Our first day trading exit rule was
to always exit into sharp waves. Unfortunately, not every day trade
will have such a happy ending. Having a rule that helps you identify "dead
money" trades and gets you out of them quickly can be just as important to your
bottom line as knowing when to exit the big winners.
Day Trading Rule #2 -- Angle Your Stop Line
Everyone knows the importance of having a stop loss in on
every day trade you make and sticking with it. But what about trades that "just
sit there" or turn into slow, agonizing losers without ever hitting your stop?
That's where angling your stop-line comes into play. First,
let's take a look at what I mean by this by looking at a sample day trade:
In the example above, let's assume you bought Apple Computer (AAPL | Quote | Chart | News | PowerRating)
at the area highlighted in yellow. You want to protect yourself, so you set a
stop loss just under the low of the day. This is what I refer to as a "standard
stop"--it's horizontal and remains at the same price throughout the trade.
The second line, angled upwards, is what I prefer to use as my
stop line. Notice how it is angled in the same direction as the trade at about a
45-degree angle. In theory, the angle of your angled stop line should match the
angle of the trendline of the stock that you are trading.
This type of "angled stop" trading has three main advantages:
1) It requires the stock to maintain its trendline for you to
maintain the position. If the stock isn't still trending in your direction, why
do you want in anyway?
2) It constantly decreases your maximum loss on the trade as
time goes on.
3) It helps you account for the negative value of time. It
really helps you get out of stocks that aren't moving much--and therefore gets
you moving on to the ones that are faster.
Of course, when I talk about an angled stop I don't mean
actually placing an order with your broker and adjusting your stop every minute.
I am also not referring to a trailing stop, which is adjusted based on stock
price and NOT on the passage of time. Simply draw your angled stop line on your
chart upon entry into the position, and exit the position anytime the price
crosses your angled stop line.
It's also important to note that the angled stop line will
often pass into profitable territory on your day trades when a stock maintains
its trend and continues to move in your direction.
You really need to check out our Live Trading Room--you will
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Andy Swan
Andy Swan created and
co-founded DaytradeTeam five years ago on a principle of empowering
individual stock and options traders with the techniques and analysis methods
typically reserved for elite professionals. His expertise in technical analysis
and commitment to educating members earned DaytradeTeam a top-ranking among
advisory services for several years.
