Question about Volume in trading Options, stocks,Futures?

When is the Best Time to Sell Your Stocks

Copyright (c) 2009 Scott Cole

Since late 2007, most stock markets are down over 50%, and many stocks have lost over 90% of their value. These results have had a devastating effect on many portfolios.

So, how does an investor or trader know when to sell? Well, my perspective is from someone who focuses primarily on price and volume, rather than the fundamentals of the underlying business. Admittedly, I’ve owned some shares that have fallen a bit. I intended to hold them as very long term investments, but it has been quite painful to watch them decline to current levels. This market has clearly demonstrated that the buy and hold strategy can devastate your portfolio if you do not use a form of protection, such as options, stock index futures, and shorting strategies.

Now, back to the question of when to sell. However, some hedge funds and Commodity Trading Advisors actually made a lot of money in 2008. Some made big bets on a collapsing credit market and shorted the financial stocks. Traders that I am more familiar with, have had significant success in trading in the commodity and currency markets. Their strategies will be the focus of this article.

Generally speaking, the majority of Commodity Trading Advisors (CTAs), traders that make a living by managing funds through the trading of futures markets and options on futures, can be regarded as trend followers. Among the more famous of these traders is John W. Henry, the owner of the Boston Red Sox baseball team. Trend following traders capitalize on the big trends that occur in the financial markets from time to time. In 2008, there were a lot of big trends in the markets, and probably the single best trend that these traders made easy money on has been in the downtrend in Crude Oil. After peaking at $150, this market has traded below $35 recently. Most trend following traders would have initiated short positions from about $120 down to $100. The move from $100 down to $40 equates to $60,000 for each contract held by these traders. At today’s margin requirements, that is better than a 400% return.

Trend following traders do not try to pick tops or bottoms. They wait for a market to tell them when a trend may be starting, and they will exit when the market indicates that trend may be over. There is no magic formula for determining when these trends will occur, or when the high price will be set, or when the bottom will be found. During periods where the markets are choppy, these traders do not make money, and tend to experience some significant drawdowns on their equity. However, with the strict application of risk management in their portfolios, some of the better performing traders will reduce the volatility of their portfolios.

So how does this apply to stocks? Well, most individuals want to be able to catch that hot stock when it moves 500% or more. Unfortunately, many will experience that gain, then watch it evaporate as they hope for more gains from that stock. The professional trader, however, will have separated his/her emotions from the stock, and exited when indications were that the trend was over.

However, there is no one particular price level, or indicator that the professional relies upon to exit his position at once. Rather, he will exit at different price points within the trend. Here are some ideas that will help you determine when it is time to start taking profits in your stock, and when to exit altogether.

Let’s suppose you purchased shares of JRCC as it was breaking out to the upside from a small base back in April of 2008. This breakout occurred at about the $20 level. The stock then rallied over 300% in less than three months to a high close over $60. The astute trader would not have exited his entire position at that level, since it is impossible to pick a top. However, the smart trader would have begun unloading some shares around the $55 level, and would have completely exited the position between $45 and $50. That’s a pretty sizable gain in three months! Since then, JRCC has traded as low as $5.05 in November.

So, what were the signs that this stock was hitting its peak? The first sign occurred on June 19th. The stock had closed higher on four consecutive trading days, with a gain of over 30% during that time frame. The stock was going to the moon, and eventually, when a stock goes to the moon, it must come back down to earth. On June 19th, the stock opened up over $2 at the open, then closed down almost $3 for the session. This was the widest trading range of the move up so far, and that day’s volume was its highest as well. This was the first sign of distribution, and the smart trader would have begun to exit either at the close or during trading the next day.

Two days later, JRCC had closed at a new high, over $62. On that day, its trading range shrank significantly, as did its volume, compared with the previous few trading days. The next day, on June 24th, the stock closed down almost $6, and nearly 9%, its biggest down day of the trend. Volume was higher than the previous day, indicating more distribution. The next day, it was down another 5% on even higher volume. This bottom formed a new swing low. It proceeded to rally for the next three days, but volume began to decline, and it could not take out the recent highs. On July 2nd, the stock broke through the short term swing low and closed down over $13, or 22% on its highest volume. The stock’s back was broken. Traders following this stock should have exited all positions by the close of trading on this day.

Now, if you want a more basic idea for exiting a high momentum stock such as this, simply exit 50% of the position when it makes a 10 day low in price and the rest when it makes a 20 day low in price. This is an unemotional way of exiting a stock position. Sometimes, you will exit a position way to early in a trend, since stocks will shake out shorter term traders, but a 20 day low is a good sign that an existing, intermediate term trend is over. Longer term traders who may use a methodology such as the CANSLIM method to enter momentum stocks at 52 week highs may instead exit position if the stock makes a ten week low and then a 20 week low. However, you will give up substantial unrealized gains by waiting for a 20 week low, so it is a good idea to pay attention to the price and volume relationships discussed previously. Or, you can exit at a 5 week low and 10 week low.

These are just some ideas for when to exit stock positions after they have made significant moves. There is no one perfect exit strategy. However, if you trade in this manner consistently, you will experience nice profits in the long run, and you will be forced into 100% cash when the market experiences the type of bear market we are seeing now.

About the Author

Scott Cole is a trader and analyst with a focus on developing trend following trading systems for stocks and commodities. He is the owner of the website http://www.kungfutrader.com and the site http://www.theultimatestocktradingsystem.com

Question about Volume in trading Options, stocks,Futures?

Hello Everbody,

Volume and open interest are very important when it comes to getting a good fill. AAPL is a very good example of a highly liquid vehicle. Tons of people trade each and every day so you get in an out in matter of secs. Since you day trade you want something more liquid than if you are a long term trader due to slippage

a. Options – OI >10,000 V> 3,000
b. Futures- there is no set number but the most liquid futures are ES, NQ, YM, TF, QM, and YG
c. Stock- greater than 2 million in volume

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One Comment on “Question about Volume in trading Options, stocks,Futures?”

1. 

   freetradingvideos 12th March 2010

   Stocks, one million shares or more

   futures- ES is liquid, YM is less liquid, NQ, is lessl liquid but all three are tradeable. Other futures I don’t know.

   Options, I don’t think about volume, I think about open interest and the spread. I need open interest to be more than 1000 and spread to be very tight.

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