What are your Trading Parameters?
Parameters are not a strategy, or a system, they are your unique and individual rules for trading based on your experience, capital base, trading education, risk tolerance, and personal preferences.
There are many parameters you need to consider as you set up your trading and before you choose your primary trading style as what parameters you choose, will dictate what trading style will work best for you. And your trading style will dictate what strategies you should use during each market condition.
Parameters should include:
Price Range, Sectors or Industries, Exchanges, Risk Ratio, Hold Time, etc.
One parameter you need to consider is your
price range. A price range is the lowest price to highest price you will buy into a stock or sell short a stock. Ranges tend to be in whole number increments but can be varied as well.
Under $5, $5 - $10, $10 - $25, $80 - $140 as an example, and so on. Determining your price range will eliminate stocks that are either too low priced or too high priced. Keeping your price range restricted to specific range of price also will reduce the number of charts to study, streamline your analysis, create discipline and eliminate stocks that are not suitable for your trading style.
This may sound simple, or it may sound ludicrous--why would you limit your choices? The answer to that is: there are far too many choices some 7,000-20,000 and choosing a range compels you to disciplined trading techniques. There are plenty of stocks to trade at each level. What happens and why many traders just turn to recommended stocks which by the way doesn't work for many reasons, is that they become overwhelmed with the number of stocks to analyze. Using the TechniTrader Explorers screens down the list to a much smaller group but you must still have a price range you choose.
Most traders just choose a price range that relates to their capital base, however there is a whole lot more to it than just choosing a price range you think will make you money.
Here's the other aspects of a price range parameter to consider:
Stock price action behaves very differently for each price range. The reason price action changes at each level is the Market Participants who trade or invest in stocks at that range.
Below is a weekly chart to show you what I mean by this.
Chart 1
The weekly chart exposes just how much price action changes as a price moves up into different levels.
The $5 and under price points are areas where the institutional investors are seldom prevalent. The only time quiet accumulation in heavy amounts occur in the under $5 dollar stocks is after a severe deep Bear Market. During a Bull market as we have had since 2009, the under $5 stocks will be traded mostly by small lot traders, retail traders, and those with less experience and lower capital bases. Since these groups of market participants have less experience and market knowledge their buying and selling can be unreliable.
Quiet accumulation tends to occur as a stock moves above $5 and holds moving up into $10 range rather quickly. You can see this effect with TTQA on this chart.
Between $10 and $40 more conservative buyers, funds managers and longer term funds investors move in slowly creating a steady but slower activity.
As a Stock runs and heads into the $40-70 range, it enters the High Frequency Traders and Professional Swing Traders, and Retail Day Traders price ranges. These are active traders who push price up due to the speculative nature of their trading.
Further on, the price becomes even more active as more and more market participants, often those with very limited market experience rush to buy due to news, and excitement around the stock.
By understanding the various levels of price, which market participants tend to buy in that range and which do not buy there, why they buy or why they sell, a trader can select the range best suited to their trading style.
Many times novice traders want to swing trade thinking it will be fast money. But they have a smaller capital base so they try to swing trade the lower priced stocks only to be disappointed in their results.
The reason this happens is that swing trade action seldom occurs in the lower priced stocks. Most swing is best in the mid-range prices.
Stocks over $100 do not move the way a $50 stock moves. So as each level forms, you must understand how price will behave at that level. The change occurs due to market participants trading in that range and their reason for buying or selling the stock at that price level.
Each trader is unique. How you trade, your risk tolerance, your capital base, and your experience, the way you handle making decisions under duress or excitement differs from your neighbor, or co-worker, it even differs from your spouse.
This is just one of several parameters you need to consider. Choose carefully, by selecting the price range not only for your capital base but also, what market participants you wish to be trading with or against. Think about who is trading in that range and if you have the experience and expertise to trade with them. If you are a novice, you should be striving to trade with the quiet accumulation funds managers because they are the most stable of all the market participants.
Trade wisely,
Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
http://technitrader.com
MetaStock Partner
(c)2011 Decisions Unlimited, Inc.
Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.
