Getting From Analysis To Executing The Trade - Part Two

Submitted by Marco on 17 May, 2006 - 22:34

In the previous post we had a look at the first step in how traders get from analysis to finally executing and committing your capital to the trade, be it forex, stocks or futures. The first step was to have yourself a test to determine if the trade is worthwhile for you. You may have your own methods (send me some ideas!), but I suggested one of my qualifiers as the momentum of the trend line of the particular equity you are looking at.

Analyse the stock, determine if it worth while and then execute your trade on markets

The next step in your trading analysis is to have a look at where you are going to place your stop loss, what could be your profit target and further insight as to whether it is worthwhile to enter in the trade. A stop loss is basically a price at which you will place a limit order that will bail you out of a losing position. Once you are in a profitable trade, you can bump up your stop loss to protect your profits. When you start to do this it is called a trailing stop loss.

As you did with analysing the stock to decide whether or not the trade is worthwhile to take part in, there are many methods to decide where to place your stop loss and where to place your profit targets. As with anything in trading, there is no one right magical one-size-fits-all method. You need to test out a few, research for others and settle with one or a few styles of setting stop losses and profit targets.

My trading style is based on the premise of KISS. (Keep It Simple Stupid) So my favourite stop loss and profit taking prices are set using the most basic of systems. I use it to set my stop losses for the forex markets as well as the Australian stock market. To set my stop loss I would have a look at where the price is at the moment and draw a line on the graph. Then I would look at the current support and resistance line supporting the current price and look at how long that support has been there and whether or not the support has been used previously (looking back previous months or years). This would gauge the strength of the support line. Then I would look at the next support line, if the price were to trade down. I would gauge at how strong that support line is, then I would set my stop loss just a few cents or pips below that support line. I would also then calculate my potential loss if I were to be exercised at that point. I would then proceed to set my profit targets in a similar manner - looking at future support/resistance lines. If there aren’t any lines of support or resistance, then the profit target relies on my trailing stop loss and the market momentum as well as my analysis the next day.

Come back for the third part of this series - executing the trade.