First, you need to set up a limit:
Let’s say you see a 5-8% chance of hitting a swing high (see the above chart for a visual) in your current trades, so you trade a $100 stock on $5.00 a trade for $5.00 an order. This will ensure that after every order you get a swing high. This will also ensure that the stock has a small profit margin at the end of every trade.
As a general rule, this method is better than buying on a margin because you are buying a market-maker who has built up a lot of money. Instead of buying on margin, you are basically trying to “pump the pump” to get a higher payout, but at the expense of the stock. If the stock goes down, you can make your original trade without risk to your initial $5.00 trade.
Now I know that this sounds very simple, but this method has its own set of variables.
Your risk of losing more money than you trade at will be slightly higher if you place your stop loss on the bottom of the chart, as discussed above.
This is why this is the most simple method. The risk is extremely low to begin with. You must have a few more trade ideas before you decide to set up a stop loss for your stock, so just keep that in mind.
As a general rule, traders will not want to wait until their price has reached the upper range before moving, to ensure that they are getting a full range of profits. If you wait until the middle then you have more exposure to margin loss and you will have to adjust your positions accordingly.
This means that you should always begin your trading with a small profit, to avoid being “lucky” and have to adjust once your profit margins are higher. (this is discussed in greater detail later)
After you have set up your stop loss on the bottom end of the chart, you will typically want to adjust your position. For example, in a $90 stock, it would make a lot of sense to place a $10.00 order and immediately sell a $12.00 order to make a $10.00 profit. The reason for this is simple: If the stock drops back up to the $90 level, the profit margin is lost and your $6.00 trade is made.
Instead, it’s more efficient to use other stops to ensure the same profit margin
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