Steve Palmquist

TIme Tested Trading Tips...

An Excerpt from the Timely Trades Letter.

Trading is about risk management. I manage risk by adjusting position sizes, and the number of positions I am trading. When the market is trending I am willing to have more funds invested, so I use more trading positions and larger position sizes. When the market is not trending, I reduce my exposure by reducing position sizes, and the number of positions I am trading. 

When the market is in a narrow base I might only be trading two positions. That does not imply I only make two trades while the market is in the base, because when a position hits its limit or stop I will replace it with another setup that triggers. It is just that I am only holding two positions at a time; most of my account is in cash or ETFs. Only having a few positions at a time, limits my exposure to the market during periods of market uncertainty. 

Testing and experience shown that a three day holding period can be an effective exit strategy during trading range markets and that longer holding times can be used during trending markets. In practice I use this as a guideline and not a hard and fast rule. If a position approaches support or resistance I will generally take the profit whether or not it has been three days. The most likely thing for a stock to do at a key support or resistance level is to bounce or retrace. If the stock is going to bounce or retrace from support or resistance most of the time, then...

Time Tested Trading Tips... May 21.

An Excerpt from the Timely Trades Letter.

The large drop in the market on Thursday  was interesting, but the question is always what does it mean, and what is likely to happen next. In order to get some insight into this question I ran a test that looked back over the last three years to see how many times the market was down at least 80 points, and what would happen if I had bought at the opening the next day. The table to the left shows that during the last three years the market was down at least 80 points 16 times. If you bought the market the next day, and sold the following day, you would have been profitable eight times and shown eight losses. Essentially being down more than 80 points has not been predictive of whether or not the market will be up or down in the short run. When the market shows strong down days, like we saw on Thursday, the news media is full of stories about major corrections and the like. The news media’s job is to sell commercials, advertising space, and not necessarily to provide actionable information for traders. The market’s behavior over the last three years indicates that in the short-term it is just as likely to bounce after an 80 point drop as it is to continue going down. Based on this data we need to look elsewhere to determine an effective trading plan.

Extensions below the lower Bollinger band are unusual, as you can quickly verify by just scanning a NASDAQ chart for the last couple of years. The Bollinger bands contain the vast majority of the price action, and movements outside the band rarely last more than two or three days. The market typically moves back inside the lower Bollinger band by either moving sideways for a few days, or bouncing. I ran another test that bought the market every time the NASDAQ closed at least 10 points below the lower Bollinger band. I ran this test over the last 36 months using a one-day holding period to determine whether or not closing below the lower band was predictive of short-term behavior. The results, as shown...

Time Tested Trading Tips... May 15.

An Excerpt from the Timely Trades Letter.

Volume patterns have an important effect on many trading systems. Volume measures the interest in a move, it shows how many people are interested in the current price pattern and how they are voting with real money. Rather than listen to the talking heads on the business channels discuss their opinions of what is going on, it is better to look at the volume patterns and see what people are actually doing with their money.

Serious traders will go through a learning curve as they study market behavior and how their trading systems function. They will have times when they run into situations that have not been experienced or researched and they may be unsure of what to do. This is normal, it is the price of admission to the trading business. My general rule is that when I am unsure I close the position. It is hard to go broke taking profits so my focus is on needing a clear reason to stay in a position, not wondering whether or not I should get out. If there is no clear reason to hold I take profits and move on to another trade.

When trading I am not holding out for the perfect trade, there is no such thing. Trading is about managing risks and I use the current market conditions to determine how many trades to be taking and the appropriate position sizing to use. Setups with more room to run are prioritized above ones with little room to run. Setups triggering on stronger volume compared to the previous days volume are prioritized above ones with lower trigger day volume. Setups with shallower pullbacks are prioritized above ones with deeper pullbacks. I then look at the setups that are triggering and...

Big Drop, Now What? Market Analysis and Trading Plan...

An Excerpt from the Timely Trades Letter.

During Thursday’s session the market dropped 82 points, on very strong volume. This strong down move had the market moving further below the lower Bollinger band than any time in recent memory. On Friday the market dropped again, moving down 54 points on another very strong volume day; and closing unusually far beneath the lower band.

The trading plan was to avoid Long’s, we took profits on them last week, and to hold off on new short positions until the market moves back inside the lower Bollinger band. I followed the trading plan and avoided new positions, since the market remained well under the lower Bollinger band.

The trading plan outlined in the last few Letters allowed us to pick up profits on a number of trades during the markets run up, and then lock them in several days prior to the big drop last Wednesday, Thursday, and Friday. We locked in profits  on all but a couple of longs on the markets trend line break during the 04/27 session, and took profits on the last two long positions when the market broke below the tight basing area on May 4.  Trend lines, resistance areas, and tight basing patterns are important components of a trading plan; they tell us when it is time to lock in profits and change trading tools.

In trading I want to be positioned to profit when the market does the usual or normal thing in a given situation. Trend line breaks and moves below a tight basing area indicate a change in market behavior. When the market is indicating a change in behavior I need to respond and change my trading activities. The market will not adapt to me, I need to adapt to it. Sometimes the market makes a big move after one of these pattern breaks, sometimes it just moves sideways or rests for a bit. In any case, trend line and base breaks are a call to action. Ignoring them will eventually be painful. In this case, listening to their message locked in nice profits, and avoided big losses.

Thursday’s move had the market closing right on the ascending trend line shown in the weekly chart above. On Friday the market broke below that ascending trend line and closed well below the lower Bollinger band.  This trend line break on the weekly chart indicates a change of behavior. After a trend line break the market will typically...

Time Tested Trading TIps...

An Excerpt from the Timely Trades Letter.

At a recent trading conference several traders were talking about exit strategies at lunch and one noted that he ‘liked to hold positions for about a week’. When asked he had no reason for the decision, it just ‘felt right’ to him. Trading on tips, emotions, or what ‘just feels right’ is unlikely to produce good long term results. Trading should be based on the careful analysis and testing of each trading system that a trader uses. Testing does not eliminate risk or guarantee results, but it can help to give a good idea of how a system has actually performed.

In trading ranges I generally do not hold longer than three days. I will exit sooner if the stock approaches the upper Bollinger Band or a horizontal resistance point. I do not want to hold out for the last dime, I want to be taking profits as the stock approaches resistance. In a trading range market it is generally better to get out too early than too late. It is tough to go broke taking profits.

When I say this at trading conferences there is usually someone who says, ‘yes, but if the stock broke through resistance wouldn’t you have been better off to have held longer?’ the answer is obvious, and...

Time Tested Trading Tips...

An Excerpt from the Timely Trades Letter.

Trading is a statistical business, traders focus on risk management using systems that have been shown to provide an edge. Trading stock tips, news stories, stocks you are familiar with, and similar approaches can lead to mixed results. No one guesses right all the time. Trading is not about guessing or hoping. Traders need tools that are well understood, like an old friend. You usually know how a friend will react in a given situation, sometimes you are surprised but more often than not you have a good idea of their reaction to things. Trading needs to be the same way. No system reacts as expected all the time, if they did everyone would be driving a BMW to their Yacht. A traders job is to find a system that has an edge, learn how it behaves in different market conditions, and then be positioned to profit if the system does the normal thing. 

Trading involves more than just picking a stock and entering a position. You don’t have a profit until you are back in cash. Exit strategies and money management techniques are important aspects of trading. Traders need to vary their position sizes and the number of trading positions used based on the current market conditions. In order to do this traders need to know how their trading systems perform in different market conditions. We cannot control what the market is doing, but we can react to it. During conditions that result in lower success rates for a trading system we need to either switch to a different trading system, or reduce positions sizes, as a way of reducing risks.

I went to a high school football game to watch my oldest daughter play in the band. After awhile I walked over to the refreshment stand to get something to drink. As I was walking toward the stand the crowd noise greatly increased, and people were cheering loudly. I knew from the increased noise level that something important had happened so I turned around and saw the end of a long yardage play. Stock volume is a similar indicator, when stocks are moving on volume there is 

Market Adaptive Trading.

An Excerpt from the Timely Trades Letter.

The market has three basic modes. It can be going up, down, or sideways. Over time the markets movement is made up of combinations of these three different behaviors. None of these behaviors lasts for long, the market is always switching between them. This is one of the keys to trading. Traders need to recognize that the market moves between these three modes and have the ability to recognize then the change has arrived and be able to switch to trading tools suitable for the new environment. This is a process I call Market Adaptive Trading. The market will not adapt to us. It does not care what we want or think. Therefor we must adapt to it. For more information on Market Adaptive Trading visit www.daisydogger.com

If you scan through a daily or weekly chart of the market for the last decade you can quickly identify a number of bullish, bearish, and trading range periods. The entire chart pattern for the decade is made up from varying length bullish, bearish, and trading range periods. Since the market has been, and will be, made up of bullish , bearish, and trading range periods; it is important to know how a trading system performs during these different periods. I do not know if next year will be like last year, but I do know that the market action next year will consist of some combination of bullish, bearish, and trading range periods. 

If I know how a trading system, or trading tool as I refer to them, performs in each of the three different market conditions; then I can watch the market to determine what type of condition we are currently experiencing and then use the tools...

Time Tested Trading TIps...

An Excerpt from the Timely Trades Letter.

When I am trading I know exactly how I am going to exit the position before I ever enter it. Entering a position without a clear exit strategy usually ends up trading on emotions or hunches. Trading on emotions or hunches often leads to losses. Mary your spouse for life, but just date stocks. Always have an exit strategy. Always.

The current market conditions play a key role in determining exit strategies. Stocks behave differently in trading range markets than they do in trending markets. Since a key part of trading is adapting to the market (it will not adapt to you, you must adapt to it) traders exit strategies should change with the market conditions.

The market is the summation of a large number of individual stocks. In trading range markets most stocks tend to ‘pop and drop’ rather than show strong trends. When the market is in a trading range then almost by definition most stocks cannot be trending. If they were then the market, which is the sum of all those trending stocks, would also have to be trending. When the market is in a trading range it tells you that the typical stock is not going to run far before it retraces. Traders use this market information to realize that in trading range markets they need to focus on shorter holding times and quick profits. In trading ranges traders are trying to piece together a trend in their account from the brief pops in several different stocks rather than trying to catch the rare single stock that is trending. Traders pick up the initial move on a stock that triggers, close it then pick up another pop and keep trying to repeat the process. Looking for stocks that run far in a trading range is likely to just be frustrating, adapt to what the market is showing you. If you use the same approach in all market conditions you are likely to get a lot of practice exercising stops.

When the market is trending stocks tend to run longer because...

Market Analysis and Trading Plan.

An Excerpt from the Timely Trades Letter.

The trading plan from the last Letter was to continue 

trading longs while the market remains above the ascending 

trend line drawn through the lows of 02/05 and 02/25 and 

04/01; with a note that ‘the best time to pick up new trades 

is during retests and bounces from this trend line’. I 

followed the plan and picked up several long positions on 

Mondays trend line bounce. The markets bounce generated 

profitable moves in several of our setups including PNRA, 

LPX, DLM, AVID, TWX, and HNR. I took profits in DLM when 

it hit the upper band, and will continue to use that as 

a successful exit strategy on swing trades, until the market

breaks above minor horizontal resistance in the 2555 area. 

Since the market is approaching minor horizontal resistance, 

I do not want to overstay my welcome in any particular trade;

so I take profits on trades that hit the upper Bollinger Band,

a horizontal resistance area, or are moving up on declining 

volume. I would rather take profits on those types of positions 

and then put them to work in another stock that is just

breaking out and starting its move.

The market price pattern is positive, it is moving up between 

the ascending trend line noted above, which acts as support; 

and the upper Bollinger Band, which acts as resistance. 

The volume pattern turned positive, since we have now seen 

three above average accumulation days in the last ten sessions.

As long as the market remains above this ascending trend line 

Time Tested Trading Tips, April 16.

An Excerpt from the Timely Trades Letter.

Sometimes traders will start trading more aggressively when they are down 

in an attempt to get back to even. Draw downs are a fact of life in trading. 

Trading is not like drawing a paycheck. You do not get paid because it is 

Friday. I research the systems and then use that information when trading. 

If I have a losing streak I know that is to be expected and just stay 

focused on using the knowledge and skills that come from fully testing 

and analyzing trading systems.

Serious traders will go through a learning curve as they study market

 behavior and how their trading systems function. They will have times 

when they run into situations that have not been experienced or researched 

and they may be unsure of what to do. This is normal, it is the price of

 admission to the trading business. My general rule is that when I am 

unsure I close the position. It is hard to go broke taking profits so my 

focus is on needing a clear reason to stay in a position, not wondering 

whether or not I should get out. If there is no clear reason to hold I 

take profits and move on to another trade.

When trading I am not holding out for the perfect trade, there is no such

thing. Trading is about managing risks and I use the current market 

conditions to determine how many trades to be taking and the appropriate 

position sizing to use. Setups with more room to run are prioritized above