Dave Landry On Laying The Foundation For Successful Swing Trading, Part III
In Part 3 of this lesson, I’d
like to answer some frequently asked questions I receive from readers:
Q&A
Q. When trading pullbacks, how do
you know that this pullback won’t be the last?
A. You don’t. You have to keep
playing the stock as if the trend will last forever. Hopefully, you won’t get
triggered on a pullback that turns into a major reversal. Or, at worst, you’ll
get stopped out with a modest loss. The good news is that markets often offer
many opportunities before they eventually fail.
Q. You didn’t mention ADX as a
determinate of trend. Do you still use ADX?
A. In my first book, I felt that
I had to quantify trend for those new to trading or those who needed more of an
objective type analysis. Inadvertently, I think too much emphasis was placed on
the indicator. I don’t use ADX to quantify a trend for a potential setup. I
“eyeball†a chart and look for Trend Qualifiers. I do use ADX for
research purposes, especially when working on contra-trend market timing
signals. However, on a day-to-day basis, I simply prefer looking at the charts.
Q. Do you use actual or mental
stops?
A. If I am distracted or have
many positions on, I will place an actual stop. If I can watch a screen and not
be distracted, I will use mental stops. I will look to exit after my
mental stop is hit. In other words, I will “trade out†of the position. In some
cases, I end up risking slightly more than intended and in other cases the trend
resumes I end up with a winner. Mental stops do require discipline though. I’m
amazed at the number of people who ask me for advice on what to do with a
position after they have losses of 5, 10 and even 15-points or more. For these
people, they should place actual stops in the market. This makes controlling
losses a passive decision and not an active one.
Q. Do you carry stops overnight
(i.e. good till canceled orders)?
A. No, I allow the stock to open
and then place my protective stop. This allows me to “trade out†of adverse
moves. Again, this requires discipline. If you find yourself being a “deer in
the headlightsâ€, hoping for a stock to come back, then you’re much better off
carrying the stop overnight.
Q. You mention that the low of
the pullback is a target area for market makers. Can you elaborate?
A. Yes. The “textbook†place to
put your initial protective stop is right below the low of the pullback.
However, if this is fairly close to the entry, for instance, less than those
parameters given in table XX, then there is a high likelihood that it could be
hit.
Q. You mentioned that the initial
protective stop should be varied depending on volatility of the stock but you
didn’t define volatility.
A. It’s beyond the scope of this
text to get into complex volatility measurements. The good news is, one of the
best ways to gauge volatility is to simply “eyeball†the chart. A hot technology
stock that moves several points a day is volatile. And, you’re kidding yourself
if you think you will be able to trade that stock with a tight stop. Conversely,
REITs or certain utility stocks that might only trade several points in a week
are not. Therefore, on stocks like these, tighter stops can be used.
Q. You seem to imply that people
use too tight of stops to capture swing moves. Are there cases where a tight
stop can be used?
A. Yes, if everything is “in
gearâ€â€”