Trading Rules

Different Types of Buy Orders

Entering a stock properly is responsible for 85% of all successful trades, so knowing the different types of orders, which can be used to enter a stock, is obviously crucial. And while this is neither the time nor the proper format in which to review this matter in detail, I will quickly list the primary order types that are most frequently used in the strategies outlined in The Pristine Day Trader.

    1) The Market Order is simply an instruction that informs your broker that you want to buy or sell a stock at the best possible price that can be currently obtained. This is the most widely used order type which is precisely why it isn't overly used by astute market players who have the luxury of watching their stocks closely. This is not to say that the market order has no place in a traders program, but rather that it should be utilized sparingly, and only after the market and the playable stock has already begun trading. Rule: Traders should never place a market order on any stock before the market opens. This is an error typically made by inexperienced stock market players who get over-zealous in their desire to buy or sell a particular stock. Professionals simply don't buy or sell stocks without any regard for what price they are going to open. They would prefer to run the risk of missing the entire play, comforting themselves in the irrefutable fact that "missed money is much better than lost money." Market orders should be used primarily in quiet trading climates, and only then after the overall market and the underlying stock has opened. Market orders used any other way are nothing more than dangerous, shoot-from-the-hip, gambling bets that will wreak havoc with your trading career. How many times have you bought at, or before the open, only to find out later that you purchased at the highest price of the day? Want to dramatically reduce the odds of this ever happening again? Just have the patience to wait a few extra minutes, and I guarantee that those extra moments will often mean the difference betwen latching onto a winner at the right price, and getting caught in a dud.

    2) The Buy Stop Order is by far our most frequently used order type and should be thoroughly understood by all of our traders. This order instructs your broker to buy a stock once (and only if) a specific price objective has been met. For instance, we may instruct you to place a buy stop order for XYZ Company at $20.50, which is well above XYZ's current price of $19.75. If XYZ displays enough strength to trade up to $20.50, you will be filled at the best price obtainable at that time. If XYZ fails to reach the buy stop price of $20.50, because of inherent weakness or overall market softness, you (fortunately) will not be executed. Whenever we advise you to use a buy stop order, you should observe the following cardinal rule, unless otherwise instructed. Rule: Place all your "buy stop" orders after the underlying stock has opened for trading. Just like the rule above, this will virtually eliminate the chance of you being caught into an issue that gaps open several points higher at the opening bell. Tip: You will be frequently instructed to buy a stock once it trades above a certain price level. It is this recommended strategy that is ideal for the "buy stop" order. If we are advising that you buy ABC Company, once it trades above $30, you will want to place a "buy stop" order at $30 1/16, providing that you are dealing with a stock on which you can place such an order. Unfortunately, stop orders cannot be placed on all stocks. The stocks on which you cannot use buy or sell stops must obviously be watched closely in order for the appropriate action to be taken. This is commonly referred to as using a "mental stop."

ON Selling

Selling is largely the most difficult part of the overall investment/ trading equation, and if a market player does not have a firm handle on a few sell guidelines which aid in making proper sell decisions, profits will be hard to keep, if they are ever come by at all. Below, I have listed a few guidelines that will help limit the number of errors which can too easily occur in this most delicate of all trading areas.

    Rule 1: Consider selling any short term stock recommendation that languishes for 10 consecutive trading days without ever achieving its upside target or violating its downside stop loss. We are in the business of moving in and out quickly (in most cases 2 to 5 trading days), and in order to maintain a certain degree of liquidity, we must eliminate any stock which attempts to tie up our much needed capital. We refer to this as a "time stop," and it is an excellent tool to incorporate into any short-term oriented trading program. Tip: In most cases, if a good part of the expected move has not occurred during the first 5 trading days, the chances are good that the stock will be "timed out" or even stopped out. You will find that most of our winning plays do produce a large part of their move in the beginning. This is not to say that one should not go the full distance with each short- term stock pick (max. 10 days). I just felt this point was worth being aware of.

    Rule 2: Consider selling only 1/2 of any stock that catapults over 25% within 3 trading days. While we are primarily short-term traders, as mentioned above, we are intelligent enough to realize the importance of capitalizing on longer-term opportunities that offer the chance of truly spectacular price gains. And our studies suggest that those stocks which rocket 25% or more in less than 3 trading days are the ones that will typically go on to be the market's big winners. Tip: We usually sell 1/2 of our position in these quick 25% cases, and keep the remaining half as long as the stock stays above its break even point and/or its 50 Day Moving Average (50 MA).

    Rule 3: On short term trades, consider always selling 1/2 of your current position whenever you can lock in a $1.50 to $2 profit, even if we state that we're looking for a larger gain. While it is true that many of our stock picks go on to score very large price gains, locking in a part of your profits by selling 1/2 gives the trader an opportunity to profit in two ways. The smaller "trading" profit will undoubtedly satisfy that insatiable urge to take home some bacon for the kids NOW. While letting the remaining half ride will satisfy the natural urge to really go for the gusto, just in case you happened to have purchased a "Pristine Rocket." Tip: This is a strategy that will largely appeal to those who trade in larger lot sizes, but we have found that it can work wonders for those who initially buy as little as 200 shares. Just remember, should you decide to put this strategy into practice, never allow your remaining portion (1/2) to slip back into negative territory. The beauty of this approach is that it is virtually a no lose situation. Locking in the initial profit makes part of the "paper gain" real, while the rest of your money either makes more money, or breaks even at the very worst. This is a very important point. Remember it.

    Rule 4: Do not lose more than 8% (10% max.) on any stock that is above $15. You will automatically adhered to this rule if our suggested stop losses are strictly administered. The "stop loss" is the the tool that we will always use as insurance against disaster. As a short term trader who utilizes the stop loss, you will frequently experience being stopped out of a stock, only to watch it quickly rise again. Unfortunately, this is a reality we traders must face and learn to live with. Why? Because this scenario is here to stay. When playing stocks over longer time frames, you can afford to give a stock a greater degree of latitude, because time becomes more of a positive factor. However, when you're playing stocks over several days (typically 2-10 days), you cannot be as generous with your risk parameters. This is why The Pristine Day Trader places such a great degree of significance on stops, even if it means occasionally selling our stocks near the low of the day. When you're primarily trying to capture $2.50 to $3 gains per trade, your average loss must obviously be significantly smaller than that. So a tight stop loss, just as those detailed in The Pristine Day Trader, is a must. Tip: At times, we will feel quite strongly that a stock which is about to be stopped out is still an excellent hold over a slightly longer period of time. And if we are willing to extend our holding period a bit, we will decide to sell only 1/2 of our current position at our suggested stop loss. The remaining half will be given a wider risk parameter. This partial sell technique typically accomplishes two things. First of all, it lightens the burden of our loss by exactly 1/2. At that point we are dealing with only a portion of your original problem. And a portion, as you well know, is a lot easier to deal with than the whole. Secondly, it gives the stock an opportunity to come back, as many of our stocks often do. While we don't want to minimize the importance of taking your lumps quickly and moving on, initially selling only 1/2 of a very strong stock on the downside can prove to be a wise choice. Just remember. Everything has its price, and this revised stop loss technique is no exception.

    Rule 5: Never let a $2.00 gain in any stock turn into a loss. This should be self-explanatory. It is hard enough finding issues that go in the desired direction, without allowing those that do to turn into wicked losers. Once you have a $2.00 gain or greater, consider yourself free from the possibility of loss. At that point you can either adhere to rule number 3 above, or even sell it all. But whatever you decide to do, never ever let a $2.00 profit go sour. It's simply not smart, my friends.

Gap Openings

Gaps openings are those frustrating occurrences when a stock (which we what to buy) starts the day trading significantly higher than the price at which it closed the previous day. Knowing how to deal with them in the context of our strategies can mean the difference between staying out of trouble and losing money very quickly. Below you will find a few helpful trading rules to aid you in coping with these frequent occurrences.

    Rule 1: Do not buy any stock that gaps open more than $0.50 above the previous day's close or our recommended buy price, whichever is higher. For example, if we state that we will look to buy once it trades above $35.00, i.e., entering at $35 1/16, and the stock then opens at $35.62 (over $0.50 above our recommended entry price of $35 1/16), it becomes invalid and should not be entered. Gap openings are typically caused by a euphoric morning rush of buy orders that dramatically overwhelms the number of shares currently being sold. As mentioned in the Market Order section of this report (see part one; page one), professional traders don't indiscriminately place buy orders at the market open, without any regard for where the stock is going to open. So, your job as a professional short-term trader is to refrain from getting caught in these amateur driven stampedes. And you can accomplish that by waiting to see where the stock begins trading, before you decide to act. Tip: As mentioned in part one of this report, you must never place a market order on a stock before it opens for trading. This one single rule should virtually eliminate the possibility of being caught in a morning gap. Also, I'd like to point out the fact that we personally use a more precise version of this rule, and strongly suggest that you consider incorporating it into your trading plan. Note: For stocks under $15.00, we will allow only a $0.37 gap above the previous day's close or our recommended buy price, whichever is higher, instead of the full $0.50 as stated above.

    Rule 2: Consider all trades that gap open more than $.50 (as stated above) INVALID, even if they subsequently fall back into our suggested buy range. This is by far one of our most important "gap" rules. Once a stock has opened for trading beyond the point we are willing to pay for it, the recommended trade becomes permanently invalid. Very often, a stock will start the day off very strong, only to meet with major selling that takes the issue back down to our originally desired buy range. When this happens, there is a strong tendency for those who feel that they've missed the first run up to gleefully buy it on the decline. Generally, this practice will produce more losers than winners. When a stock fails to maintain its initial strength, it is a strong indication that either professional traders who already own some are using the strength to take profits or that they're simply "fading" the issue. Note: Fading refers to a trading technique that involves going against the herd or crowd. If a stock jumps up too abruptly, some market makers or professional traders will sell into the rise with the idea that the herd mentality that caused the advance will quikly die out. Of course this applies to the reverse scenario as well. Tip: Just keep in mind that this is a general rule that will save you money most of the time. It does not mean that a stock cannot rally after experiencing a mild set back. I am only suggesting that the safest thing to do is stay away, because, as you know, "missed money is better than lost money." As always, when you are in doubt, call us before you act. That's what we're here for.

    Rule 3: Consider buying only 1/2 your normal size of any stock that gaps open within our suggested buy range. As mentioned above, we will limit our buys to a maximum $.50 above our suggested buy price; however, when a stop gaps open less than that (say 25 cents) it is still buyable but should be bought with 1/2 the funds you were initially willing to commit to the trade. Why? Because any gap open will translate into a higher purchase price, and a higher purchase price obviously means a higher degree of risk. If our stated downside risk is $1.50 based on our recommended stop loss (assuming no gap), adding 50 cents to the cost will now make the downside risk $2.00. To compensate for the additional risk, a trader limits his/her size.

Tip: Additional risk can always be compensated by buying less than your normal lot size. Whenever you are not buying at the ideal point, you are assuming more risk. Buying less will help offset the added risk. Make sense? I hope so.

On the Single Gap Exception

There is only one exception to the rule(s) mentioned above, and I feel compelled to briefly mention a few comments regarding this exception to the rule(s). Exception: Anytime a stock gaps out of a six to eight week base, it should be bought according to Rule 3 (above). At times, we will recommend a stock based on a strategy we call The 6 - 8 Week Break-Out, which is an extremely powerful stock play that often leads to big price moves. Because of the enormous upside potential that this particular strategy possesses, the underlying stock can be bought irrespective of a gap opening. Tip: An important point to note is that "gaps" are a sign of strength (although often temporary in nature), but one does need to have a general idea of when that strength is likely to be the start of something big, versus a temporary phenomenon that will quickly die out. The 6 -8 Week Break-out plays recommended in The Pristine Day Trader will offer you that clue. Look out for them and play them.

Pristine on Miscellaneous Points

Below you will find a list of miscellaneous points that do not command their own category, but are just as important as the aforementioned rules (some are even more important). In fact, this page may be the page to which many of you turn the most frequently for daily guidance. Repeatedly read each item with care, internalizing the rich meaning contained within.

    Point 1: Consider "6-8 Week Break-Out Plays," "50 Day Moving Average Plays," "Channel Plays," "Stair Step Plays" and "3 to 5 Down Day Plays" our most compelling trading strategies. As a Pristine subscriber, you will be exposed to, and learn from, a large number of reliable trading tactics, but the above mentioned strategies (listed in order of importance) are by far the most reliable and the most plentiful. In fact, some traders may want to play these strategies exclusively.

Tip: Whenever these strategies are used, they are very clearly stated in the commentary and/or on each accompanying chart.

    Point 2: If a recently recommended stock is not mentioned in our "Pristine Stocks Update" section, it is to be assumed that the original (or last updated) strategy is to be adhered to. Because of limited space, there are times when we are simply not able to update every one of our open positions; however, this is not usually necessary, anyway. Each of our stocks is accompanied by a very detailed buy a sell strategy at the time of its recommendation. That original strategy (namely stops and price targets) should be strictly adhered to, in the event that no update appears. Typically we will not mention a stock in our update section if it requires not change or adjustment in strategy. Tip: There will be times when a stock is not updated, despite having met its upside target or violated its downside stop. This lack of an update is not to be construed as no action taken on our part. In these cases, all stocks meeting their up or downside objectives should be assumed closed by us.

    Point 3: Please keep in mind that our suggested price objectives are calculated from the most current price, not from where you buy the recommended stock. For instance, let's assume that a stock is currently at $35, and we are looking for a $3 rise. this will make our upside target $38 ($35 + $3 = $38). Should you happen to buy the stock at $36, your upside potential profit will then be $2. Tip: Consider this important point whenever choosing which stock(s) to play.

    Point 4: Do not anticipate (jump the gun) by buying a stock BEFORE the suggested buy point is met. Very often we will recommend that you buy an issue once it trades "above" a certain price (example, XYZ: Current price $20. Buy once it trades above $20.25). We obviously choose to buy certain stocks this way for a good reason. Buying them before the upside buy point is met can prove very costly. DON'T DO IT. That is if keeping your hard earned money is important to you.

    Point 5: Do not buy any recommendation that hits its entry price in pre-market trading, before the market is actually officially open for trading. Occasionally, one of our over-the-counter recommendations will trade up to meet our stated entry price before the bell, but oftentimes these pre-market machinations are nothing more than market maker games best to be left alone by all but the most experienced traders.

    Point 6: Consider buying only 1/2 your normal lot size on any stock recommendation that has a stop loss more than $2.00 away. Playing half when the potential for loss is a bit healthy is a very important element in our approach. There is nothing more important than our (your) original capital, and keeping it in tact is the paramount objective. We'd rather err on the side of making far less than we could have to save ourselves from the potential of being devastated by a large loss. Tip: always err on the side of caution. You may not become a billionaire, but at least you'll be around to play another day.

    Point 7: Whenever choosing which of our four stocks to play, always consider the worst case scenario first. Each of our stock recommendations will have a suggested stop price at which to sell, should the trade go sour. If the noted stop loss is $2.50 away, tabulate the loss you will sustain if the stop is hit. If you feel that you will have no problem taking a loss of that size, then all systems are go (green light). If the tabulated loss will cause emotional and/ or financial difficulty, either reduce your size (example: reduce from 500 to 200 shares), or disregard the trade. Its fortunate that as traders we do have choices. You'd be very surprised how just a little forethought can save us a lot of heartache and pain, not to mention money.

    Point 8: Do not believe that trading big size (1,000 share lots) is necessary to make big money in the stock market, because it is not. This was one of my greatest discoveries and it literally marked the beginning of an unbelievably profitable era for me. Some traders simply don't have the mental wherewithal to trade in sizes in which each up and down tick dramatically effects their financial well-being (I know I don't). The large size often causes them to "dollar count" with each tick (a dangerous practice) a make premature decisions out of sheer greed and fear. What's more, large sizes will make the most meaningless move emotionally and financially dramatic,a fact that will certainly evoke frequently "stupid" decisions. Trading with smaller lots eliminates many of these concerns by evoking a calm that produces a high level of mental clarity. It is only in the state of this calm that sound decisions and responses can be made. I dare you to try this. Stop being greedy, and start being consistent.

Most traders, lacking consistency, try to substitute a high batting average with size (obviously going for the grand slam). I say lower your lot size, and go for the higher batting average. When you are wrong and lose, it will be easily dealt with. When you're right (consistently) you'll laugh all the way to the bank. "Small" is a very good thing at times. Try it!

*We hope that you find all of the items above to be informative, educational and financially rewarding*

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