Wednesday, March 25, 2015

Trade Planning: Your Window Of Opportunity


This is the final part of our 3 part series on how to create a basic trade plan. If you missed the initial posts on identifying a profit target and establishing loss thresholds, you can start here and you may want download a free copy of my handy PDF check list.


PHOTOGRAPH BY RYAN MCGUIRE


Every trade has a Window Of Opportunity associated with it. For me, that window is identified by taking into account general market conditions and weighing all of the variables for positions I'm considering.

When I'm using CAN SLIM to identify a particular stock, I like to take a position based on its momentum. How do I determine momentum, you may ask? I follow 3 simple steps as a part of my routine:


1.) Use The Most Recent Data

For starters, I pull up a 6 month chart on the stock to give me some insight on how institutions are behaving. In the first part of this series, I mentioned the weight of institutions when planning a trade:
"Keep in mind that institutions are highly informed and quite well versed in trading so their investment behavior has a significant impact on the value of a particular stock."
I use this same reasoning to help me pinpoint my window of opportunity too.  If the chart shows increasing volume over the most recent 30 day period, that means the big dogs are getting behind this stock.  For me, that's a really clear signal that my window of opportunity is approaching.  

Another key data point for me is the Relative Strength (RS) line.  I use a very strict set of criteria on any position I'm considering and, for me, the RS line helps me to quickly identify whether a stock is a true leader of the pack.  If I'm seeing a 92 RS rating that's still pretty good but I want to see 95 or above before looking any further into an opportunity. 


2.) Don't Trade On Earnings

When it comes to earnings, there are two schools of thought.  Some people like to trade around earnings and have had a lot of success with it.  It's not something I choose to do, however, because it doesn't fit into my personal trade philosophy.  I think it really just boils down to risk management.

For me, the reason it's risky to trade around earnings is because you can't predict how institutions will react to the the information.  Even when a report looks good, institutions can react negatively.  I've always struggled to understand the "why" in these situations and since I can't really figure it out, I remove the variable.  I like to wait 3 sessions to confirm that institutions have really "digested" and settled down.  

Another thing that gives me a level of comfort is looking at other stocks in the industry group I'm researching.  If they're running in the right direction - you better believe I'm paying attention. 
   

3.) Trade During Uptrends

This is probably the most important factor in pin pointing my window of opportunity.  Given that my criteria are so strict, I need to make sure that the biggest market barriers aren't in my way.  Seeing the phrase "market in a confirmed uptrend" in my IBD® Market Pulse removes the last barrier for me.  I don't really understand how IBD® uses the data it gets to make such a statement - but I trust it. 

With trading, there are variables all over the place and it's basically impossible to keep track of all of them.  Having a market in a confirmed uptrend means that I can settle down, tune out the noise, and get back to business - cultivating my watch list.

What's Next?

During the month of April, I'll have a 4 part series that goes over the basics of building a watch list.  We'll dive right into specific and actionable tips that you can use right away.

As always, keep your comments and emails rolling - I love interacting with my readers!


Amin Hemani

investorspotlight@gmail.com

DISCLAIMER



Do not take a position unless you are prepared to sustain a TOTAL LOSS. Your loss could include the money you invested as well as commissions and transaction charges.


The Information I provide is for education and informational purposes only. The Information provided is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice. The Information provided is general in nature and is not specific to you or anyone else.


YOU SHOULD NOT MAKE ANY DECISION, FINANCIAL, INVESTMENTS, TRADING OR OTHERWISE, BASED ON ANY OF THE INFORMATION PRESENTED WITHOUT UNDERTAKING INDEPENDENT DUE DILIGENCE AND CONSULTATION WITH A LICENSED PROFESSIONAL. You understand that you are using this Information AT YOUR OWN RISK.