Small profit more frequent trades or big profit less frequent trades

3 day swing trade in CF

One of the constant question faced by new traders. They constantly shift from one end to another. Last night I got two emails and that had me thinking about this.

One person wants to only swing trade few triple etf while the other wants to only focus in finding stock likely to double. Focusing on less number of things will make higher returns or improve focus is the basic assumption.

Having thought about this issue a lot and researched it a lot in last decades , my view is the more opportunities a trading method produces better it is. Given a choice a method that produces 1000 trades in a year is better than a method that produces only 10 trades in a year.

A swing trading method or day trading method that produces frequent trades has big advantage over methods that trade less frequently even though the profit per trade is small. For example in the above CF trade I risked 254 dollar on a trade in a 110000 account to make 672 dollars in 2 days. In a year I am happy to find 500 plus trades like these and risk small amount. With commission cost being so low, it is better to trade frequently. For example in above CF trade my commission was 4 dollars. That is insignificant cost. 

A trader who focuses only on finding big opportunity has to bet significantly higher per trade to ensure higher returns. That significantly increases risk.

While a swing method that produces say 10 trades per day with lower per trade profit is significantly better as long as it has net profitability over large number of trades. Currently 53% of my trades work and give me 2.05/1 risk/reward. Then it becomes a task of finding more trades. Higher the number of opportunities, better it is. More trades you take with say 53% expectations level better it is as you can bet just .25% and still make good returns by increasing number of trades.

While everyday I look for a big opportunity trade like FB which made over 70% return on one trade last year , I am more focused on finding the small opportunities. The big trade is a bonus if it comes along, I will definitely take it.But as these trades require big risk if they do not work out , finding next opportunity involves long wait periods. 

Grinding out profit using swing trading is less risky due to small per trade risk as long as you have profitable method and it produces large number of trades. that allows you to increase your account in small but frequent increments and is less stressful. 

For a new trader who is just starting out this is even more important . Frequent trading with low risk allows you to build your skill faster than a less frequent trade method. It is also the reason most of the wall street and quant traders use high frequency trading methods with low per profit trade. With commission cost being so low, it is better to trade frequently. 


Looking for new leadership

JVA: Coffee Holdings Co

After few days of correction as of now market is attempting to stabilize here. Many beaten down stocks are bouncing as bargain hunters and mean reversion traders look for that kind of trade.

There is another kind of trade where new leadership can start emerging. They are stocks that did not get affected during the selling and had low volume orderly sideways moves or pullback near the high. They can be first to start rallying once weight of the market is lifted.

JVA is one such stock I bought today. it had orderly pullback after recent high volume earnings breakout. Today it is breaking out. 


Market setting up for a larger pullback

Market setting up for a larger pullback than we have seen so far in 18 months.

Momentum and growth names have entered correction zone and unlike previous corrections of 5 to 6 % , they do not show orderly pullbacks or continuation setups.

But markets do not go straight down, so there will be in near future a bounce and after that more failures.

Once the faster phase of selling is over, selective long work as market starts rotating in to new names. Those stocks that break down after a counter trend bounce offer low risk short setups.

The above action likely if we get multi leg pullback. So far in last 19 months we have had only one leg corrections.

While yet another miracle of V shaped recovery is possible , it based on setups looks like a lower probability event.


How to find big opportunities during coming earnings season

Everyday hundreds of stocks release news before and after hours. These news releases can lead to stock making big move for the day. What you have to look for is extreme surprise or growth.

A big surprise on neglected stock or stock with low expectations leads to big multi quarter move...

Some quarter back FB offered such opportunity on earnings day. 

FB was a low expectation stock and the sentiment was it has missed the mobile ad bus. A big surprise made analyst eat crow. Since then it has gone up.

If FB has smaller float it would have gone up 300% plus by now on the basis of big surprise.

Earnings season is starting so look for big explosive earnings surprises. The information to do this is easily available and for those looking for explosive returns this is one of the best way to get in to stock right near start of its big move.


How to find new leadership

Money finds new sectors to rotate in to during correction. That is what is happening right now.

Money has come out of  biotechnology , drug , China, and technology sector. Many of the stocks in these sector were up a lot in last six month , now they are having much needed correction. Some of them will go up again, some will never make it back to their high.

As a momentum trader and swing trader you have to look at where the new momentum leadership is developing. In any trading software it is not very difficult to do this.

In Telechart you can run a scan :

c/c10>=1.08 and minv3.1>100000 and c>5

c= price today
c10= price 10 days ago
minv3.1= minimum volume in last 3 days as of yesterday

This gives you stocks that are up 8% plus in last 10 days. That gives you good idea of where money is flowing .

As a swing trader I look for 8 to 20% moves. This scan gives you stocks that in past 10 days had that kind of swing moves.

You can run a similar bearish scan :

c/c10<.92 and minv3.1>100000 and c>5

Besides the above two scan I also run a Dollar move in last 10 days scan to find stock up or down  at least 10 dollar. Higher priced stocks may not get captured in a 8% move scan, the dollar scan captures those movers.

If you go through stocks appearing in the two scans you can figure out where new leadership is no both bullish and bearish side.