Master Trader Session 5

Our second-to-last session of Wealth Intelligence Academy's Master Trader live online course taught by Matt Gildea began with a review of our last session from 2 weeks ago. If you recall, we looked at the Bull Pullback Long and the Bear Rally Short. Included in both the first time I took the class and on the retake (due to technical difficulties with the first class), were descriptions of how a short sale works. If the selling short is still a difficult concept, take a look at my Master Trader Session 4 posts. Hopefully one of the two descriptions will clear it up for you.

Entering a trade is only half the battle, possibly the easier half. After all, you can get fairly clear signals on a chart that sets up a good entry for a high probability trade, but what signals can we use to get out? If we don't get out at the right time, we can easily give back all our gains. In previous sessions we've talked about setting our stop loss at the prior day's low as a way to manage the trade. This is a fairly effective management strategy, but often times we'll get stopped out short of the full move because we don't give the stock enough "wiggle" room. Loosening up our stop (stop-loss) will give the stock a bit more freedom to continue the trend, but will also expose the position to greater risk. It's always a balancing act between reward and risk. The cool part about taking control of your trades is that you can tailor your trading style to agree with your risk tolerance.

Managing the trade is also more dynamic than entering the trade. Consider a particularly strong day's movement where the stock increases nearly half of the move that we expect -- say it moves up $3 and our initial target is for a $6 total increase. If we stick with the stop-loss at the prior day's low we leave a lot of room to lose the gains we just picked up. In this case, we probably want to adjust our stop up a little tighter to lock in those gains. Even if we get stopped out, at least it will be for a reasonable profit.

One strategy for exiting the trade is to do so in 2 stages. In the first stage we will likely close out half of the position we hold while we let the other half "ride." If we're not interested in a Position Trade, we may choose close out the position entirely. Naturally this means we'll set our stop a bit tighter for the first stage.

We were given the following strategies for Stage 1 (Swing Trades):

• Upper Channel Line: Draw in an upper channel line along the peaks and when the stock moves into the "retail" price either tighten up the stop or simply close the position.
• Reversal Candle: Look for one of the many reversal candle patterns and tighten up the stop or close.
• Prior Day Low: Probably the simplest management strategy -- simply update your stop at the end of each trading day.
• Prior Resistance: If there's significant prior resistance we may want to close as the stock comes into an area of prior resistance. This could simply be our initial target for the move and it may be wise to tighten up our stop to squeeze it for the reward we originally sought to capture.
  

2nd Stage (Position Trades) exit strategies include:

• Swing Low Violation: If the swing low drops out of the trend it may be a good time to close.
  
• Daily MACD Divergence: If the MACD crosses itself we may be seeing the end of the trend.
  
• Major Resistance: If we find the stock in an area of past resistance, especially tested resistance, we probably want to exit.
  
• Weekly Reversal: Weekly reversal candlestick patterns may be an indicator for a timely exit; however, you're probably better off managing this off the daily chart, follow the normal swing lows and adjust the stop.
  

You may have noticed something in common with all of those exit strategies: they basically all involve adjusting our stop (stop-loss). Doesn't that sound a bit easier than attempting to guess where to exit the trade? There are times we may want to use a trailing stop. I'll let you take the course to learn about when this strategy may be appropriate, but I will share with you another exit signal. If we watch for when the EMA(2) crosses the EMA(5) we can use this to keep us in the trade a bit longer. The difficulty with the 2/5 EMA crossing as an indicator is it requires a bit more attention to place the order as there's no way to automate based on this criteria.

After looking at the exit strategies we looked at a the following additional setups: High Base Breakout, Low Base Breakdown Short, Ascending (Descending) Triangle Breakout (Breakdown), and the Symmetrical Triangle Breakout (Breakdown). These are similar to the Pullback Tactics we've already studied, but are more of a consolidation pattern compared to the Pullback Long or Rally Short. I will offer this additional clue: the 2/5 EMA crossover often yields good results when applied to one of these consolidation tactics.

If you're finding all this confusing, don't worry, I'm leaving out a lot of details. If you're truly interested, signup for the class and get the full story instead of my generalized digest version. Tell them Mark Jones sent you... Are you reading this TMTT/EduTrades? I want a commission! ;-)