Entering And Exiting Trades: 'What I Look For Are Those Broken Structures'

In the world of stock trading, every stock can be a winner and every stock can be a loser. The key to huge profits is simply knowing when to buy and when to sell.

At the Benzinga Trading Boot Camp on May 29, Rolf Schlotmann of Quantum Trade Solutions discussed the importance of determining when to enter and exit trades. Schlotmann typically trades on the forex markets, but he said these general principles apply to the SPDR S&P 500 ETF Trust SPY and individual stocks as well.

Breakouts Are Everything

Schlotmann said the first idea traders need to know is that breakouts are everything when it comes to successful trading. The majority of the time, stocks trade in ranges, and he said ranges are where the majority of amateur traders lose their money.

“Breakout trading is much more than people realize,” Schlotmann said. “It really pays off to know first of all what is a high-probability breakout scenario, when don’t you trade a range and what are bad ranges, when you better stay out, when is the likelihood highest for a successful breakout, and when do you expect fakeouts and how do you deal with all of those things,” he said.

Broken Structures

Schlotmann said one of the first things to understand when looking for a potential breakout is the basics of Dow Theory, which states that a market is in an uptrend as long as it is making a series of higher highs and higher lows.

“What I look for are those broken structures. When is a market not making higher highs and higher lows? This is not automatically a reason for me to get into a trade, but it’s the first reason I start stalking setups,” he said.

Once a trend is broken, Schlotmann said there is often a period of range trading before the market either reverses or continues its previous trend. Understanding how to recognize and determine that intermediate period is the key to getting on the right side of the trade. In addition, Schlotmann said traders need to make sure they confirm any breakouts so as not to fall victim to false breakouts.

Exit Strategies

One useful tool traders can employ to manage exit points are stop-loss orders, which automatically close out trades at a certain price if the market turns in the wrong direction.

“The general stop-loss idea that I use is I always want to protect my stop-loss behind some price action barrier. It could be a support or resistance level, it could be a moving average," Schlotmann said. "I use the 50-day average in my trading from time-to-time. But I want to have at least one barrier of protection between the entry point and the stop-loss."

He said he never tries to time market tops and bottoms precisely, so identifying signs of trend exhaustion is critical.

“For example, double tops, double bottoms, triple tops, triple bottoms, are very popular and very common in forest trading, for example,” Schlotmann said.

He recommended new traders start with breakout trading rather than attempt pullback trading because breakout trading is much cleaner and simpler.

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