1 Simple Technique That Reduces Risk

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After Trump slapped Mexico with a new set of tariffs for not “playing by the rules”, equities are spinning, even though the market looks arguably oversold.

As we talked about on Thursday, technical indicators are flashing “BUY!” while the headlines are telling us to panic sell like never before.

Analysts are indubitably split on the matter, and the general consensus is a resounding, “I don’t know.”

Thankfully, there’s a tool that plenty of (not all) technical analysts use to enter new trades. It protects us from getting in too soon, and more importantly, lets us enter orders after-hours and premarket without having to worry about significant price gaps at the market’s open.

Price slippage, a major concern especially for lower priced stocks, can put investors into trades at wildly different prices than they may have intended. Assets can shift in price big-time while the market’s closed, but by using trade triggers with limit orders, we can eliminate that risk completely.

For our purposes, the trade trigger is simply the price at which we want to enter the trade. So, when we place our order to enter a trade, we’ll use a contingent limit order with the contingent price set as the trade trigger price.

As soon as the stock hits that trigger price, our order will fire, filling relatively soon thereafter. If for whatever reason the stock rockets well above (or below for a short trade) our trigger price, then that order will not fill, because we used a limit order to ensure we don’t buy in at too high a price.

This way, we can keep ourselves out of trades that open too high (or too low), then rebound back down (or up) a few hours or days later. Getting caught in trades like this can be a huge headache for most short-term traders, as they’re typically not looking to deal with the stress and time commitment of day trading – something you’ll likely have to deal with if you get stuck with a trade that explodes (or craters) at the open.

And as of yesterday, I’ve run across a potential trade that shows exactly why using trade triggers is so important. Not just to avoid volatility, but to let the market tell us if we really should be entering this trade in the first place.

In the daily candlestick chart above, you can see that Synchrony Financial (NYSE: SYF) looks like it’s about to fall off a cliff if support at $33.56 is broken. That almost happened on Friday, but even still, many traders would be hesitant to take SYF short simply for two reasons:

  1. Friday’s move was well outside the average daily price movement for the last week and a half.
  2. There’s huge market uncertainty, and a trade deal between the US and China could flip the market in a hurry.

But if we zoom the chart out and look at the weekly candlesticks, we can see that a huge trade could be developing – another one that daily candlestick-focused traders might’ve missed.

In this chart, you can see that bearish divergence has formed between SYF share prices and the stochastic indicator at the bottom of the chart. Even though a higher high was set, the stochastic reading dropped, even before the high of last week (which was a red candlestick).

So, because there is so much uncertainty in the market these days, we can use a trigger price just below support from the daily charts to allow the market to confirm if we should really enter the trade. Typically, in a situation like this, I want to see the stock drop at least 0.5% below support ($33.56), so if SYF falls beneath $33.39, we might have the confirmation we need to go short.

That means that I would want to use a contingent LIMIT order to short SYF (or buy a put with sufficient open interest) if SYF < $33.39, with the limit price at $33.39. If I was buying a put option instead, I’d need to calculate the price of the option if SYF hit $33.39, then enter that as the limit price.

Using trade triggers like in the example above is something you should do for almost every trade you enter, so as to allow the market to show us when we should really be entering new positions. Moreover, it allows traders to make trades without having to babysit each order during ordinary trading hours, when most of us would rather be doing other more important things.

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