Buy Signals Sell Signals: Strategic Stock Market Entries and Exits pdfdrive com

Your stop loss is the brakes and your profit target is your destination.
Your signals will only work if you are risking a little to make a lot. If you are
risking a lot to score a big win, then those risks will eventually catch up to you.
Even professionals like Victor Niederhoffer, Long Term Capital Management,
and Amaranth learned the lessons of the risk of ruin the hard way.
Exit when the risk is greater than the reward

The next step in our signal example is to see exactly where we would exit after

our entries. Some studies by Van Tharp and Tom Basso have shown how even
random entries can be profitable if the exit is managed to create big wins when
the trade trends, and small losses when the trade goes in the wrong direction.
"Tom Basso designed a simple, random-entry trading system … We determined
the volatility of the market by a 10-day exponential moving average of the
average true range. Our initial stop was three times that volatility reading. Once
entry occurred by a coin flip, the same three-times-volatility stop was trailed
from the close. However, the stop could only move in our favor. Thus, the stop
moved closer whenever the markets moved in our favor or whenever volatility
shrank. We also used a 1% risk model for our position-sizing system. …
We ran it on 10 markets. And it was always, in each market, either long or short
depending upon a coin flip. … It made money 100% of the time when a simple
1% risk money management system was added. … The system had a (trade
success) reliability of 38%, which is about average for a trend-following
system."
Source: Van K. Tharp, Trade Your Way to Financial Freedom
To limit randomness and create a profitable system after you enter with a trade in
the direction of the trend, you will set up your sell signals to limit losses. At the

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same time, you should allow your winning trades to grow as big as they can
before your price target is met. Trailing stops like ascending moving averages
and ascending trend lines are tools to help you maximize these gains.
Reaching a price target to a descending moving average, at a round price
number, or at an old price resistance is another great time to take profits off the
table and look for a better risk/reward ratio for your next entry. Remember, the
easiest path to profitability is to create asymmetry in your trading so you have
big wins and small losses.
Another key to trading profitability will be the ability to hold a winning trade
and let it go as far as possible and not exit it until there’s a valid reason. Winning
trades should only be exited for a reason and not an emotion. You will need the
big wins to pay for all the small losses and cutting winners short will greatly hurt
your profitability. Do not get out of a trade until your signal tells you to, but
when it does, then get out!

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How to build your own signals
“I turn bullish at the instant my buy stop is hit, and stay bullish until my sell stop
is hit.” – Ed Seykota
Just like builders use hammers and saws to build houses, traders use technical
tools to build their own trading systems. You only need a few of these tools to
begin to build your own signals, and in fact, you can have too many indicators
that lead to confusion. The most important thing to keep in mind is that there is
no one-size-fits-all solution. Some technical indicators work while markets are
range bound and others only work during trends. Many are useless during high
volatility and crashes. No indicators work in all markets or under all conditions.
Trading profitability doesn’t come from a perfect indicator or a magic system, it
comes from creating an edge over other traders and trading that edge to have
more profits than losses over a long period of time. Your win rate will fluctuate
as market conditions shift between uptrends, downtrends, range bound, and
volatility.

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