2 Q&A from August 14th Webinar
Q: Are there any circumstance in which you’ll get out of a trade before it hits your stop — a candlestick pattern that says the trade is going strongly against you before it breaks support or resistance? -Kate
A: Great question! Yes – the market gives you fresh information every day – don’t ignore it. You originally set your stop based on the information you had at that time. With new information (a candlestick reversal, news event, etc.) you may want to close a position even before it hits your stop.
Q: Does The Equity Oracle cover small cap penny stocks? – Mark
A: The Equity Oracle and Options Oracle generally do not consider penny stocks as trade candidates. Occasionally, The Equity Oracle may address penny stocks from an educational standpoint to illustrate how they vary from higher-priced stocks.
Q: How much should my trading account be to make the Oracle worth the subscription? – Bill
A: You can certainly benefit from the Oracle education regardless of your account size. If you’re thinking in terms of trading your account and paying for your subscription, we recommend at least US$5000 in your trading account.
Q: I have spoken to some “experienced” traders which have completely pulled out of the market and moved in cash as they said its a bear market. In your opinion are we in a bear market? If not would what are the indicators of a bear market? – Mark
A: Are we in a bear market? Yes! Are we in a bull market? Yes! The answer is, there are both bear and bull markets right now. For a while, oil and gold were raging bulls. Recently, we have seen the clear bear prints in the financials. By definition, a bear market is a 20% pullback from the highs. The main point is this – the market is not homogenous. You can always find stocks to buy and stocks to sell; regardless of the direction of the major indices. Therein lies your opportunity. Happy hunting!
Q: Hey, Rick! I just watched one of your webinars through E*TRADE FINANCIAL and really enjoyed it! I took notes on it and everything. It was very informative. However, I have a question for you: once I finished watching your live webinar on price, I watched an archived one on conditional orders. I would like to know what the difference is between ‘sell stop’ orders and ‘stop limit’ orders. I was a little bit confused when someone asked a question on stop limit orders and just needed some clearification. Thanks! – Connor
A: A sell stop order is a stop order that becomes a market order upon triggering. A stop limit order is a stop order that becomes a limit order upon triggering. A great resource to learn more about stop orders and risk management is the 2007 Webinar Library. The 10-DVD set includes sessions on conditional orders and much more!
Q: I’m trying to settle on a decision-making strategy for stock-picking. Suppose I run the Strategy Screener in Power E*Trade Pro and I come up with some individual stocks that look like good buys or good shorts. Do I pass the trade if: 1. The market is trending in the wrong direction. 2. The industry is trending in the wrong direction. 3. The market or industry has no clear direction, and is quiet. 4. The market or industry has no clear direction and is whipsawing violently? Or, basically: when does ‘the general conditions don’t favor the trade’ override ‘this individual stock looks good’? – Kate
A: The overall market and sector/industry trends should be taken into consideration but the go/no-go decision will be based on the stock itself. For example, when oil prices were shooting up, we saw many days when the indices were weak but OIH, for example, was strong. A strong move in the market will tend to influence trader/investor sentiment, of course. Buying an uptrending stock in an uptrending sector will tend to be a better trade than buying an uptrending stock when the rest of the sector is falling. Whatever your choice, be sure to follow The Market Guys’ 1% Rule and you’ll know what to do if your pick is wrong!
2 Responses to “Q&A from August 14th Webinar”
OK, getting out of trades before it hits the stops. I’ve made two different kinds of errors. I’ve held on when I should’ve gotten out. Now, I’m not likely to make that mistake in an account-crushing manner now that I know how to set stops. But another thing I’ve done is get out early out of fear, and turn what would’ve been a winning trade into a loser. So I need to develop some objectivity in the signs I use to get out early.
Obvious really bad news probably doesn’t need commenting on, but which candlestick patterns or price/volume patterns do you consider a reliable “get out of this trade” indicator? And does the time horizon of your trade affect how much weight you give the candlestick? For instance, is there a time horizon for a trade when you consider the daily patterns unimportant because the trends are too short, but you’d act on the weekly patterns?
Hi Kate,
You’ve obviously identified the two mistakes that can be made with stops – too tight and too loose. As you said, too loose creates the “account-crushing” losses – if you don’t use the 1% Rule. Remember, with the 1% Rule you size your position so that regardless of where you place the stop, you have a predefined loss limit of 1% of account value.
Setting stops too tight can be caused by several mistakes.
a) Trading with scared money (afraid to take a loss) is usually resolved by taking a break. Get back into the game with 100 share trades and build confidence.
b) Reading the charts too tightly. Intraday and daily volatility can sometimes shake you out of a trade too early. Look at the weekly charts to see where the major support/resistance levels are and use them.
c) Consider how closely the candles respond to the support and resistance. If you see long shadows punching through the 50 SMA, for example, you have to set your stop far enough away to accomodate the volatility.
d) Understand how each candle pattern is used – the finer points of application. For example, a hammer reversal should have HIGH volume to represent selling capitulation. A morning star reversal should have a GAP before and after the spinning top candle. Reversal patterns should be confirmed by a support or resistance line.
As you trade and learn, you will continue to develop your skill in setting stops correctly. If it helps, this is one of the hardest skills to master. You are doing the right thing in attending our webinars and subscribing to The Equity Oracle!
Thanks – Rick
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