half-hour, the 5-minute low will be the same as the 30-minute low. This point is crucial.
5) Sell all your stock if and when the stock breaks below the 30-minute low (established during the first 30 minutes of trading). Keep in mind that this is the real line in the sand that must be drawn. Just as we explained in the Gap Buy and Gap Sell sections of this report. What happens after the first 30 minutes of trading tells all. If the stock moves to a new daily high after its first half-hour of trading, the strength is real and should be respected. If the stock breaks to a new daily low after the first half-hour of trading, watch out. This is a very weak stock that has further downside to go. The stock must be eliminated. No ifs, ands or buts about it. Gone!
6) Use the Trailing Stop Method. This is the action the trader would take if the stock managed to remain above its 30-minute low throughout the whole day. Note: Some traders I have taught opt to keep their stop at the low of the disaster day. In other words, they don't use a trailing stop method. Their view is that as long as the stock remains above the low of the gap down day, it can be considered to have bottomed. Sometimes this approach improves the outcome. But the trader's risk of doing this is possibly losing the opportunity to narrow his loss forever. I have found this alternative approach to be most useful on leading technology stocks that gap down, such as an Intel, a Dell or a Microsoft.
A special word: Some of my most aggressive traders will use the 5-minute rule on the upside to add to their crushed position. In other words, if the stock breaks above the first 5-minute high, they will buy more stock with the idea of flipping it (selling the new lot quickly) several levels higher. This aggressive strategy is called Bullet Play and it often helps the astute trader to further narrow his loss. However, it must be realized that the same 5-minute sell rule stays in tact. The only difference here is the additional buy. Nothing on the sell side of the equation changes. This is just a note for those who consider themselves to be aggressive.
Signs of Impending Danger
While we can never prevent disasters from taking place, there are times when clear signs of impending danger can alert us before a debacle occurs. Knowing what those signs are can save the active trader thousands if not tens of thousands of dollars over a lifetime. Not only that, under the right scenario, the astute trader can even use some of these warning signs as a way to profit in reverse. Let's face it. Sometimes bad things happen to good traders, but knowing and watching for the warnings signs listed below will ensure that those bad things happen to you a lot less than they will to others. Become intimate with each sign below, for they will literally save your financial life. And I'm willing to bet they save it more than once.
There is much more to come, my friends. We will be issuing additional segments over the next several weeks. Please stay tuned as we complete this most valuable report. We are fully aware that many of you will be overly anxious to get the rest, but good things really do come to those who wait. Besides, we have already dispensed a great deal of information in a compact format. Several reads of the above information are absolutely mandatory. It is so easy to breeze through the above too quickly and too lightly, missing the numerous life giving jewels and gems contained within. I want every one of our serious followers to know that each time you read the Master Trading Plan, a new level of knowledge and understanding will open up to you. Digest it. Devour it, but most of all Live it. You won't be sorry.
Trade Types
The following is a list of the most common trade types complete with a brief description of each style of trade. These trade types should not be confused with the many specific, proprietary trading strategies and tactics used by Master Trader.
Scalp Trade: A style of trading that is designed to capitalize on small moves, using price setups that present exceptionally low risk opportunities. The typical objective for a scalp trade is 1/4 to a 5/8 or more. Scalping demands a familiarity with Level 2 as well as the use of a direct access system for instant order execution. The best scalping opportunities are found in liquid stocks (trading 500k or more shares a day) with quality market maker representation. Scalp setups are typically found using charts in smaller intra-day timeframes such as a 2-, 5- and 15-minutes.
Day Trade: Conventionally speaking, a day trade is a position initiated and closed out in the same trading session. In our ITM, a day trade is an opportunity with the potential to become an overnight (o/n) and/or develop into a swing trade, but because it occurs early in the day, it is typically treated more aggressively in terms of locking in partial or complete profits. Day trades also typically employ tighter stops than the average swing trade does. We have found that the best day trades usually have "room to run," with resistance being far enough away to warrant holding through a brief pullback or period of consolidation if necessary. Day trades are typically found using intraday charts with medium length timeframes such as a 15-minute or hourly chart.
Overnight Trade: An overnight trade is typically a position entered late in the day in a stock which is closing at or near its high (or low, for shorts) with the potential to gap up or see follow-through the next morning. As mentioned above, an overnight can also start as a day trade that closes strong enough to warrant holding past the close and into the following day. Overnights are frequently closed out in the early going of the following morning (if not right at or before the open) with some traders opting to sell only half, with the remaining half held for a longer period and a potentially larger price gain.
Swing Trade: A swing trade is one that is entered with the idea of profiting from the natural ebb and flow of a stock's daily movements. Swing trades are usually initiated in an area of significant support (or resistance, for shorts), and seek to capture between $1 to $4 in profits, depending on the situation. Typically held for a period of two to five (or more) days, swing trades take advantage of a very profitable market niche overlooked by most active investors. Too brief for large institutional concerns to take advantage of and, at the same time, too lengthy for floor traders (who typically don't hold positions overnight) to be comfortable with, this time frame offers the perfect opportunity for independent traders who possess the expertise necessary to profitably exploit it. Swing trades are found primarily using daily (and weekly) charts, with occasional reference to a 15-minute chart as well.
Core Trade: A Core Trade is a longer-term style that seeks to take advantage of an extended market move, typically on the long side. Looking beyond the usual two to five day objective of the swing trade, a core trade is often held for weeks if not months. Exiting a core position could be based on either the market signaling that it is time to cut back our exposure, or the stock itself experiencing a technically bearish breakdown such as a weekly reversal candlestick or violation of a significant moving average. Because of the very different mindset involved in managing core trades, it is recommended that traders keep a separate account.
Miscellaneous Points
Below you will find a list of miscellaneous points that do not command their own category, but are just as important as the aforementioned rules (some are even more important). In fact, this page may be the page to which many of you turn the most frequently for daily guidance. Repeatedly read each item with care, internalizing the rich meaning contained within.
Point 1: Consider "6-8 Week Break-Out Plays," "50 Day Moving Average Plays," "Channel Plays," "Stair Step Plays" and "3 to 5 Down Day Plays" our most compelling trading strategies. As a Master Trader subscriber, you will be exposed to, and learn from, a large number of reliable trading tactics, but the above mentioned strategies (listed in order of importance) are by far the most reliable and the most plentiful. In fact, some traders may want to play these strategies exclusively.
Tip: Whenever these strategies are used, they are very clearly stated in the commentary and/or on each accompanying chart.
Point 2: If a recently recommended stock is not mentioned in our " Stocks Update" section, it is to be assumed that the original (or last updated) strategy is to be adhered to. Because of limited space, there are times when we are simply not able to update every one of our open positions; however, this is not usually necessary, anyway. Each of our stocks is accompanied by a very detailed buy a sell strategy at the time of its recommendation. That original strategy (namely stops and price targets) should be strictly adhered to, in the event that no update appears. Typically we will not mention a stock in our update section if it requires not change or adjustment in strategy. Tip: There will be times when a stock is not updated, despite having met its upside target or violated its downside stop. This lack of an update is not to be construed as no action taken on our part. In these cases, all stocks meeting their up or downside objectives should be assumed closed by us.
Point 3: Please keep in mind that our suggested price objectives are calculated from the most current price, not from where you buy the recommended stock. For instance, let's assume that a stock is currently at $35, and we are looking for a $3 rise. this will make our upside target $38 ($35 + $3 = $38). Should you happen to buy the stock at $36, your upside potential profit will then be $2. Tip: Consider this important point whenever choosing which stock(s) to play.
Point 4: Do not anticipate (jump the gun) by buying a stock BEFORE the suggested buy point is met. Very often we will recommend that you buy an issue once it trades "above" a certain price (example, XYZ: Current price $20. Buy once it trades above $20.25). We obviously choose to buy certain stocks this way for a good reason. Buying them before the upside buy point is met can prove very costly. DON'T DO IT. That is if keeping your hard earned money is important to you.
Point 5: Do not buy any recommendation that hits its entry price in pre-market trading, before the market is actually officially open for trading. Occasionally, one of our over-the-counter recommendations will trade up to meet our stated entry price before the bell, but oftentimes these pre-market machinations are nothing more than market maker games best to be left alone by all but the most experienced traders.
Point 6: Consider buying only 1/2 your normal lot size on any stock recommendation that has a stop loss more than $2.00 away. Playing half when the potential for loss is a bit healthy is a very important element in our approach. There is nothing more important than our (your) original capital, and keeping it in tact is the paramount objective. We'd rather err on the side of making far less than we could have to save ourselves from the potential of being devastated by a large loss. Tip: always err on the side of caution. You may not become a billionaire, but at least you'll be around to play another day.
Point 7: Whenever choosing which of our four stocks to play, always consider the worst case scenario first. Each of our stock recommendations will have a suggested stop price at which to sell, should the trade go sour. If the noted stop loss is $2.50 away, tabulate the loss you will sustain if the stop is hit. If you feel that you will have no problem taking a loss of that size, then all systems are go (green light). If the tabulated loss will cause emotional and/ or financial difficulty, either reduce your size (example: reduce from 500 to 200 shares), or disregard the trade. Its fortunate that as traders we do have choices. You'd be very surprised how just a little forethought can save us a lot of heartache and pain, not to mention money.
J Santellan.
The Master Trader
