Have you been able to see how the SET principle can help us reduce the emotion in our trading? We get to know where to get in, where to get out and a pretty good idea of the money that can be made on each trade, this goes a long way to reducing the unknowns that we face every time we jump into the markets. We can’t control where the markets go or how they react to certain events but we can control what we do and that is what will ultimately keep us in the game for a long time.
Now, before we get to making ourselves efficient in running our SET numbers as I mentioned last week I think it is a good time to go over where we started and how we got here as we have covered a tonne of ground and we need to tie all this together before making our first trade. We need to understand that there is an order of operations that traders must go through before venturing into the deep waters of the markets. Think of it like your going for a boat ride. You will need certain items to ensure that the trip is enjoyable. You may need a life preserver, you may need the key to the boat, you might need a map or some form of direction assistance, like a GPS. Depending on how long you are on this journey you may need many other items like food or a cooler or a fishing rod and bait or whatever, the point is we need to plan the trip and go through a series of steps before actually getting on the boat. Trading is no different.
Let’s recap what we have covered so far…
We started with goal setting, we went over the picture and how to set S.M.A.R.T goals as well as making sure we are using activity-based goals and taking action on those goals.
Next up we dove into Fundamental Analysis to make sure that the companies we trade are on a solid foundation especially if we intend to hold those companies for longer periods of time. We went the valuation of companies using P/E ratios, PEG ratios and the Debt to Equity ratios. We then went deeper with Free Cash Flow, Price to Book and the Dividend Payout Ratio. Using these numbers we got a decent idea of where a company actually stands fundamentally speaking.
Then we looked at the most important concept in all of trading and that would Technical Analysis. This is where we can see information in pictures and use price action and good trading practices to decipher when to trade and what to trade. We looked at different types of charts and focused on the candlestick type as our basis for retrieving information. We then learned about trends, specific patterns and support and resistance concepts. We looked at particular patterns that tend to repeat themselves over and over again and this gave us the basis for finding quality setups. The typical patterns we are looking for are the bull retracement, bull breakout, bear retracement and the bear breakout. With these four patterns, we can find plenty of trades that will give us an opportunity to profit. We then added indicators into the mix to enhance what we were seeing from the candlesticks. All this gave us a technical basis on which to push forward to actually finding equities to trade and to read the overall state of the markets.
We then moved onto the actual mechanics of trading, that is the setting up of trades in a manner that keeps our capital safe and still gives us an opportunity to be successful. We went through the Top-Down approach to looking at the markets as a whole so that we could develop a market bias and know which side of the market is the path of least resistance. We looked at how we decide which equities to trade and which ones to leave behind, this was our discussion on liquidity. We went through the process of making a watchlist so that we could watch our favorite stocks for when they present an opportunity such as when they fall into one the patterns mentioned above. We then looked at what to do when you don’t have a watchlist or you are not finding any opportunities in your favorites. That is when we went over scanning, or as I like to call it scanning for dollars!!!
We then went into two extremely important concepts for all traders and investors and that is position sizing and risk/reward. Without implementing these two concepts into your trading you have almost no chance of being successful in the long term. We discussed how to figure out when to get into a stock and when to get out as well as how much capital we want to put to work in anyone equity just in case we are wrong and every trader is wrong at some point and most traders are wrong more than they are right but we could also see that if we work out the risk/reward that that becomes less of a factor to successful trading.
That brings us to today. We are at a point now where we are ready to set up our first stock trade. We have the tools and the knowledge and now we need to put it into practice. Before we get to that we need to understand the order of what we need to do to set up a quality trade. The following is the order that I believe you will find most helpful. This order assumes you have already set your goals and learned about fundamental and technical analysis, if you are not there yet then you will want to review the past issues of this blog. When we are looking for a trade this list is how we will approach it.
- Determine Market Bias
- Check Watchlist or Scan for potential candidates. (Look for our patterns)
- Work the SET principle, figure out your Entry, Exit(Stop Loss) and Target.
- Determine your position sizing, (Ensure that you are not risking too much on any one trade and that you are not putting too much of your portfolio into anyone equity or trade)
- Enter the trade into your platform
- Monitor the trade and journal the trade.
We did not discuss entering the trade on the platform but we will do this as we place our first trade and we will also go over how we keep track of our trades so that we can learn from both winning and losing trades.
Next week we will see some tools that help make the above process easier and we will begin sourcing our first stock trade. Until then go back through any of the aforementioned concepts to ensure that you are ready for the first trade setup!
