Episode 8: Walking Through a Trade

Having covered all the major components of a Trading Plan, let’s now take a walk though the entire process, by following a trade from start to finish.

Transcript: 

'Successful Trading' - Episode 8: Walking Through a Trade

Presented by Jeff Bryant, HomeTrader.

Hello - and welcome to Episode 8 in our series on becoming a Successful Trader.

Last time, we looked at how to use a fixed stop loss exit to keep our losses from losing trades to a minimum, and then how to lock in profits on winning trades using a Trailing Stop.

Having covered all the major components of a Trading Plan, let’s now take a walk though the entire process, by following a trade from start to finish.

As we go through this process, you’ll see me using a charting package known as Market Analyst. Here at HomeTrader we chose Market Analyst for their ability to create tools for the exclusive use of our members to make their trading easier. In the course of this episode, you’ll see me demonstrate a number of these tools.    
OK - the process commences with us looking to see if there are any stocks that meet our entry conditions. These conditions are all shown here in the ‘Scans’ section of our software. As you can see, we’re scanning the Top 300 shares on the ASX. In this example, the date is the evening of 29th May 2009.
   
As you can see, on this particular evening, we have EXT meeting all our entry conditions. In this example, we can see from our chart  that the price has closed at $5.46, a point that is above a previous peak. This is one of the triggers we talked about in Episode 4.
   
The results are saved and then quickly & easily imported into our Trading Spreadsheet.     
From here, having decide we want to own shares in EXT, we need to place an order for tomorrow’s trading. The order type is a limit order, (good for the day only).
   
The quantity we wish to buy has already been calculated by our spreadsheet. Our limit price is given to us using one of the custom-made HomeTrader indicators that we provide as a plug-in for Market Analyst. That price, as we can see here, is $5.76, and represents the maximum price we are prepared to pay to get into the trade. Hopefully, though we will get our order filled at a lower price, depending on what it opens the next day. Having placed the order, we are done for the night.

The next day comes and goes. That night, we check our trading platform to see if the order has  been filled. It has - we now own a parcel of EXT shares at the opening price of $5.40, marked here with a simple trend line.

The only question that remains now is when to get out of the trade. Our exit rules will determine this for us. They are easily applied, again using some of our customised tools.

In the first case, the fixed Stop Loss. Applied to the chart, with a couple of clicks of the mouse - and seen here at $4.67. The other part of our exit strategy is our Trailing Stop – again easily added, here at $3.65.

The fixed stope (being the one that would be hit first when price falls) is the Active Stop. With tonight’s price closing at $5.29, well above our Active Stop Loss, we're still in the trade. It’s actually very rare to see an exit signal on the same day as entry, but regardless, we check, just in case.

From here, all we have to do is monitor the trade, watching for the signal to exit. As time passes and the price lifts, we see our Trailing Stop moving up to a point where it is now above the Fixed Stop. Our loss is now reduced.
   
In our example, we can see the price then retraces, moving down toward our exit point. Fortunately, the nature of our exit strategy is that we give the stock enough room to breathe. This means in our example we are not tempted to jump out of the trade too early.
   
Here we see the stock regain momentum and our trailing stop is again moving up and has now lifted above our entry price. At this point, we are locking in profit.


As the price goes higher, the Trailing Stop continues to lift, locking in more and more profit. Finally, on the night of September 25, we open up our chart to see that the price has finally closed below our Active Stop Loss. It's time to go. We now place a Limit Sell Order to make sure we sell our shares the next day.
    
The trade has been a good one, lifting nearly 70% - making us quite a tidy profit.

Using Market Analyst, with the tools they make available to us; the market scanner & the customised indicators, the trading process is simple. Running the scan didn’t take long - less than a minute. Checking the chart in the evening didn’t take long - nor did placing the orders. When you know what you’re doing and you have the right tools, it’s just a matter of having the confidence to do what has to be done.

We’ll talk more about BackTesting our system in our next episode. In the meantime, if you’d like further information, you can visit our website at hometrader.com.au, and book in to one of our free 2-hour information seminars.