You can’t focus on only one aspect of trading and expect to do well.
Even if you win on several trades, you’ll learn the wrong lessons. In the end, it will come back to haunt you.
When I started teaching, I needed a simple explanation for my trading thought process.
Why do I choose a stock?
What’s the pattern?
And how do I determine position size?
You must PREPARE for every trade — that’s actually a handy acronym for what I call the Sykes Sliding Scale.
Let’s break it down…
What You Need to Know to P.R.E.P.A.R.E. for a Trade
The key to using the Sykes Sliding Scale is to prepare ahead of time. Again, I’ve been doing this so long that it’s second nature to me.
If you want to get good at it, you’ll have to practice. There’s no “easy” button.
P is for Pattern and Price.
What’s the pattern? What’s the price in relation to the pattern?
Too many newbies buy anything that’s spiking. Don’t get me started on short sellers. They want to short anything that’s up. It’s crazy.
Always look for a clear pattern. At first, you’ll have to test and tweak. That’s trading.
R is for Risk/Reward.
What’s the risk/reward ratio?
I don’t like to trade something unless there’s potential for a decent gain.
I’m not looking to risk $0.05 a share for a possible $0.10 gain. That 1:2 risk/reward isn’t enough for me. I’m looking for 1:3 or 1:4. (Or better.)
E is for Ease of Entry and Exit.
• How easily can you get in and out of your position?
• What’s your position size in relation to the average trading volume?
• What’s your position size in relation to the current trading volume?
• How fast is the stock moving?
You don’t want to get stuck in an illiquid stock. I learned my lesson the hard way on the biggest loss of my career.
Also, with fast-moving or choppy stocks, you might have to account for slippage.
P is for Past Performance and History of Spiking.
You should always check to see if a stock has a history of spiking.
A lot of stocks come into play again and again. If I’ve traded a stock in the past, I remember.
But I still check to see if it has a history of spiking, gapping up, or multiday runs.
I’m a glorified history teacher. You MUST study stock market history if you want long-term success in trading. That includes individual stocks.
A is for At What Time and Personal Schedule.
This is SO important. You need to make trading fit your lifestyle.
For me, I love to travel. And I spend time on my charity. Normally, I’m not sitting in front of the screen all day watching the markets.
For you, it might be different.
If you’re working a full-time job, you have to respect that. If you have an appointment at 10 a.m., you probably shouldn’t get into a trade at 9:59…
Also, time of day matters. For me, lately, I’ve loved trading during the pre-market and after-hours.
R is for Reason or Catalyst.
Why is the stock moving?
Again, I avoid buying random spikers.
Does that mean I never buy a stock without an obvious catalyst? No. Sometimes I do.
But that affects my position size. It affects how long I’m willing to hold.
You need to study to know what news has the potential to move stocks.
E is for Environment of the Market.
Three out of four stocks follow the overall market.
• Is it a bull market or bear market?
• Is there some big news about jobs?
• Are we in earnings season?
• What’s the market sentiment?
You need to understand what’s going on. It might not directly affect the stock you want to trade, but it will help inform your decisions.
3 Benefits of Using the Sykes Sliding Scale
Many students use the Sykes Sliding Scale to decide if a setup has potential. But there are other benefits, too.
Here are three that go beyond just getting into a trade in the first place.
1. Modulate Position Size
Many traders determine position size based on the size of their account or how much they’re willing to lose. And both are valid.
But using the seven indicators can help you refine on a trade-by-trade basis. Sometimes it pays to take a speculative position.
At the same time, you can reduce risk by taking a smaller size.
Use the Sykes Sliding Scale to know when to size down — or when to size up in a hot market.
2. Trade Reviews
Reviewing trades is essential to refining your process over time — especially on a loss.
You might see something you missed that explains why. Use the scale to post-grade your trades. It gives you deeper insight into your ability to read the indicators.
3. Track Data
I don’t use spreadsheets, but a lot of my students do.
You could set up your tracking spreadsheet to include the seven indicators in addition to other data.
That way, it’s part of your pre-trade process, your post-trade review, and your tracked data. Now THAT would be powerful.
The Sykes Sliding Scale is the result of years of trading experience. It was me taking a step back and asking myself, “What am I thinking and why?”
It still works for me. So use it.
Again, I’m not always right. And I still have to follow my rules — especially rule #1: cut losses quickly.
What do you think of the Sykes Sliding Scale and PREPARE-ing your trades ahead of time? Let me know here: SykesDaily@BanyanHill.com. I love hearing from you!
Cheers,
Tim Sykes
Editor, Tim Sykes Daily
