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The 5 Phase Trade: Lesson 2

/The 5 Phase Trade: Lesson 2

Plan Your Trade and Trade Your

Plan!

 

A couple of years ago I was doing my homework one Sunday when

I spotted a stock that fitted the “Five Phase Trade” category perfectly.

Rather than placing the orders with my broker and walking away, I broke my rules and decided to watch the open on Monday morning and transact the business myself, using a recently opened account with an internet broker.

 

The stock showed significant resistance at the 3.2 cent level so I decided to buy half a million shares at 3.3 cents if it traded up to that level or higher. When I looked at the online platform the market depth was almost non-existent. There were only a couple of buyers and very few sellers with very small parcels of shares to sell.

 

The market opened and there were no trades done in the first thirty minutes, then twenty thousand went through at 3.2. I waited another half an hour and another thirty thousand traded at 3.2. It was pretty clear to me that I would never get my half a million shares that day even if the price did break through the resistance.

 

Appropriately annoyed at the waste of time, I hopped into my car and drove to the office, a short twenty minute drive. On arriving at the office I fired up the computer and nearly fell off my chair. The stock had traded thirteen million shares and had traded as high as 5.3 cents. I missed out on somewhere between $8 to $10,000.

 

There are several lessons here:

 

1) Place your orders and walk away.

 

2) Stick to your plan and show discipline.

 

3) Watching live data on a screen does not give you any great insights.

 

4) Most importantly, you should place the orders regardless of how volumelooks at any particular time.

 

On-balance-volume

 

I believe On-balance-volume (OBV) to be the single most important piece of information that is available to a trader. OBV is a computer indicator available in most good software. It is a simple measure of whether the buyers or the sellers are in control. If OBV is increasing the buyers are in control. What else do I need to know?

The Goals

 

The first goal in this trading method is not to lose any money. While this is not always possible and you need to learn to accept the odd loss, I feel that many people have the wrong focus when trading stocks of any description. Most people are thinking “How much money can I make from this trade?” The question you should ask fi rst is “How much can I genuinely afford to lose on this trade?”

 

Your next goal is to protect yourself from any unforeseen events. To me it is like a game of golf. I am standing on the tee of a par three and there are a hundred metres of water between me and the green. I see no water (risk), and know that I can carry across to the green as I have done many times in the past, but I still carry a few spare golf balls just in case.

 

Entry Signals

 

As with any purchase of stock, I need clear entry signals based on price alone. It is fi ne to get a “hot tip” or to read some great story in a newspaper or a newsletter, but I only see these things as something that draws my attention to a stock, not a reason to buy it. The actual purchase involves a degree of precision; this can only come from a price chart. Far better to rely on price action for an entry signal, not some story!

 

I find the only clear entry signals based on price are derived from three common technical entries. The entry signals are a break of a resistance line, a Darvas Box entry or trading an ascending triangle formation.