Teaching You the Essentials of The Stock Market

Do not chase price. We allow price to come to us and never try to chase it. Set up in advance, and wait for the price to come to our level. This is based on institutional and algorithmic order flow and where the imbalance of that order flow has happened historically. For example, if there is a large order flow below the current price where there are buy orders (3%, 5%, 7%, 10%), the deeper the market drops, the larger that order flow is. 

Markets remember the price. Especially where there was a large move coupled with a big volume. This typically occurs on certain events such as stock earnings, Fed Reserves decisions, unemployment, and political policy changes. These are four of the main drivers, and assets have a tendency to revisit those numbers off other market-moving events as well.

With the propriety system, we plan the trade as such with a predetermined entry, target, and stop loss. The main thing is to plan the trade and trade the plan. Most traders go into the market without a plan and chase price. By the time traders make an emotional decision, the asset has more than likely already moved. Our system is mechanical and takes the emotion out of the trade by mathematical setups. We call a set it and forget it!

Do not place a stock trade with less than fourteen days prior to earnings. Someone always knows something we don’t. For example, the asset may move ten percent plus going into earnings during those few weeks. The earnings come out good, but the price has already reflected that in the move in that asset.

The insider on the other hand will take the profit off those earnings, as they were most likely in early on the trade, and the prices drop after the earnings were released. We have all seen this happen, and most retail traders don’t understand why. As traders read that the earnings were good, the price already reflected that news. However, there are some rare exceptions.

Regards to earnings. We wait till the third day after earnings come out to get the true direction. Meaning, the asset stays in its trend or did it change the trend? On Wall Street, this is known as the three-day fire drill of traders. Some are going to be right and some are going to be wrong. We want to let all this action occur; this still gives us eighty-seven days to trade before the next earnings.

This is an example of mitigating risk. We call the trader going into earnings the "Hero or Zero” guys. “If they are right, they are a genius, or if they are wrong, they look like an idiot.” No one needs that risk! Let the dust settle, and get the true direction. The old saying is still true, "the trend is your friend."

If the asset moves away from our entry price after seven trading days, cancel the order. Two reasons for this are tying up money in the traders account and the low probability of getting the order filled. Trading software at a brokerage firm’s back out a certain amount of funds while the trade is sitting waiting to get executed. Second, there is also the imbalance of order flow that has moved away from our entry price.

Never risk more than one and a half percent of the total account value on any given trade. If a trader had a $200,000 account, the max risk is $3,000. The issue with a novice trader is they lack proper risk management skills. This is a big problem coupled without a predetermined target of profit. In trader terms, this is known as the risk to reward mathematical measurement, and it is one of the most important aspects of trading. Having no plan is death to the account value.

Do not trade any stock with less than 2.5 million daily volume of shares. Volume has to be there so we know the institutions are involved, and as the asset moves, the algorithms trigger on that momentum either buying or selling, and the move will usually last for a while.

Never risk a dollar to make a dollar. We want to have at least a 3:1 risk to reward measurement. Our sweet spot is five to seven risk to reward, depending on the planned duration of the trade. Let’s say we get stopped out 2 times in a row and then hit a 6:1 trade, the math still makes a 4:1 in the grouping of trades, the net result is profitable.

We have to understand that losses are part of the trading, and should be expected. Stop the losses and let the profits run. If the trade is working for you, the first move of the stop loss is to break even. If the asset continues to move, we adjust the stop. At that point, we are starting to lock in profits. However, it still may have more room for the trade to continue for more profits.

Know how much to move the stop depends on the average true range. ATR is based on a fourteen-day moving average. Coupled with the curriculum's proprietary mathematics, you have to have wiggle room for the volatility. We never put a stop loss inside the ATR, as you would have a higher probability of getting stopped out.

If the asset runs in your favor, this can be very frustrating. The key is to let the asset run, and when there is room using our proprietary mathematics, adjust the stop. Let the market dictate the appropriate adjustment with our tools. This is how to stay in a good trade until it runs out of gas or gets in the overbought or oversold area on the relative strength index.

If done right, the stop should be moved five to six times in a good trade to lock in those large profits. This all depends on price, time, velocity, and how long the trade is planned for.