7/30/2014

My process flow for Episodic Pivots (EP)



Analyse all after hours movers up 4% plus on 50k volume to see if there is stock with neglect+ game changing earnings

Pre market Run IB scanner to find stock up on 50k plus volume and up at least 2% . See if there is stock with neglect+ game changing earnings

During the day Run EP scan c/c1>1.04 and v>3*avgv50.1 and v>=300000 multiple times , see if there is stock with neglect+ game changing earnings

Tools used:


Marketsmith to find earnings and earnings trends, float, fund holding

Theflyonethewall to see news on the stock

IB scanner Top % gainers volume >50k

Trade Ideas Biggest gainers scanner + Trade ideas stock with Most upside momentum


If I find a good EP I buy immediately in pre or post market.

Most EP where I made big money I bought in pre market.

You have to keep doing this daily and once in a while big fish shows up....

T2108 in rapid decline


T2108 is Worden indicator that measures % of stocks above their 40 day moving average. As you can see it is rapidly deteriorating . As of now only 39% of stocks are above their 40 day moving average.

In swing trading you want to see rapidly expanding breadth as it shows buyers coming in to market. Current markets indicate sellers in control.

Buyers have continuously stepped in on minor corrections so far, however now less and less stocks are participating in the up move.

I am extremely caution mode. Big drawdowns can happen in the kind of phases if you are too leveraged or have too many open positions.

Big intraday moves continue to happen and day traders must be laughing all the way to bank but for swing it is a risky period.

Playing great defense is important if you want to survive and prosper in this game. 

My swing trading Process Flow


I look for two kinds of opportunities every day , a big game changing catalyst trade that can add 25 to 50% to account (Episodic Pivots) and small swing trades that can add .25 to 2% to account. 

Obviously the big trades do not happen daily so much of the daily focus is on finding swing trades of 8 to 20% profit potential. It is a very simple task now that I have been doing this successfully for 14 years. 

I just run a simple process loop daily and focus on it shutting out all other noise. I do not need others opinion or picks during trading day. It is just a bunch of simple tasks done efficiently. The outcome is profitable year. 

Basic Structural phenomenon

All my swing trading scans and efforts are based on a simple market observation, stocks when they move , move in momentum bursts of 3 to 5 days and 8 to 40% magnitude. This is inherent tendency of the market. 

Scans I run

To find stock likely to make these 3 to 5 days move I run a  bunch of scan throughout the day. 
  • 4% Breakout scan looks for stocks up 4% plus on 10000 volume
  • Dollar Breakout scan looks for stocks up 1$ plus on 100000 volume ( good at finding b/o on high priced stocks above 40)
  • Range Expansion scan for stocks whose range today is bigger than the range in last 3 days and that was not up more than 2% as of a day before
Same scans have bearish version to look for short candidates. 
 
The scans run on their own throughout the day and I use bunch of sorts using Trend Intensity to narrow down focus to few good candidates. 

If I find a stock that meets my setup definition I buy.

What do I look for in good setup

You can read my post which gives details of what I look for in a good setup for swing trading.


Basic things I look for is :

First leg should be linear

Stock should not be up 3 days in a row (small range days up 3 days is ok)

Orderly pullback or consolidation

Should close near high

Volume high

No 4% b/d in last 3 to 5 days

If good candidate shows up I calculate position size using risk calculator and buy.

Where do I put stop

If I enter a breakout I put my stop at low of the entry day. 

How much do I risk

.25% to 2% per trade. 

How Do I exit

Either it hits the stop in that case it is failed trade.

Exit after 3 to 5 days

Exit if position gives abnormal profit in one day of 10% plus. (at least part exit and move stop to protect rest.

Now this is a simple process I run day in and day out . Small gains like these add up due to compounding and in few years you can run up your account up significantly. 100k has compounded to 789k using this kind of method if you take every trade I take in last 5 years. 

The process has evolved over last 14 years and every year it becomes simpler to do . 

this is just one of the ways to do it. Various traders use various other setups like these to do this day in and day out.

For beginner trader it is difficult at first to do this with same speed and efficiency. It also depends on when you start trading methods like these. If you start trading them in right market conditions you find trades after trades working , in range bound environment you find smaller moves. Near reversal zones you can have trade failures. So overall market filter is used to calibrate trading using this process.

This is a simple process template. If you are new to trading you need to develop your own process flow. Once you do that you can fine tune it over number of trades. 

 

7/29/2014

Why constant wins are good for beginning trader

We do things that we are successful in or are winners in . We avoid things where we are losers or not successful. That is the inherent nature of human beings. As  a beginning trader learning to trade or someone who is frustrated with his trading it is very important to first learn method that will involve frequent wins.

Frequent wins give you positive feedback and motivate you. Frequent losses sap your confidence and energy. Learn methods that will give you frequent wins early in your trading career. It will help you a lot.

One of the reason swing trading methods are so popular among active traders  is because they give you frequent winners when done right. That helps you stay motivated and focused on trading.

Stockbee Swing Trading Method 

A swing trading method that gives you 60% win rate and average wins are double the size of losses is psychologically make you feel a winner and also build your account.

Stockbee Working People Method

A method that trades infrequently and has only 37% success rate is psychologically difficult to trade for many. Even though it might produce bigger profits.

If you do not quickly find success in trading it is most likely you will give up trading. There are very few human activities where humans persist if they are constant losers. that is why the often given advice of best thing that can happen to you at beginning of your trading is to lose all your money or to learn to lose first is wrong advice.

If you make money in first year of your trading you are more likely to continue with it. If you struggle it is most likely you will give up.

Do not underestimate the power of winning trades to motivate you. If I had not found a winning trade that more than tripled my account in few months right at the beginning of my trading career I would not have stuck around for next 14 years and grown my account multifold.

That is why it is important to have positive strokes from winning trades for traders to be motivated.

So if you want  to learn to trade learn methods which will lead to frequent profits and not methods which do not have immediate feedback.

7/28/2014

How to find stock with big catalyst

While there are thousands of small moves in the market of 20% kind magnitude, in a year there are also 100 to 300 big moves where stock make 100 to 1000% move. Finding big moves of 100 to 1000% in a year requires a  different kind of approach compared to swing trades.

Big moves tend to have big game changing catalyst. Your ability to understand the impact of that catalyst is important skill needed to trade the big moves.

The work of finding big game changing moves starts after market close. After market closes for the day , many companies start releasing earnings or other kind of news impacting their earnings or sales growth. 

If the news is surprisingly good or bad then the stock gaps up in after hours and trades with volume. Your starting point for finding big movers is scanning for after hours movers. 

Many free resources are available for this. One of the better one is on Wall Street Journal site
After hours movers  In this focus on stocks up 4% plus or 5 dollar plus in after hours with 50k plus volume. 

For those stocks you have to find if they had big earnings surprise. Earnings surprise is basically compared to analyst forecast. So if a stock has say 300% surprise it means it did 3 times better than analyst expectations. Stocks with big earnings surprise make big moves (if they were not rallying in expectation of such surprise)

Information about earnings surprise is also easily and freely available. You can find it here: Earnings Surprises 

Once you combine the two information of stock up big post market and its earnings surprise, you have possible list of candidates for further analysis. Then the next task is to get in to details of these stocks earnings and see if it is first or second big earnings surprise. First time is real charm. A first big earnings surprise on neglected stocks can produce a 300 to 500% move if that earnings surprise signals start of a new growth phase for that stock.

Once you do further research then you have potential candidate. For my further research I use Marketsmith and theflyonthewall. These are paid services and give you a snapshot of stocks earnings trends and news history.

They are expensive and cost around 100 dollar for Marketsmith and around 65 dollar for theflyonthewall. For me that is not a big expense as the total capital I trade is in 7 figures. But for small trader it can be big cost. You can use free tools like Zacks, Finviz, Seeking Alpha to do same thing . That requires certain compromise and requires more effort. 

Same things you can do in the morning. Some stocks announce earnings pre market. If earnings is good they start rallying. To find stocks up pre market, I use Interactive Broker Scanner. It gives you stock up on 50k volume in pre market.


Another tool I use is Trade Ideas scanner. I scan for Biggest Gainers in pre market you can find stocks up on volume using the above scan.


If you do this daily you will generate some ideas in after hours and before market open , if they are high conviction ideas then you need to decide when to enter and with how much size. I often enter good high conviction trades in after hours or pre market  itself. If a stock is going to make big move entering it as early as possible is best as you can benefit from the days move and you can have stop right near breakout point. 

The primary focus for pre market work should be to find such big game changing earnings or other catalyst stock. In a year chances of finding such big ideas are 1 to 20 but just one such big trade can make significant difference to your account. For that you should have conviction to risk big on these ideas.

When looking for Game changing catalyst stock in pre and after hours I am always looking for situation that is likely to result in explosive move in short period of time. During peak earnings season there is always a temptation to look at every earnings, many of them are just day trade or few days swing trades. They are not real game changers.

A genuinely surprising earnings in most cases leads to big gap up and huge pre market volume. A stock up in pre market on below 50k volume is not what you want to focus on. Similarly a large cap up on 50k volume is also not important.

The objective of finding game changing catalyst stock is to find a stock that will increase your overall account by 25 to 100% in one trade. Which essentially means the stock should be capable of big move and you should risk sufficiently big on it. I often risk big on such rare opportunities.

If you have IBD subscription you can use it to find such find big game changer candidates. Big catalyst stories show up on front page. If you do nothing but just focus on stock highlighted on front page on earnings day and research them you will probably find 3 to 5 big winners in a year. In some market conditions you will find 20 to 30 good winners.

If you are motivated and genuinely serious about making big money in the market focus your efforts on big movers in pre market and after hours.

7/25/2014

Simple secret to trading success


Procedural memory is memory about how to perform procedures.

We have as an adult thousands of procedural memory. We perform these processes without thinking.

Driving a car is about procedural memory. We drive effortlessly without thinking. We are not even conscious of the process unless something happens.

Shaving, brushing your teeth, washing dishes, cooking, and many other things are stored in brain as procedural memory where we can do them without thinking.

The day you realize trading success is about developing procedural memory specific to a setup or style of trading , you will be on path to success. You will do things that will enhance procedural memory.


A good swing trader is driven by procedural memory. He looks at above stock and instantly procedural memory kicks in. It helps him instantly decide whether this is good setup or not, where to enter, where to put stop,  where to exit and so on.

This is why when you read about a setup in a book, it does no mean you will be able to trade it immediately. Because most trading books do not provide you procedural template.

If you read a book Trade Like Market wizard you will intellectually learn about setups used by market wizard but it does not develop procedural memory. To develop procedural memory you need to do same process as the market wizard does.


Same way knowing that the 96 million man uses Episodic Pivots as a setup is just one part of the equation but developing same process as he does is the key. Unless you develop similar procedural memory you will not find same stocks. He looked at this stock and bought it as EP, because he has developed procedural memory to find such stocks. He has well defined process he follows day in and day out. If you do same thing , you will find same thing.

There is no pill for developing procedural memory. Only significant effort can develop it b doing same process again and again.

Trading success is about developing expertise on a setup. When you try and develop expertise on a setup you train your procedural memory.

Procedural memories are implicit memories. They allow us to lower cognitive load. They are learned intuitions. It is stored in memory as one schema.

A process containing say 32 steps is not stored in memory as 32 discrete step but as one sequence of step. When performing that task the brain efficiently recalls all those steps simultaneously so you can do the task effortlessly.

A Episodic Pivots method once you develop procedural memory for will be stored in your brain as one sequence of events. It gets triggered once you see a EP candidate. same thing applies to any breakout or pullback setups.

Once you develop procedural memory it helps free up the brain to do other things. That is why once you develop procedural memory on setup you find trading becomes easy.

Developing procedural memory frees  the brain by reducing cognitive load. We know which stock to select, where to enter , where to exit, how much to risk. Beyond that it is adaptive so if we see change in market condition we slightly change our process instinctively.

Successful traders develop thousands of procedural memories about thousands of decisions or processes involved in trading. They make our life easy as a trader. If you watch a novice trader he or she spends so much time on things which trained trader does effortlessly and without much thinking.

When we are new to trading , we do not have many procedural memories. But as we develop as trader we quickly start building procedural memories about trading tasks.


You see the above stock in your anticipation scans what happens.. Few months ago if you were new to it, you did not have procedural memory for it, but through constant practice you see CHTR you know what to do. But now many members  have develop a procedural memory for it and it takes then 10 to 12 minutes or less to find good candidates. In the beginning they were consciously doing the process, now they don't need to do it as step by step sequence. As soon as they run the scan the entire set of memory of the process is triggered and you start looking for good setups.

Same thing happens to the Range Expansion setup once you start using it daily. You can be talking on phone or eating and you see good range expansion candidate shows up and you enter it while continuing to do your other things.

If you read about trading or buy trading manual you will not develop procedural memory. You develop trading related procedural memory by doing actual trading . If you do a process thousands of time you develop procedural memory.

How many hours and tries are required to learn to swim or perform dance or gymnastic. It is same for trading.

If your setup is fast setup requiring fast entry and exit like say day trade , then procedural memory is even more important. You have to perform the task at speed without thinking too much.

New traders spend too little time developing procedural memory. Before they can develop procedural memory they switch to new ideas and setup. One day they ride bike for few hours struggle, next day do few hours of swimming and give up because water enters nose and ear, next day they try something new. In the process they do not have procedural memory for setup.

In order to develop procedural memory at first you need t have a process template and then after repeating the process template hundreds of time it become automatic. While doing that you develop your own process and might develop process different from the template I provide.

You will see hundreds of examples of that on this site. Members have taken setups like EP or STIB or Momentum Burst or Anticipation and develop their own process flows or modified them to develop new methods.

For discretionary trading it is all about procedural memory development on a specific setup. For mechanical traders machine does that job.

If your efforts at training procedural memory to trade a setup or style are successful then you will become efficient in trading that style.

Once you learn a setup it become relatively easy to develop procedural memory on related style or setup.

If you want to make money trading focus on developing procedural memories and developing process loops.