PT Education Series - Entries & Position management ⚙️
Here we go with the second article of this PrimeTrading Education Series!
This one covers the subject that I get probably the most questions on via Twitter.
How do I select the stocks I’m gonna buy?
How & where do I enter?
Where do I put my Stop Loss (SL) once I’m in the trade?
What’s your target? (More on than later… 🤦♂️)
You’ve probably guessed it now, the subject of this article is about Entries & Position Management. Along the subject of my first article, risk management, these are probably the two most important trading skills to be successful in the stock market. Finding a setup and pressing the BUY button is quite easy, it’s how you manage your positions that will bring you to a whole other level in your trading craft.
So, let’s dive in!
To make this article more “hands on” I’ll use a recent trade I took in 2022 as an example to explain each steps of a trade management system.
The stock I’ll use as an example is NEX - NexTier Oilfield Solutions inc. (were you expecting anything else than an Oil play this year)
Also, consider that what I’m explaining here is my system, there is thousands way to trade and these rules might not suits you. You can however use it as a guideline to get inspired and develop your own system with your own rules.
Focuslist with Setups
First thing is to have a setup playbook. You have to know that these technical setups have an edge in the market and that over time they will have a positive expectancy.
For reference, here is the technical setups that I use now for many years and that I take entries based on.
There is many technical setups that have an edge in the market and I won’t tell you that mine are the best or the only ones working, it’s false. The important is that you have to find what is working for YOU and you build this playbook that you’ll use and focus on. FOCUS ON is important here… being a Jack of all trade is not the best idea in trading, you want to start with 1 or 2 setups that you’ll really master before adding anything else to your playbook.
Once you know what you’re looking for, you have to build a Focuslist each night (or week if you trade longer term) that includes the names that are near triggering the setups that are in your playbook. This will be the short list (5-10 names max) that you will focus on once the bell rings at 9:30 (EST).
NEX came on my radar after an impressive 75% move in less than a month during an important market weakness period and breaking out of his base with an impressive 26% move in 3 days from the 21dma retest. You don’t want to buy when you’re than much extended… I want to wait for the lower risk entry after a pullback to the 10 or 21dma after the breakout. This indicates that the breakout is holding and no more sellers is coming to the market.
In this case, once I got 2 daily highs to work with, I draw my down trend line (DTL) from these 2 highs and that forms the DTL that I want to work with to enter the trade. A breakout of that DTL is indicative of a continuation.
With NEX, we had 5 consecutive days of tight action right under that DTL and being squeezed by the 10dma. That’s the kind of action you want to see before a breakout. Selling pressure is out, so once the buyers come back, the path of least resistance is up.
Note: I always use a full position at my entry, I do not “scale-in” into my entries.
I have 3 tactics to enter on that DTL breakout:
1- Entry on the DTL breakout
First, I put an alert in my charting platform TradingView directly on the DTL that trig once the price crosses it. When I get that alert of the line breakout, I can enter the trade directly if I have a high conviction in the name and if the volume is there on the breakout.
2- Entry on the H1 high breakout
When I want to be more conservative, I wait for the first hour breakout candle to close, and use the high of that candle as my entry level. This way, you have less chance to being caught in a false breakout of the wedge DTL (I’m sure you know too well about those, specially in 2021)
I enter the trade on the breakout of the H1 breakout candle close.
3- Entry on the pivot high (gap up & wick play)
Now for the 3rd tactic, I’ll use a more recent setup in NEX. It often happen that you don’t get a chance to trade the direct wedge DTL breakout because the stock open with a gap up right out of that wedge already.
When this happen, I use the high of that breakout gap up candle as my entry pivot. Now you’ll say that this pivot breakout didn’t work as it came right back in and went back to the the 10dma the day after. Well… that’s trading! Entry levels or setups don’t work every time and that’s why you have to manage risk. If someone is selling you a system with a 100% win rate, run the fastest you can, it’s a scam.
We’ll use that example again later for the early violation section
Stop Loss (SL) level/order is essential in having success in trading. (More in a future Article).
You might want to use hard stop (automatic order with your broker) or a soft stop (only alert in charting software)
You want to put your SL at a level that will limit your maximum risk in case of setup failure (trust me they will fail), but also giving enough room for perfectly normal market movements.
For that reason, one level that I found to work really well through the years is the Low Of Day (LOD). Meaning that you put your SL at the low of the breakout daily candle.
In that case, notice the red line @ 6.23 where I put my SL once I entered on the wedge breakout. If price comes below that price, you know that something is not right with the price structure not being respected.
In that case you want to cut your position immediately without questions. The more you wait and hope the price will come back, the harder it will get to actually cut the trade. If you struggle with that, use hard stop with your broker.
As I said, not every entry will work. You’ll notice that sometimes they try to breakout a stock only to sell into that strength. In that case, the price will come right back to your entry or below. You have to anticipate that scenario that happens quite often, specially in the last year or so during bad market environment.
When you enter the stock you have to look for these early cues:
1- Price breakout powerfully, then pullback slowly to the pivot level
In that case, watch for a simple retest of the level, and continuation upward. Could simply be an intraday BORS setup.
2- Price breakout and they are selling it hard BUT without taking out LOD
In that case, I want to give the stock some time below the entry level to see if it was only a shakeout. I keep the position intraday (if SL not hit), but if price did not come back above pivot at the end of the day, I close the position.
3- Price breakout and they are selling it hard even below LOD
In that case I sell the position right away without asking question.
With scenarios 2 & 3, you want to always reset your pivot alert in case in was a false breakout due to a bad general market day and they try to breakout the stock again the day after. I missed too much opportunities by removing the stock from FL only to see it rocket higher the following day.
These 2 last sections are really where you have to make it your own, test some things that speaks to you and develop a methodology that resonates with you. What I’ll lay down here is what I feel more comfortable as a trader, and might changes based on my performance & current market condition.
Specially since 2021, I like to SELL 1/2 position on strength during the initial move of the stock which tend to be from 2 to 5 days. As a rule of thumb, I like to take my first half trade out after an initial 10-15% initial move.
With NEX, the stock moved 18% in 2 days, so I SOLD 1/2 right on that second day. Don’t be greedy with that initial position.
This method is very powerful as it makes you instantly in the money for the trade whatever what happens next (almost). Even if the stock pullback to your SL, you make money. For me, mentally, this removes A LOT of stress to handle the trade once I sold that first half.
Let it Ride
You still have 1/2 position open after you sold into strength, so that’s where I like to switch to a position trader mindset. I want to give the stock enough room to work and catch a big triple digit gain over multiple months.
I am a firm believer that “Price Targets” are total BS and people that throw numbers around are even more clueless. You could be amazed at how far they can run a stock up…but you could also be amazed how strong they can crash a stock even if it’s an A+ company. For that reason, I want to let the stock “trend” until in doesn’t, and then I want to cut it on weakness. Innocent until proven guilty :)
To help me achieve that, I use a moving average system to help me determine when I’m gonna close the position.
1- 1/4 position - Close below 10DMA
That first “let it ride” part will be closed on a close below the 10dma.
You want to wait at the end of the day to see if it’s not only a shakeout and they’ll buy the stock and close it above 10dma.
Also, if we get a close below the MA but it’s a very tight & low volume day, I’ll probably wait for a second close below the 10dma before closing the trade.
2- Last 1/4 position - Close below 21DMA
The last part of the position will be closed at the break below 21dma.
Same 2 rules applies for a potential shakeout of that level
See how last 1/4 position of that NEX trade would still be on with a nice 45% gain.
Note that you could use other moving average length. You could use the 21/50dma, 50/200dma depending on your personality & time horizon.
In this article, I showed you my own system for entry tactics & position management, however these rules might not fit your style or personality. You MUST have a system in place with specific rules that fits your personality, and that, you’ll have to experiment to find what fits you best.
I really hope that you enjoyed that second PrimeTrading Educational Article. If you did, please share it so that more folks can be reached and this Newsletter can grow. :)
I would highly appreciate if you could DM me with constructive feedback or new idea for that newsletter.
Also, if you have questions, don’t hesitate!