The working person’s trading method detailed. Part 6 Money Management: Finding Buy Points, Setting Stops and Targets, Position Sizing

Money Management for Busy People

Narrow Down the Watch List

Now that I have a watch list, every week I go through this list looking for the best setups. I narrow my watch list down to about 20–25 of the best looking charts, and/or charts that have made a constructive pullback and are near a buy point. My main watch list is usually around 100+ stocks added via my various scans over the years. I do pare that list down from time to time.

Once I have the 20–25 best setups I will rank the top 5 or so out of them. I will flag these five best setups, if I have capital available I will place orders on the absolute best setups out of these. I want to wait for the premium setups and if no setups are available then I do not place any orders. One of the reasons I wait for what I deem to be perfect setups is that I use large position sizes. Larger than what I would say a lot of traders would be comfortable using. What do I mean by position sizing? That is the amount of trading account that you put into one trade. For me I like to put 50% of my account into each trade. That is why I wait for the very best setups.

Position Sizing

Why such a large position size? My trading style is somewhat infrequent. I am not making a large amount of trades, so in order to achieve a decent return a large position size is needed. It is not for everyone. You have to be confident enough in your trading skill to be able to risk so much.

We have been very conditioned to not take risks with our investments and to play it incredibly safe, so it is hard for a lot of people to take these kinds of abject risks. That is probably a topic for another blog post, but I have a different opinion that in order to get ahead in life some highly calculated risks are needed. Keep in mind, this is no way akin to quitting your job and going all in on a business idea. This is much less risk, as you should be funding your trading account with risk capital and not with your emergency fund. I realize it is hard for people to save enough to actually have risk capital in today’s world, but it is possible. If anyone is interested in how I did it just ask.

Buy Points

Now that position sizing is out of the way, let’s get to the details of buy points. As I stated before, I narrow my list down to the best setups for the week. I will place an order or two on the best of the best in my broker(IB). The rest of the 20–25 best for the week I will set an alert via IB near where I would consider buying them. When I get the alert I check the chart, if it looks like a good buy I place an order. I use limit, good until canceled, and after hours as my options. I also like to hide my order with the hidden attribute.

The limit order is the price that the order executes at. It is placed at the Bid in the Order Book. This is superior to a market order in many ways as a market order just buys at the Ask price. This can be problematic. Good until canceled simply means the order stays until I cancel it. It is not a day only order. After hours means it will execute in after hours if my limit is hit. I have gotten into some nice trades this way, occasionally you see weird dumps in after hours that one can take advantage of. I like to hide my order, this is a preference but I want every advantage I can have against the trading algorithms.

Where do I look for an ideal buy point? I like to buy at or below a really good support level. The ultimate support for me would be a horizontal support level aligning with an up trend line, preferably early in a new trend. You often seen manipulation rip through that level briefly and then resume the up trend. If you can catch a nice, new trend at a buy level below a superb support you can end up with a very nice trade. I generally do not use many indicators, except when setting my buy levels.

STS is a good example of what I like to see. It setup with a nice first thrust off of the low and forms a first stage base. The bottom of the base at 11.6 or so made a nice area to enter, especially when it came into contact with the up trend line. Those are my top two “indicators”. It is mostly visual and somewhat subjective. It is also incredibly simple and effective. Other indicators I will use, in order of how much weight I give them, are Bollinger Bands, Volume at Price, RSI, MACD, and occasionally Fibonacci levels. I do not give these as much weight, but they do help in finding support levels. The more of these that align the better the support. Why do I use these? Primarily, it is because they have been statistically proven to have an edge. See Adam Grimes’ work for details.

Secondary Indicators

Bollinger Bands simply gives you an indication of overbought and oversold levels. You can determine this visually, but BB give you some precision. Volume at Price just does what it implies. It can help find support levels. RSI and MACD can show shorter term overbought/oversold as well showing you some divergences. Fibs do not have a statistical edge per se, but I do occasionally use them. They can help to enhance your perspective of the chart.

Here is STS with all of these indicators turned on. This is my “Mega Support” tab of Telechart that I switch on when finding buy areas.

At the 11.6 level the price was at or near the lower Bollinger Band several times. This helps to confirm and strengthen the support level. RSI and MACD are fairly neutral. There are not any divergences to speak of either. Volume at price indicates a lot of buying within the base, further strengthening that 11.6 level. Hopefully, this gives you a nice example of what to look for.

As I said I place orders and alerts in IB. This is all done during the weekend typically so during the week everything kind of runs on autopilot while I am working. I may have to pull up a chart from time to time when I get an alert and make a decision to buy or wait for a better setup, but other than that is all about executing the plan at this point. Once into a trade I will have to manage the stops and targets.

Stops

Targets are entered into the IB platform via limit orders. Stops I do not like to enter into IB as there is a lot of manipulation that currently happens and getting stopped out at the low of the day and seeing a stock reverse higher has happened to me on more than one occasion. That is the big banks and algos hunting stops to accumulate a larger position.

That is why I use a series of rules for my stops. They are end of day based and I do allow some wiggle room for the stock to move back above the stop. I always have a place I would sell no matter what, a hard stop if you will. For the soft stops I let the stock move below intra-day as long as it closes above the stop at the end of the day. If it closes below at the end of the day I give the stock one hour the next morning to move back above that stop level. If it does I reset the process, if it does not I enter a sell order.

This may sound convoluted and confusing. It is, but it has also allowed to stay in several trades that ended up being big winners. It has helped me more than hurt me to use this method along with using a fairly loose stop to begin with. My typical soft stop level is around 20 percent below the entry on average. I again like to look at the chart and find a good support around 20 percent below my buy level. If possible, I like to be below that support if possible with my stop. I am using the same indicators to find these supports as when picking my buy levels.

Targets

Targets are much simpler. I look to sell half of my position at roughly a 20% gain. From there I go into trend-following mode and trail my stop higher as the

stock trends higher. I trail my stop higher even before I hit my initial profit target as well. This means I do have a better than 1:1 risk reward ratio even though a 20% target and stop would not necessarily indicate that. After my initial profit target I do not set another profit target, I simply trail my stop and eventually get stopped out, in profit, and hopefully above my initial profit target. These targets are hard placed with my broker with the same options that I use when buying(limit, GTC, hidden, AH).

I do also utilize margin when deemed appropriate. This is another way to increase returns. I would not recommend margin for beginners, but it is useful for more advanced traders.

The system is now starting to really come to life. I covered a massive amount of information in this blog post. It may require re-reading. I originally intended to break this topic into multiple posts, but it flowed extremely well so I went with it. Please ask questions as they arise. The rest of the series will be devoted towards setting up and running the scans primarily.

Working person’s trading method series:

Part 1: Why you should trade.

Part 2: Resources

Part 3: My Trading History and Introduction.

Part 4: An overview of my process.

Part 5: The characteristics of a stock that makes my watch list.

Part 6: Money Management: Finding Buy Points, Setting Stops and Targets, Position Sizing

Part 7: The Weekday Routine and Scans

Part 8: The Weekend Routine and Scans

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Originally published at Speculate Freedom.