Anticipation or Confirmation Day Trading

During the first four months of trading, I would always wait for confirmation before getting into a trade. If the stock were tanking, I would wait for two green candles when the second candle’s price broke above the high of the first green candle. I would tell myself to click the buy button and I did without hesitation. I had no fear. Buying shares when the stock was moving up was easy. My emotions were justified. My stop-loss was now the low of the lowest two green candles. Because I waited for confirmation, my average stop-loss was 30 to 40 cents. On 1000 shares, that amounts to $300 to $400, a large risk in my opinion. With such a large risk, the reward should be a minimum 1.20. Looking at the current chart, it would take a miracle to get over a 1-point move.

It is even more difficult waiting for confirmation to get short a stock. Remember, as traders we can only short stocks during an up tick. Waiting for two red candles, the second breaking the low of the first, has you chasing the stock down so fast that by the time you get short, not only is your stop-loss now 40 to 50 cents, but the stock starts to bounce immediately after you get into the position. If you decide not to chase the stock price, and you wait for the stock to bounce up to the high of the two red candles to get short, you are asking for trouble. A stock that has two red candles, the second breaking the low of the first then going back to the high of the first candle, is a sign of strength, a time to be looking to go long, not short. Waiting for confirmation to place your trades is not always the most profitable method to play the markets.

Short into strength; buy into weakness. How do you expect to win against the big players if you do not play like them? You have to anticipate the direction of a stock. When everybody is selling in a panic, and not a single person is on the buy side, you jump in with a bid and buy other people’s fear. It is the hardest trigger to pull, but good trading usually feels wrong. Now, it is not easy picking tops or bottoms, but using this method keeps your stop-loss small, and because you might have guessed the bottom at the correct moment, you will also stay on the boat for a much longer ride, reaping larger profits.

Depending on the particular stock I am trading, I will try to anticipate tops and bottoms within 15 to 20 cents. If I cannot pick the top or bottom within 15 to 20 cents, I take my stop-loss and admit I was wrong. If I get stopped out only to see the stock move in my desired direction, I analyze the reasons why I should have waited for a better entry and learn from my mistakes. I cannot get mad at taking a stop-loss; it is the only rule that keeps me alive to stay in the game another day. If I cannot get into a position within 15 to 20 cents, I only have myself to blame. I really started to see my profits increase dramatically using the 15 to 20-cent top-bottom anticipation play. It is not for the novice trader, but with time, I believe everyone can master this method.

I did not like to risk more than $200 on any trade when I first started trading. Some people will protest that you should have your stop-loss located at support and resistance areas, not dollar amounts. This is somewhat true, but I changed my trading style to accommodate this conflict.

If my entry point is more than 20 cents from a technical area, but within 30 cents, I use 500 shares instead of 1000 shares for my first entry point. Now, if the stock goes against me 20 cents, I am down $100. Then I short another 500 shares. If the stock goes against me another 10 cents, I take my stop-loss of $200. Using this method, I can still stick to my $200 stop-loss rule and keep my position within a larger technical area of 30 cents.
However, if the stock goes in the desired direction, I am happy using two entry points because it prevents me from taking a loss. If I had used 1000 shares at the first entry point instead of 500 shares, the trade would have stopped me out and I would be down $200.

This particular style suits me well. It may generate more commissions, but if it helps you avoid large losses and take more profits, the commissions are justified. Remember that commissions are just part of doing business.

Stock Teacher