6 Tips for Timing Trades

 | Feb 15, 2016 | 2:00 PM EST
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This commentary originally appeared on Real Money Pro on Feb. 11. Click here to learn about this dynamic market information service for active traders.

I love my computers, all three of them. Thus with Valentine's Day just over, that grandest of all human emotion -- love -- does come to mind, and to heart. My father introduced me to the world of computers, and all that data stuff, back in the early 1960s. He did have top secret government clearance, which got my attention, respect and curiosity about anything to do with a computer.

My first computer, bought in 1986, was a newfangled IBM behemoth (it was heavy and rather bulky). Nevertheless I paid for "rented" space at my trading pit for that $3200 IBM personal computer. Thus any break in the trading action allowed me to "go play" with my new toy as it was only a few feet away from where I stood in my pit.

That playing would lead to many new technical findings that prior to this time were only in my head. Eventually, what became S3 (my intermediate-term sentiment indicator) and my Oscillator were from the numbers crunched on that old IBM PC. Both daily results of S3 and the Oscillator are posted here each day: You find them on the page titled "Options Profits Chat Forum,"

The greatest day for technical analysis was the day when the the personal computer was able to be used to time a trade execution. I began my years as a floor trader well before this "greatest day" became a reality. Today, I merge that enduring floor trader's feel with the patterns that only the computer can make available for us. 

Here are some strategies to help in timing trades:

1. Keep it simple. I always strive to keep simple the art of trade execution. That simplicity begins with a bias on my part that in order to buy low and sell-short high I must be willing to understand the risk of buying or selling short when everyone else is exhausted by having done just the opposite -- in great excess. 

2. Set risk parameters in advance. Before any trade execution is begun, I preach that the capital that will be risked is a preset amount decided in advance. In addition, that trade execution should be a series of three attempts, each trade used to average in the best net price, because no one can consistently buy the low and sell the high.

3. Use the five-day stochastic to time the trade. Once the capital outlay to be risked is quantified, the execution process begins. What I use to time each trade is the five-day stochastic. This valuable technical indicator can be found in any charting package or service. In fact, it is available gratis on Yahoo! or Google Finance. I use the default numbers of the %K and %D that are standard for these sites' Stochastic computation.

4. Look for the %K to cross over %D. If you peruse any five-day stochastic chart, you will begin to see a consistent pattern that shows that the top and bottom of each move in price of the stock or index in question happens in tandem with the faster %K line crossing over the %D line. At the top of the price move, the %K line eventually crosses the %D line from its topped formation as it heads in a downward path. 

At the bottom of the price move, the %K line eventually crosses the %D line in an upward path. Time the crosses of each in your attempt to literally buy near the low or short near the high.

5. Watch supporting indicators. In addition to this discipline, it is best to have the RSI pattern in tandem or at least moving in that same direction. The RSI plays a supporting role, of sorts. 

6. It is better to be late than early. You can be profitable late in these attempts to maximize your results, but you should fight the emotional urge to try guessing when these crosses will happen, as over time you will eventually learn a mean lesson: getting "tricky" is not wise. Better to be a bit late than early. In other words, see the cross and then make your execution. Best to know the stock market adage: "Wall Street's graveyard is filled with traders who were early." 

You will definitely find that using the five-day stochastic is a valuable tool. If you are new to this technique, simply watch how it works in the real world, paper-timing trade after trade until you become confident with it. While there are no guarantees in the world of trading, this pattern should at the very least help your trading executions as well as keeping you from taking trades that might be "early" and create serious losses. 

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