Thursday, August 16, 2007

An Analysis of a Trade

The most important rule for traders- is to establish a concrete stop loss rule. You must have a stop loss in place especially in times of market volatility.

The downside is that you face the prospect of getting bounced by the market. Meaning you sell when the price hits your stop loss during the day - and you see it rise the next day.

In this market, it can easily happen.

So one thing you can do to see analysis the chart as throughly as you can- get in at a good price- set your stop loss close - at 2%.

But frankly to be on the safe side- its best to stay out and see how the market trend develops. At the moment- its pointing downward- so the risk may be too great though tempting.

Anyhow check out the chart for Swiber. Click on the above chart. You can see that it was developing a nice trend channel since 2006 - and then in June 2007 it had a massive breakout and soared upwards to $3.40.

As the price goes upwards- what you should be doing is moving your stop loss upwards - to protect your profit. No point buying it at - say at 50 cents, watching it go to $5 - and not selling it hits back to 50 cents. That's not a fun roller coaster.

One way to determine your stop loss is to do simple line drawing. Draw the lines where you see the top and bottom and you can get an idea.

Now watch out for these things - as the moving day average widens as the share price soars upwards - watch out when they start crossing each other's paths - the yellow and the blue lines representing the short and medium day averages crossed at about $3.20 on the 30th July 2007 - cautious traders could start selling at this point as the trend is coming to strong resistance.

You may have bought in at $1.90 or even $2 - so if you sell everything even at $3.20 you make a 60% return in less than two months. Pretty good eh?

Say you buy 1000 shares at $2 - $2,000 - you have a stop loss at 2% - so you risk only $40 or so. Remember the trend is your friend - so if you jump for that strong ride- you should expect it to keep on going up. Don't set it too far otherwise you may get caught in a false breakout.

So you've made a profit of $1,200 or so - and risked only $40 - $80.

Warning signs.

Be careful when the trend ends- particularly when the market takes a downturn. Don't be too quick to jump back in.

I got in at $2.90 - thinking that the correction would be short-lived- that's what everyone was telling me. But the chart indicators- the moving averages - were not positive. See the moving averages pointing towards a downward descent.

Buy and hold- it sounds great but it does expose you to more risk.

I really should have exited at $2.80 - and taken a 3% loss.

Now I'm holding a stock that's fallen over 17%. Just over 10% today.

It looks like it may down further more.... aiyoh....

Of course its easy to say these sorts of things in hindsight. And the sudden downfall took everyone by surprise. But that's the market.

Anyways, don't listen to me too much- I'm a crappy trader. If you can buy books by Daryl Guppy- he has a series of books on charting which are readable.

I have all of his books- but sadly I rarely read them. lol.

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