VCM Weekly Trading Lessons
Timing Issues for Trades
Many traders have different views about the concept of ‘time stops’. This is when you stop out a trade, but not because it hit a certain price. It is because too much time went by without satisfactory performance by the stock. Some traders use an extreme view of stopping trades that do not move in three bars, some do not use any form of stop other than price.
One big issue is that too many traders exit trades too early. If you have taken the time to find a trade, enter the position, and have decided to risk a certain amount of money, why do you now want to get out a few minutes later? The truth is that many trades need some time to develop, and they are not necessarily ‘weak’ if they don’t move the second the market does. Many stocks move in tiers, and just because you were not the first out of the gate does not mean you will not hit the finish line first. Many new traders are looking for an excuse to exit trades, and often times a ‘time stop’ can provide the excuse to exit with small profits.
However, there are certain times when the odds begin to change, and most well written plans should allow for exits in certain well defined situations. Let us take a look at the first example, a trade taken as an extended scalp or a ‘half day’ trade, meaning you want to sit flat at lunch.
The trade taken is a nice looking 15 minute VCM buy set up (VBS) on Cisco Systems (CSCO). The trade is entered at ‘1’ and the target is set for ‘2’, the prior high and just under the 200 period moving average.
Perfect. However as we enter lunch, the stock stalls a little short of the target. Here is a great example of deciding to exit, or perhaps raising the stop to a prior bar’s low in lieu of getting out. We cannot help the fact that the stock came short of the target. We do not know or care why. What we do know is that it did, and pullbacks usually occur at lunch. So as a half day trade, manage based on what is happening, not what you hope to happen. This is known as exiting because the duration of the trade is over. No different than needing to exit at the end of the day if you do not hold overnight positions.
Next let us take a look at another example. Below is the 15 minute chart of KLA-Tencor (KLAC).
The play taken was a 15 minute VCM buy set up on a retest of the low of the day at ‘1’. The target was at ‘2’, the 200 period moving average and other resistance that cannot be seen on this chart. The play is going along just fine. Notice at ‘3’, we put in a green bar that negated the prior red bar which is very bullish. Yet, the right thing to do was to exit in this case. How did you know to do that? Based on the second concept, a time stop based on the ‘market’ arriving at its target. Take a look at the QQQQ on the same chart, same time.
Note the 1:30 time period, which is at ‘3’ on both charts. The QQQQ hit a serious resistance level and formed a triple top high. Bottom line; the market is the driving force for most stocks, especially a market stock like KLAC. The ‘market’ reached its final destination. You must acknowledge this in your trading, and adjust your target.
Targets are always estimates, and they must be adjusted and fine tuned IF certain contemplated events happen. We have shown you a couple of examples here, hitting a major reversal time such a lunch, and the market timing indicating you are at your final destination.