Trading: How much can I
make if I start trading the Qs?

Golf: How much can I make
on the tour after I start golfing?

Many pursue trading for the
income potential without regard to the time and commitment required to develop
and refine the underlying skill.

Entering a Trade:

Trading: How much can I
make on this trade?

Golf: How can I eagle this
Par 4?

While profit potential is a
necessary component of the trade decision making process, focusing on profit
alone can be like driving the ball as hard as you can for distance with little
regard to precision.

Trading the Qs vs.
Individual Equities

Trading: Why trade an index
since stocks have more upside?

Golf: Let’s play that Par
5 dogleg with bunkers … better chance to make 3.

Simply put, volatility and
its inherent risk can be double-edged.

Managing a Trade Gone Bad

Trading: I can make it back
if I average down

Golf: I can still make 4 if
I hit it through this redwood

Have you ever hit a drive
into the woods?  It happens. 
And what do the best golfers do?  They
chip out into the fairway, take the extra stroke and immediately focus on the
next shot.Perception of Other Traders

Trading: No one in my
chatroom is losing money.

Golf: No one else on the
course is struggling.

Do you ever get the feeling
amidst the industry hype and chest-pounding that all of the other traders are
making piles of money?  Yet we know
just because you don’t hear screaming or get hit by someone’s club toss on
the course that everyone is playing the same course and facing the same
challenges and struggles you face.

Lack of Individual Responsibility

Trading: I’m going to let
the stock caller do the work.

Golf: I’m going to let my
caddy hit my shots.

Would you prefer that your
caddy hit your shots or simply provide counsel as to various options which can
help you make the ultimate decision, take the shot, and accept appropriate
responsibility?  It’s no different
with trading.

Trade & Risk
Management

Now let’s go over a few
trade management fundamentals, including effective entries, exits, use of
protective stops, and incorporating the concept of trade probability.

High Probability Entries

As every QQQ trade entry is
made with the intent of capturing anticipated market movement, let’s review
some attributes of high probability entries:

Align
With Probability

We’ll review the concept
of probability shortly.  For now,
suffice it to say that it’s the trader’s goal to be positioned in such a way
where the market will move in a given direction more times than not.

Ensure Sufficient Profit
Potential Exists

What is the risk/reward ratio?  Are
you risking $1.00 to make $3.00 or $3.00 to make $1.00? 
Is your trade likely to run into brick wall of trend support for a larger
timeperiod?  Do you have multiple
supports on your side?Minimize Loss Potential

Knowing the specific
premise for your trade and what it will take to break that premise and trigger a
protective stop are prerequisites for any successful trader.
 

Effective Stops

Effective use of
trade stops is incredibly important in protecting the trader against significant
capital losses.  Nothing will put a QQQ trader out of business more quickly
than a blown stop.

Stops can be price-based or premise-based.  An example of a price-based
stop is exiting when the price movement exceeds a certain amount (e.g., $0.10)
from the initial trade entry.  A premise-based stop would be triggered by
chart signals, such as key support or resistance, rather than a specific price. 
Conversely, premise-based stop exits would be triggered upon a change in the
original trade premise regardless of price, with the objective of not allowing a
stop based on a specific price increment trigger a stop while the premise
remains intact and profit potential still exists.

However defined,
stops should be thought of as a temporary escape to cash to immediately
reassess and reevaluate, with re-entry or reversal should signals dictate. 
Depending on one’s trading style, re-entry or reversal timing can be
vary from immediately to several time periods later, depending on specific trade
conditions.  As such, it may help to
consider the exit to cash to be more of a “yield” rather than a “stop.”

Stop costs should also be considered a natural and managed cost of doing
business in a profession that depends strongly on the concept of probability to
conquer uncertainty.

Profitable Exits

Have you ever noticed that
few ever assist or encourage you to exit a profitable position? 
Between analysts with little incentive to issue “sell” ratings,
investors and momentum traders who don’t want to do anything to adversely
affect their position before they exit in the dark of the night, and a
general misconception on “buy and hold” strategies (how long do we hold??),
it’s no wonder why I refer to trade exits as “the trader’s loneliest
decision”.

Suggested exit strategies
include:

Exiting into Supply

Imagine you’re running a
store.  Suppose you were selling
merchandise to relieve inventory and a busload of out-of-town customers suddenly
appeared waving their folding money because they simply “had” to buy your
goods. Would you sell to them while
they were physically in the store and willing to fight over your goods and pay a
premium, or after the bus left and you have to not only chase them down
but offer to sell your merchandise at a discount? 
A similar analogy holds true for purchasing inventory from suppliers. 
Would you rather buy from suppliers able and highly willing to sell you
inventory at a discount or when they have less incentive and you have to pay
them a premium.  Whether you’re
running a store or buying and selling QQQ inventory, the concepts the same.

Resistance Levels

Areas of price resistance
can include larger contra-trend supports and statistical targets such as
Fibonacci figures.

Balancing Gain Maximization and Uncertainty

Since the market is an
uncertain environment at best, attempting to time perfect exits is a clear
exercise in futility and can quickly lead to trader frustration. 
One way to offset the imprecision inherent in the market is to scale out
of positions at appropriate resistance or statistical target levels, thereby
ridding us of that “perfectionist” demon that can cause havoc in one’s
trading psyche and results.

Low % Trading Times

Staying away from the QQQ
marketplace during times when risk or cost exceeds reward is a key to any
successful trader’s performance.  While
“when not to trade” periods can vary based on trader style and area of
specialization, here are some generic low % trading environments when you may
want to consider scaling back or not trading at all.

During Periods of Low Volume or Low
Liquidity

11:00 A.M. – 2:00 P.M. ET

Before/After general market
sessions

Day(s) before or after
Holidays

Prior to the release of key
economic or market-moving news (e.g. FOMC, MSFT earnings)
When Time is Not an Ally
(For Intraday Scalpers)