I love arguing.
I know that sounds weird, but I promise it’s a valuable trading lesson.
A lesson that you really need to learn.
How do you know the right amount of risk for a trade? I mean really deep down where you “just know” it’s time to size up, hold longer and get paid in a big way.
Most traders make the mistake of thinking that entry patterns are the reason for a trade. Or a stock hit their scan.
Or they watched CNBC and the CEO made the company sound amazing! (Talking about you Alex Karp).
While each of these can be interesting, they aren’t enough to justify accepting risk.
When I’m looking to put capital to work, I want as many reasons as I can find to believe the odds are stacked in my favor.
We call this building an argument for the trade.
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We argue for accepting risk.
The more reasons you can find, the more solid the idea. A bull flag is a reason. But If the industry group shows several stocks breaking out on good volume, is a better argument.
If you also have the broader sector showing the same order flow, even better.
That’s a good start, but we don’t stop arguing.
What’s the risk, the stop loss? How far has the stock recently moved? Does the LIKELY profit target from this moment justify the risk?
Are you near an optimal entry or chasing a stock about to reverse?
Does volume support the price action? Is the stock rallying on above average volume and pausing on light volume?
How about secondary metrics? What does the advance decline look like? Does it support holding the trade or selling at the first sign of weakness?
Let’s finish with the previous two weeks. Have been long (buying stocks)? Or have you focused on the headlines and the bearish sentiment? The recession mongering.
Sure that might unfold some time in the future, but for now. Stocks are going up, and many are breaking out.
Our community follows the order flow. Stocks that have institutional attention, and then we build arguments.
One of the primary arguments is breakouts.
Stocks pushing to new highs. Buyers stepping up, paying higher prices and pushing through a wall of sellers.
Twenty day breakouts are a better argument.
When you track these metrics, they add conviction to your argument. Here’s the last two plus weeks of twenty day highs versus twenty day lows. (see chart below)
If you had this to add to your argument, it was time to hold trades longer.
