Enter the Trade(20)

 

1.1      How to Enter the Trade

As with when to trade, how to enter depends on whether the stock gaps up/down or not. Typically, the stock price doesn’t gap up or down and the entry price is based on the previous day’s prices. When the stock gaps up or down, the entry price is not based on the previous day’s prices, but on the current day’s prices. Whether

based on the previous day’s prices or the current day’s prices, the entry rules are the same.

·         The most common occurrence – the stock opens within 50 cents ($0.50) of the previous day’s close – buy the stock the moment it trades 6 cents (1/16) above the previous day’s high. This can be accomplished by using a buy stop order. This increases the likelihood that the price is moving in the direction of the bullish (long) trade.

·         Occasionally a stock gaps up or down 50 cents or more – buy the stock the moment it trades 6 cents above the high of the new day. This would be 30 minutes after the market opens for a gap up or 5 minutes after the market opens for a gap down.

 

1.2      What to do After the Trade is Executed

Once the trade is executed, the exit orders are placed.

·         The profit order – a sell limit order is placed at a price that is 7% above the entry price.

·         The capital preservation order – a sell stop (stop limit) order is placed at 4% below the entry price OR 6 cents below the low of the day that was used for the trade (whichever is higher) – for a stock that opened without a gap the previous day sets the prices; for a stock that opened with a gap, the price action before the day (high and low) sets the prices.

1.3      What to do the Day After the Trade is Executed

As with when to trade and how to enter, the following day’s activity depends on whether the stock gaps up/down or not. If the stock price doesn’t gap up or down, the stop loss is changed based on the previous day’s prices. If the stock gaps up or down, the stop loss is changed based on the current day’s prices. Whether based on the previous day’s prices or the current day’s prices, stop loss rule is the same.

·         When the stock opens within 50 cents ($0.50) of the previous day’s close – if 6 cents below the previous day’s low is higher than yesterday’s stop loss, raise the stop loss to this new price.                                                

This is known as raising the trailing stop, which further limits the downside risk.

·         When the stock gaps up or down 50 cents or more – wait 30 minutes for a gap down or 5 minutes for a gap up – if 6 cents below the today’s low is higher than yesterday’s stop loss, raise the stop loss to this new price.

 

1.4      What happens if the Trade is Not Executed

Let’s say that you are receiving recommendations from MasterSwings or MrSwing Lite and your trade is not executed on the day the order is placed. You can repeat the process for up to 5 trading days.

·         If the stock gaps up or down, wait the appropriate amount of time (30 minutes for a gap up and 5 minutes for a gap down) – determine the entry and exit prices based on the current day’s prices.

·         If the stock opens with 50 cents of yesterday’s close, the entry and exit prices are based on the previous day’s prices.

The chart on the following page should make the trading rules clear.

1.1      What to do the Day After the Trade is Executed

As with when to trade and how to enter, the following day’s activity depends on whether the stock gaps up/down or not. If the stock price doesn’t gap up or down, the stop loss is changed based on the previous day’s prices. If the stock gaps up or down, the stop loss is changed based on the current day’s prices. Whether based on the previous day’s prices or the current day’s prices, stop loss rule is the same.

·         When the stock opens within 50 cents ($0.50) of the previous day’s close – if 6 cents below the previous day’s low is higher than yesterday’s stop loss, raise the stop loss to this new price.                                             

   This is known as raising the trailing stop, which further limits the downside risk.

·         When the stock gaps up or down 50 cents or more – wait 30 minutes for a gap down or 5 minutes for a gap up – if 6 cents below the today’s low is higher than yesterday’s stop loss, raise the stop loss to this new price.

 

1.2      What happens if the Trade is Not Executed

Let’s say that you are receiving recommendations from MasterSwings or MrSwing Lite and your trade is not executed on the day the order is placed. You can repeat the process for up to 5 trading days.

·         If the stock gaps up or down, wait the appropriate amount of time (30 minutes for a gap up and 5 minutes for a gap down) – determine the entry and exit prices based on the current day’s prices.

·         If the stock opens with 50 cents of yesterday’s close, the entry and exit prices are based on the previous day’s prices.

The chart on the following page should make the trading rules clear.

1.1      Once half the shares close at a 7% profit, the other half remains open to “ride the wave”. When do we close the second half of the trade?

A trailing stop is used to close the 2^nd half of the trade. Remember that a trailing stop is used to raise the sell stop (stop loss) during the trade. The same rules apply (see 6.6 above). The shares are sold when the price drops to 6 cents below the low of previous day (no gap on open) or the current day (gap on open).

1.2      The Short Swing – how we make money when we think the price of the stock is going down

A short swing is used to make money when a stock’s price is predicted to go down. We sell short the stock. For those unfamiliar with shorting stocks, we sell the stock without having previously owned it. Additional detail about shorting stocks can be found the Appendix. For now, it is only necessary to know that our goal is to sell the stock and buy it back at a lower price.

While anyone can sell short, you must make sure that your brokerage account is approved for trading on margin. If you do not have a margin account, simply fill out the necessary forms with your current brokerage firm or open an account with one of the firms recommended for swing trading.

A short swing is a mirror image of a long swing. The price of a stock in a downtrend tends to have periodic, short-term rallies (pull-ups) as the price moves lower. The set up for a short swing is the brief rally (or pull-up). The decision rules in the Master Plan help enter the trade when the stock is resuming it’s downward path.

A chart showing a downtrend that is conducive to short swing trading is shown on the next page.

Notice in the chart below that the downtrend is interrupted by short-term rallies (pull-ups). The trade is placed after a short-term rally (or pull-up), once the stock resumes its downtrend.

The trade is entered on a day when the price falls below the low of the previous day.

The rules for entering and exiting a short swing are shown schematically on the next page.

While the rules might seem somewhat complicated, several brokerage firms make the process quite easy. Interactive Brokers – described in the next section – allows you to enter the three components of the trade all at the same time. For a short swing they are:

·         A sell stop to sell the stock when the price moves below the stop price

·         A buy stop to buy back the shares if the price moves up 4%

·         A buy limit to lock in profits (on ½ the shares) when the price drops 7% The schematic diagram provides instructions for how to adjust these prices on the second day, third day, and so on, based on whether the stock has been sold short or not. The schematic provides exit instructions as well.