GOOG Trade and Realizations

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

I was really impressed by the Marubozu candle on the daily chart for Google Inc. (NASDAQ: GOOG) on 6/5/07. So much so that I entered at the close for a swing trade:

It went nowhere the next day, and I tightened my stop as it put in a swing low on a volume uptick. This morning, it took off in the middle of the bloodbath, and I had my sights set on $550. GOOG stalled at $525, and I should have exited as I had to be away from the computer for several hours. Instead I left my stop intact and came back to find myself stopped out for about -0.6R (I tightened my stop, remember?)

I should have at least put the stop to breakeven before I left, and that’s my first mistake. Second, I was not sure about my target before I entered–that’s a recurring theme in a lot of my trades. I often have a “target” I pick, but many times it’s just a level on the chart that gives me a “good” risk:reward level. This target usually doesn’t sync with my stop choice, or else it would get hit more often. My trades hardly ever hit their targets, while my losses often hit -1R, which kills my expectancy.

This made me realize (not for the first time) that my trades are mixing up timeframes. Maybe my target can eventually be hit, but not in combination with the stop I select. Usually my trades go my way (within the confines of the stop I choose), but that stop is not wide enough to allow the trade to hit my target, and eventually I get stopped out at breakeven or a loss. This results in an artificially high reward:risk analysis of the trade. I hope this makes sense!

What I really realized is that I need to have an idea of what kind of move I am trying to capture before I frame the trade. My usual way is to try to find a good low-risk trade entry, and then I pick a target that seems sensible that will give me a favorable R:R. That’s all wrong for me! I need to have a defined plan for the type of move I am trying to capture, based on the timeframe I have chosen, and then look for a low risk entry into that move. It’s completely backwards to the way I have been trading, but I think it’s the right way to go about it. I’ll write up a few setup plans that are geared this way before I enter my next trade, and see how it works.

Any comments are welcomed!

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This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com