There is really no such thing as an “easy” market to make money in, however some types of markets are more conducive to success than others, and right now we are in the middle of one those types of markets.

If you are not making money in the market right now, you need to seriously re-evaluate your trading (and conversely, if you are making money hand over fist right now, you need to make sure it is because of your trading, not because everything is just going up).

So if your trading P/L is currently bleeding red, here are ten tips that might help put it back in the black.

1.  Cut your position size – Everybody goes through losing streaks, and if you are in one right now you should be progressively cutting your position size down until you return to your winning ways.  This ensures that you are trading the smallest size during your worst periods. Think of it like an out of control night in Vegas; as it gets later in the evening you should be drinking less, not reaching for the beer-bong.

2.  Stop trying to short stocks –  No matter what type of market we are in, short selling is probably the hardest thing for a trader to do profitably on a consistent basis. Those that can are part of a very small and specialized group of traders.  It may seem “cool” to try to make your money selling short, but what is really cool is just making money. Besides every time you short a stock, somewhere a kitten dies.

3.  Trade less (make more) – Take it easy Racer X, you don’t have to be going full bore all the time, (besides you’ll never catch the Mach 5 anyway).  There is no law that says you have to trade every day of the week.  If you are consistently losing money right now, trading more often will just increase your rate of loss.  Dial it back a bit and take that extra time to review your charts and find optimal set ups.  Then maybe Trixie will finally pay attention to you.

4.  Stay out of low-priced stocks – Trading cheap stocks may seem tempting, especially if you have a smaller sized account, but these types of stocks are often illiquid with wide spreads relative to their price.  Not unlike short selling this is a very specialized trading niche, and right now there is no lack of well capitalized and liquid stocks making nice moves in this market.

5.  Pay attention to what the market is telling you - If out of the blue your wife starts going to the gym, getting “elective” procedures, and wearing high heel boots to “work,” you better pay attention or know a good divorce lawyer.  Each time the market takes a nosedive I see the streams come alive with traders closing out their longs, or going short. But that is not what the market has been telling you.  It has been telling you that this is a “buy on the dip” market, where you add to your longs on support and you certainly don’t short there.  At some point this will change, but until then don’t try to go against the grain.

6.  Trade in the best sectors – The overall market tone is the most important factor in moving individual stocks, and right behind that is sector performance.  If you are not trading stocks in the sectors that are moving with the market, you are putting yourself at a great disadvantage.  Just look at the coal stocks during this recent rally; they have been nothing but dogs.  Make sure that you are trading stocks in the sectors that are moving up with the broader market.

7.  Check your methodology – Or more importantly, make sure you have a methodology.

8.  Review your risk/reward ratios – Are you averaging larger losses on your losing trades that profits on your winning ones?  If so you need to adjust your risk/reward parameters when entering a trade.  The minimum you should strive for is a 1:3 ratio, which means you can “win” on a smaller number of trades and still be profitable.  For more info take a look at my “Deconstructing A Trade” videos where I cover that subject so often you will want to puke….but in a good way.

9.  Eliminate external distractions – One day in 2005 I was battling a bad market, a bad Wi-Fi connection, and was forcing bad trades.  Even worse than that, my wife kept bugging me every three minutes or so. “Honey, can you come over here?”  ”Yeah, yeah, just give me a minute,” I would say. Finally she said, “honey, I think the baby is coming!”  Out of deference to her, and the doctor, and the nurse, and the intern staring at me, I closed my laptop and stopped trading for the day.  (Oh man, I wish I was kidding about this story). Point is, if there are distractions in your personal or professional life, they can often cause you to lose focus in your trading.  If you can’t eliminate them, it might be best to hold off on trading until you can get a handle on them.

10.  Subscribe to a trading service – As I have written about in the past, I am a big fan of quality subscription services.  If you are a beginning trader it is like having an experienced mentor, and if you are a seasoned trader, it is like having an extra pair of eyes on the market. The money you make in trading spends the same way no matter if you found the trade yourself, or somebody else gave you a heads up on it, so put your ego aside and make good use of this “tool.”

And of course most importantly, finding an interesting and informative free blog that talks about the relationships between the markets and life, in a humorous and relatable way, will take your mind off your trading losses and let you relax.  Just make sure you can subscribe via E-mail or RSS.

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(Note: If you are new to my blog, I post about all sorts of things.  Sometimes it involves something extremely personal, like creating a 30K baby or my Monster Trades.  Other times it deals with hot ex-porn stars who trade stocks.  And sometimes it’s about how to avoid “suicide”.  But a good place to start is The Best of bclund.  If you like what you read, please tell a friend.  If you don’t, please tell two friends.)

Today’s guest post is by Henry Brookins.  Henry is a former hedge fund manager with 18 years of trading experience.  He is a graduate of the US Naval Academy and holds a dual Masters of Science degree in Meteorology and Physical Oceanography.  He is the founder of Stocklooker.

In yesterday’s post I made the case that the markets as a whole were rigged against the average trader.  Today I will tell you how I adjusted my trading style to exploit that rigged environment.

There are 3 requirements for making money in stock trading. The first is having a proven, successful method for picking stocks. The second is having a sound risk management plan, which involves determining Reward vs. Risk and where to place protective stops, and the third is controlling emotions. By far, the computers excel over humans at controlling emotions.

But I have found that there are a couple of things the computers have difficulty doing: 1) Humans can select profitable chart patterns better than computers, at least until Artificial Intelligence improves further, and 2) Computers have more difficulty moving stock prices when the stocks have large average daily volumes.

Selecting profitable chart patterns, determining reward versus risk (risk management), and controlling emotions are topics for another day. Let’s talk about placing initial protective stops in the right location.

As I was trading in January and February 2011, I noticed an unusually large number of my trades were losses.  As any trader must do, I started analyzing why I was always being stopped out of my trades – even though my method of placing stops had not changed in years.

I noticed the stocks would hit my entry points, which were almost always above or below resistance and support areas, and then almost immediately the stock would move against me and take out my stops. Again, when you trade a while you notice these things are not normal. (I later realized it was computers manipulating my stocks on practically no volume).

The returns on a 50k account were as follows:

Jan 2011:  ($1043)

Feb 2011 ($2698)

Then in March I changed my stock selection and stop placement, and the results were:

Mar 2011 + $6,445

This turn around in performance I attribute to three changes I made:

1)       I started trading stocks that were not market darlings, like Apple (AAPL), Microsoft (MSFT), Priceline (PCLN), Google (GOOG). These darling stocks are heavily manipulated by computers and the Federal Reserve because you can move the Index by manipulating just one of these stocks.

2)      I gave the stocks “more room” between my entry price and the stop price, which also means I had to decrease position sizes in order to control my losses at a certain amount.

3)       If I was trading a stock intra-day, I would still choose a stock with at least a 3-1 reward-risk ratio (discussed in another article), but I also increased my hold times from hourly to daily. My hold times went from an average of 1 day to 15 days, approximately.

I only had one more losing month the entire year, and of those three changes, stop placement was the real key.

Here’s examples of stop placement that will work whether you invest for the long term, or trade intra-day.

Buying a stock:

I look for a strong downward move in price accompanied with volume (green circle). I also want the relative strength indicator (RSI) to be higher in value when the stock tests its previous low (see low 1 versus low 2 red circles). I determine the low price of that lowest price bar, in this case $37.58, and I wait for my stock to retrace that strong move down. The stock hits my buy point at $37.93 on a “breakout” and I immediately place my sell stop at $37.56, just below the lowest low of $37.58.

I then place a trailing stop as the stock moves higher. In this particular case, once USO moved out of the secondary base pattern at $38.37, I moved my stop up from $37.56 to $38.19 and locked in a gain.

Next up – shorting stocks and placing stops.

Find Out More About Henry Brookins At Stocklooker.com

Subscribe to bclund.com Via E-mail or Via RSS

(Note: If you are new to my blog, I post about all sorts of things.  Sometimes it involves something extremely personal, like creating a 30K baby or my Monster Trades.  Other times it deals with hot ex-porn stars who trade stocks.  And sometimes it’s about how to avoid “suicide”.  But a good place to start is The Best of bclund.  If you like what you read, please tell a friend.  If you don’t, please tell two friends.)

Today’s guest post is by Henry Brookins.  Henry is a former hedge fund manager with 18 years of trading experience.  He is a graduate of the US Naval Academy and holds a dual Masters of Science degree in Meteorology and Physical Oceanography.  He is the founder of Stocklooker.

The stock market has always been “rigged,” and there have always been “crooks,” but we have entered into a whole new era in the past 5 years. If you watch the markets for any length of time during the day, you know what I am talking about.

In the “old days,” a “rigged market with crooks” meant the Wall Street Investment Banks traded inside information, information not available to the public, and used CNBC and other talking heads to move stocks in their favor for profit. The “insiders” like Goldman Sachs would also front-run the public’s stock trades with their own trades, and occasionally would get caught.  When caught, they would receive a hand slap, pay a pittance portion of their illegally made profits, not have to admit wrongdoing, and keep on trading.

This is nothing new to Wall Street as these “games” have been going on since the  Great Stock Exchange Fraud of 1814.  And since then there certainly has been  no limit to the ways in which fraud and scandal have manifested themselves.

In the current era, there is legalized cheating, that which is approved by the Federal Government behind closed doors, and illegal cheating – that which is not publicly approved by the Government. Additionally, as opposed to the “good ‘ole days,” the way in which the scams are carried out are far more complex due to the technology explosion in the past 10 years and the invention of automated/digitized trading.

By technology explosion, I primarily mean computer speeds, which have enabled the creation of high frequency trading computers. Investment banks are now able, and in my opinion, “allowed” to see the public’s open trades and execute their own trades ahead of the public while the Securities and Exchange Commission looks away.  Additionally, “quote stuffing” (similar to Turkey Stuffing, and we are the Turkeys) makes it almost impossible to tell if a stock price is real or fake.

In the old days, you could trade stocks using either fundamental or technical analysis. Investors typically used fundamental analysis, the analysis of a company’s financial data, to determine which companies to “invest in” for the long haul. Traders typically used technical analysis to enter and exit a stock based on chart patterns, with the charts patterns themselves generated by “market psychology.”

These days, neither fundamental nor technical analysis can be used with any high degree of certainty. Two primary reasons are:

1) The stock market is now completely controlled by the Federal Reserve (which is comprised of the Too Big To Fail Investment Banks), so why waste time wondering if Apple (AAPL) is going higher – buy that sucker!!!

2) 70% of the stock market volume is generated by computerized trading, which doesn’t know bounds. The computers simply see where the open stock trades are, then go and get them.

Fundamental analysis went out the door with the Internet Boom of the late 1990’s – when the Yahoos of the world traded at 700x earnings. “Value” Funds (they look for value based on earnings) were getting absolutely killed by Growth Funds, so they changed their definition of “value” by changing how a company was valued. P/E’s meant nothing as long as earnings and sales growth were strong, so that small change allowed Value Funds to chase the high-flying internet stocks and compete with growth funds – for customers.

Of course that didn’t turn out well.  How is one supposed to “value” a company when the Government changes the accounting rules when things go bad for a company? It becomes a moving target.

Technical Analysis, which uses stock chart or pricing patterns, has been the most dependable over the years, however, it too has become much more irrelevant since 2008 when the US Government and Private Banking Cartel (a.k.a Federal Reserve) started propping up the stock markets with newly printed money (Quantitative Easing 1 through Infinity) – an act started by Greenspan and his famous “Plunge Protection Team” and carried forward by Bernanke, who I warmly refer to as Bernokio.

Computers don’t have emotions, which previously were required to create a genuine chart pattern with price support and resistance levels. Instead, the trading computers now run algorithms which manipulate a stock above and below these price support and resistance areas, which negates the purpose of a chart and trend.  Of course it also is difficult to trade against the Government’s “approved” computers which can actually see the prices of where all of the open trades are sitting.

The good news is – there is still hope.

Coming next time - Reward versus Risk – selecting the right stops.

Find Out More About Henry Brookins At Stocklooker.com

Subscribe to bclund.com Via E-mail or Via RSS

(Note: If you are new to my blog, I post about all sorts of things.  Sometimes it involves something extremely personal, like creating a 30K baby or my Monster Trades.  Other times it deals with hot ex-porn stars who trade stocks.  And sometimes it’s about how to avoid “suicide”.  But a good place to start is The Best of bclund.  If you like what you read, please tell a friend.  If you don’t, please tell two friends.)