5 Ways to Master Risk

by Darrin Donnelly on March 22, 2011

Traders must learn to master risk.

Trading stocks is a risky business.  Of course, “risky business” is one of those terms that restates the patently obvious; that is, there is no such thing as a business that isn’t risky.

But still, trading stocks, especially when it IS your business, takes risk to a whole new level.

Risk is what fuels capitalism and the world of trading is the epicenter of capitalism.

If there was no risk involved in trading, there would be no way to profit.  And the less risk you expose your investments to (Treasury bonds, for instance), the less potential for reward you have.

With this in mind, traders are a rare species.  [click to continue…]

The 4 Darvas Stocks Ready to Break Out

by Darrin Donnelly on March 20, 2011

Click on chart to enlarge.

Click on chart to enlarge.

We saw two dismal rally attempts on Thursday and Friday last week.  Even though both sessions ended with gains, both sessions saw the NASDAQ close below its open, indicating that big investors used the higher open to sell positions. 

While Thursday’s effort came on light volume, Friday’s 0.3% gain actually came on very heavy volume.  However, don’t confuse the Friday session with being an “Accumulation Day.”  The higher volume was due to the “quadruple witching” session, which occurs when options and futures contracts expire for both indexes and individual stocks, causing heavy trading volume.

As this downtrend continues and we enter the fifth week of the correction, now is a good time to reiterate exactly what a Darvas trend trader should be doing during a downtrend. [click to continue…]

The Downtrend Continues, What Can We Expect Next?

by Darrin Donnelly on March 16, 2011

Click on chart to enlarge.

Click on chart to enlarge.

On Tuesday, we saw what looked like the start of a potential rally attempt.  Even though the NASDAQ finished 1.2% lower on the session, it closed well off its lows and near the top of its intraday range. 

However, the hopes that Tuesday’s action was the beginning of a rally were crushed on Wednesday as the NASDAQ dropped 1.9% lower on its highest volume seen all year. 

Needless to say, this downtrend continues.

As mentioned here before, corrections typically last 8-12 weeks and the market usually drops about 15%.  We’re currently four weeks into this correction and 7.8% off our peak.  In other words, if this ends up being a “typical” correction, we’re at the halfway mark right now. [click to continue…]

How to Set Profit Targets

by Darrin Donnelly on March 14, 2011

As traders, we’re all looking for that homerun trade, but a lot of singles and doubles can really add up. 

This is where profit targets come in.

I advise all traders to use profit targets.  Especially in a choppier market environment, implementing profit targets allows you take more short-term gains, which make you less susceptible to pullbacks.

The typical use of a profit target means that when you buy into a stock, you cash in on 25% – perhaps even 50% – of your position when the stock reaches a predetermined price target.   There’s nothing like ringing the register by cashing in on profits and by limiting the portion you cash in, you still allow yourself to benefit big if the trade does in fact become a homerun.

However, if it is your preference, you can do very well with the Darvas System by cashing in your entire position whenever a profit target is hit and then waiting for a new breakout before repeating the process. 

This strategy is good for traders who prefer to be a little more active and like selling on the way up as opposed to waiting for a stock to fall before selling.  From a psychological perspective, many traders have trouble selling a stock 10% or so below its previous high, which makes cashing out when a profit target is hit extremely appealing.

How do you set your profit target? [click to continue…]

A Trader’s Worst Enemy

by Darrin Donnelly on March 10, 2011

What’s the fastest and most common way to ruin a trading account?

Some might say it’s “lack of capital” or “taking too much risk.”  Very good answers tied to the importance of portfolio and risk management.

Some might say it’s being “too greedy” or “too fearful.”  Two more very good answers tied to the human emotions that power the markets.

But the real answer comes down to one single word: BIAS.

Now don’t misunderstand “bias” to mean the same as “preference.”  Obviously, if I’m long in a position, I prefer that it goes higher and I make more money. [click to continue…]

4 Rules that Must Be Followed in this Market Environment

by Darrin Donnelly on March 6, 2011

Click on chart to enlarge.

Click on chart to enlarge.

We have entered into a NEUTRAL stock market trend.  And trading in this indecisive trend requires that you follow distinct rules.

A neutral trend occurs when the market becomes tired following a clear uptrend or downtrend.  It’s often a “flattening out” period as the market moves sideways and leading stocks build new bases. 

The uptrend we’ve experienced since September looks to be resting here as Distribution Days outnumber recent Accumulation Days.  However, we haven’t broken into a full-fledged market downtrend because the NASDAQ continues to find support at the 50-day line and bounce back from heavy-selling sessions. 

In the chart that accompanies this article, you’ll notice that after the last two sessions where we experienced heavy-volume selling, the NASDAQ bounced back without undercutting the lows set during these sessions.  Undercutting such lows would have triggered a clear downtrend.  This bounce-back behavior is a sign that bulls are stepping in to buy stocks whenever the market corrects abruptly. [click to continue…]