Retail Investor .org

The Basics of Technical Trading

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Cash Management

Before trading stocks using technical analysis you need to write the rules of a cash management system. Technical rules do not work all the time, in every situation. You need to deploy cash into the market over time, not all at once. E.g. deploy only 1/12th of your cash on hand at a the start of each month. Or e.g. limit your losses in one month to 6% or 8% of your portfolio. If your trades go against you and the money is lost, exit the market and don't return until the start of the next month. The market may have changed enough at that time for your trading system to now work.

Do not expect to lose money at the start. An engineer does not expect to build 5 bridges before finally building one that does not fall down. Test your trading systems before using real money. Start small with $20,000. After a series of losses, STOP and rethink your emotional reactions and trading system.

Don't make excuses. You won't improve your results by:

  • playing with more $$,
  • using 'direct-to-market' brokers,
  • trading more frequently,
  • having access to speedier data,
  • buying black-box software that makes your decision for you, or
  • trading in the after-markets (after normal close).

Do not allow any trade to put at risk more than 2% of your portfolio. Set the exit order at the time of opening.

Reserve from reinvestment enough cash to pay the taxes on your profits to date.

Never average down. Never meet a margin call. If you must liquidate - close your worst position.


Your emotions are your weakest link. Controlling your responses to both gains and losses is harder than simply reading an article and intellectually knowing the problem exists. Many successful institutional traders quit their job to work for themselves with their own money, thinking they would then keep all those profits. But they react differently when trading with their personal money. With institutional money, traders feel an emotional detachment. Those same successful traders fall prey to the same errors as the retail investor when gains and losses become personal.

If you catch yourself calculating profits from any open position - you have have allowed emotions to rule you. If you cannot banish those thoughts and focus on the trade, then close the postion.

Institutions have successful trading floors because of their cash employment rules, their exposure rules and their bosses overseeing the traders to enforce those rules. In the isolation of your home, you lack these valuable checks and balances. Institutions also have broad information gathering networks for market-moving events. The retail investor will always be behind the curve. Don't presume that just because institutions have successful trading floors, that you also can be successful trading shares with technical analysis.

Trading Systems

Any bozo can identify technical event in the middle of a graph. But the technical trader must make decisions based on the far-right-edge with the future unknown. Make sure your system works in real-time without hindsight. You can always find a group of indicators to tell you what you want to hear. Be clear which work well in which different situations - trends vs reversals.

Learn from your trades. Print out the graph at the point of entry and record your reasons for the position. When you exit, print out the resulting graph and record what went as planned, or not so. Paste them side by side in a binder.

The investor using fundamental analysis diversifies across different sectors of the economy. The technical trader diversifies by using more than one trading system. While one may be working in any situation, the other may not.

The rules you use for exiting a position should be the same as you used for the original purchase. Do not use one trading system's reasoning at the start, and another at the end.

A simple system is more robust. It will work in most situations. Do not try so hard to fine-tune it.

Incorporate three time frames into every system: the tide, the wave and the ripple. Never enter a postion that goes against the tide.

Stop Loss Orders

Never enter a position without setting stops.
Move your stops up, and never down.
After entering a position, move the stop up to your break-even point as soon as the market has moved by more than the average daily range.
Continue moving the stop to either a) limit your loss to 2% of your portfolio's principal, or b) protect 50% of your unrealized profit.
When the markets are trending widen the stops. When the markets are range bound shorten the stops.

If you are unsure whether to sell - exit the position. You think more clearly when you have no $$ on the table.

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