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A Trader's Mentality - February 12, 2019: Trading With the Trend

Follow us on Twitter @Schwab4Traders. This blog updates the first Tuesday of the month; next installment publishes March 12th. 

Many technical traders like to trade securities showing strong bullish or bearish trends. Unfortunately, locating stocks with these trends is not as easy as watching the crawling trade ticker at the bottom of your favorite financial news network.  If you’re like me, you might enjoy poring through charts and symbols to find what you want.  As I often suggest, there’s no substitute for looking at charts.  However, there is an easier way.

The Screener Plus tool in Schwab’s StreetSmart Edge® is adept at combing through the entire market to find stocks that fit your very specific strategy.  Traders can use a variety of fundamental and technical criteria to build a watch list of well-rated stocks in trending scenarios.

In our Schwab Live Daily Trader Talk in Today’s Market segments we discuss this tool frequently.  While it can be utilized to screen the market for stocks that fit your detailed strategy, even combining fundamental and technical criteria, you can also begin with one of the preset screens as highlighted below.

Source: StreetSmart Edge®

Let’s look at “Uptrend and Currently Oversold’. This screen searches for stocks in longer term uptrends which are also trading at what might be considered ‘oversold’ technical conditions.  Some traders like to initiate positions in these types of trends as they may offer a favorable risk/reward ratio.  In a bullish market, this screen will often provide a list far greater than one might have time to analyze. With this in mind, incorporating fundamental criteria, like A and B rated Schwab Equity Rating securities, for example, can help a trader to eliminate some of the less desirable trade opportunities.  (Click here for a breakdown of the Schwab Equity Ratings methodology and their performance).

Take a look at this chart for one of the stocks that appeared when using this screen:

Source: StreetSmart Edge®

For the last year, this stock had been in a well-defined uptrend using the 50-Day Simple Moving Average (SMA) as support along the way.  It looks as though retracements to the 50-SMA have been appropriate levels at which to add during this trend.  A trader who wants to follow this trend might consider buying near this current level and establishing a stop order beneath the 50-SMA to exit the trade if this trend is broken.

Taking a closer look, entering the trade near the current price of 26.79 and establishing a stop order at $26.13 (50-SMA) and simultaneously setting up a profit exit at the prior high of $29.87 gives this trade nearly a 1:5 risk to reward ratio ($.66 to stop order, $3.08 to target price).   

Source: StreetSmart Edge®

It’s important to keep in mind that while the 50-SMA might be our view of support, the stock itself does not care about this.  Traditional market volatility can take a stock below a support level intraday, only to close above said support.  One way a trader might combat these intraday moves is to place their stop order lower than what they’ve declared as support by using a calculation known as the Average True Range (ATR). 

ATR takes into account any gap, up or down, from the previous day as well as the high and low for the current day.  This can give the trader an idea of what ‘normal’ activity for a stock is during a specified period.  By placing their stop level beneath support by this amount, it’s possible for the trader to reduce the ‘whipsaw’ action of watching your stock move higher after being stopped out. 

Source: StreetSmart Edge®

In the chart above, you can see the addition of the Average True Range study in the lower left corner.  Notice the reduced stop level by the amount of the ATR and how it impacts the trade.  If a trader is still entering at $26.79 with a new stop at $25.36 and the same target at $29.87, they’re now risking $1.43 to make $3.08.  This is still better than a 1:2 risk/reward ratio, but not the 1:3 ratio for which many traders strive. 

Regardless of your method in trading the market, establishing and adhering to a plan while doing so can only help the trader to improve upon their successes while learning from their failures.  Don’t forget to join us during Schwab Live Daily for Trader Talk in Today’s Market where you can see strategies like the above covered in real time market scenarios.  View the Schwab.com/liveonline calendar for our next session!

What You Can Do Next

  • Register for an upcoming no-cost webinar to dive further into trading topics that interest you.
  • Open a Schwab Trading Services account to access our best tools and services for traders.
  • Read more timely content from our other Schwab trading specialists 

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Important Disclosures 

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

There is no guarantee that execution of a stop order will be at or near the stop price.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Schwab does not recommend the use of technical analysis as a sole means of investment research.

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