From a mathematical standpoint, one method I use to determine the second purchase/short of a swingtrade that is going in my favor is to manually determine the average true range of the stock for the past 10-20 days. While most current systems such as Tradestation already figure this out as a standalone statistic, I like to manually backtest to keep the software honest.
Basically, you subtract the daily high from the daily low to determine the range for the stock. You do this for 10-20 days and take the average of this result. What I like to do is set the 2nd, 3rd, and 4th positions between 60%-100% of this range. So for example, if a stock I'm long currently trades at $25/share and has a average true range of $1, then I would set my next three buy points at say $.70 intervals, $25.70, $26.40, $27.10.
What I'm trying to avoid is getting caught in the normal volatility of the stock that autoexecutes a new buy but has the stock retrace those gains to close below the next buy point. At the same time, I want to avoid getting front run should a pending news item cause an overnight gap that blows through a potential buy point.
Tuesday, September 18, 2007
Monday, September 17, 2007
Pyramiding a swing position
The list of stocks I select as "swingtrades", I have it in my notes that should the stock move in the direction we are predicting, that we would add a maximum of 3 more purchases/short sells to the existing position. From personal experience, I've found when I exceed the 4th purchase/short sell of an existing swingtrade, my objectivity becomes tainted.
The usual method of turning a one time purchase/short sell into a high dollar gain is to make sure the first position is for slightly more than number of shares than the potential next three. For example, if i'm looking to swingtrade 500 shares. The first position would be 200 shares. If the trade goes in my favor, then anywhere from sixty cents to a set % from this trade, I'll make my next 100 share trade. In this manner, suppose if the trade starts to reverse after the 2nd position is executed, it will be easier to exit at a breakeven trade versus watching something go from a net profit to potentially a net loss.
Even if I use odd number share positions to execute swingtrades, such as partial sells or cover shorts, I must stick to a maximum of four buys or four short sells of the same stock.
The usual method of turning a one time purchase/short sell into a high dollar gain is to make sure the first position is for slightly more than number of shares than the potential next three. For example, if i'm looking to swingtrade 500 shares. The first position would be 200 shares. If the trade goes in my favor, then anywhere from sixty cents to a set % from this trade, I'll make my next 100 share trade. In this manner, suppose if the trade starts to reverse after the 2nd position is executed, it will be easier to exit at a breakeven trade versus watching something go from a net profit to potentially a net loss.
Even if I use odd number share positions to execute swingtrades, such as partial sells or cover shorts, I must stick to a maximum of four buys or four short sells of the same stock.
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