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Adjusting Trades – Part Science, Part Art

Written by Jeff McAllister on . Posted in Instructors Blog

Recently I was asked by one of our OptionsANIMAL students about when to start adjusting trades. Seems like a simple enough question, doesn’t it? Well, not really.

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Image by Mithun Kundu via Flickr

If it were, then everyone would already know the how’s and the when’s. This is what we are strongest in teaching here at OptionsAnimal. Anyone can teach basic strategies, basic technical and fundamental analysis. But only OptionsAnimal teaches those areas as the building blocks for what we all REALLY need and want to learn – how to salvage trades that are going against you. So, here is the original question and the answer that I provided…

Collar trade / frequency of adjustments?

Yesterday while I sat in on your class on adjusting the collar trade.I have a lingering doubt and time frames. Time frame for indicators,when we have all 3 indicators signaling the same it is time to adjust. Might be that I just wrote the answer to the question I am asking. I am looking to eliminate any doubts.

We trade on technical sell and buy signals, that part of the adjustment process is understood. What I am looking for is a time frame most suitable for adjusting the trade according to the technical indicators. Weekly, daily and or monthly. I am leaning towards thinking that the weekly signal is going to be the best time frame to adjust trades by. I know which time frame depends on the stock and the other variables of the trade, but as a generalization for the buy and sell indicators which time frame should I refer to? Or is the correct method to adjust as frequently as the indicators line up regardless of the time element.

Thanks XXXX

(my response…)

“XXXX, that’s an excellent question! Guess what my answer would be… Yup, “it depends”. Here’s the issue as I see it; I am trying to determine WHEN a change in trend is more than simply a short term move. How can I effectively do that? Is technical analysis predictive in nature? No. Technical analysis is a lagging indicator and therefore validation of a trend change, but not a predictor (though many would like to say that it is… and will disagree with me!) of future price. Hmmm, so what can we look at?

Sentiment? Well, yes and no – depends on the time frame. Stocks move wildly based on sentiment and rumors (X is moving today because of renewed talk of a takeover…), but often revert to the mean.

How about fundamentals? Absolutely, and not so much… Sorry. Take AAPL for instance. AWESOME fundamentals. Yet it is having a tough time climbing higher as the broader markets just aren’t in that great of a mood.

Yikes! So much confusing and seemingly conflicting information.

Greg, I think that the bottom line is this, you have to take all three legs of your due diligence into consideration when making adjustments just as you should when initially placing a trade. Fundamentals are very important as they are what the big boys are looking at for long-term growth. Technical’s are also very important, and I do prefer to use the daily’s when doing my TA, and lastly broader sentiment is also important.

One factor that you didn’t mention that I would suggest is important – patience…

I think that making adjustments is part art, part science. You know the science – you have it in your technical analysis. Now you need to work on the “art” part. That’s the “I have a feeling” part based on the broader perspective of the markets and your own experience leading up to this moment.

So, if you’re looking for a simple, direct answer (took me long enough!), I use the daily’s. BUT the truth is that I try to look at everything and come away with a feeling – like an artists, and that guides my decision making process.”

Jeff McAllister
OptionsANIMAL Instructor

 Adjusting Trades   Part Science, Part Art

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