How to trade momentum Part 2

Yesterday we looked at the concept of ROC and simplest way to calculate ROC for momentum trading. But such simple ROC calculation has lag effect. To overcome such lag effect, you can calculate ROC in many different ways. Today we will look at one of the better ways to calculate ROC. That is by using a weighted ROC.

A weighted ROC is a average ROC of different periods. In such cases you derive a average of say a short period ROC and a long period ROC. For example you can calculate 3 month ROC and 1 year ROC and use a average of it. It will give you stocks which have one year momentum plus three month momentum. A stock can be ranked in top 10%by yearly momentum , but because of the lag in data, currently it might be going down on shorter time frame or going sideways. So on a shorter time frame of say 3 month it may not be an ideal momentum candidate.

To find such stocks normally you can use a weighted ROC.

Momentum Trading using front weighted ROC

Instead of using simple ROC or a average two period ROC we can use a weighted ROC. In weighted ROC, ROC's for different periods are added together and assigned weights. So for example you can add ROC of 1 year and 3 month ROC. One of the reason to do this is that recent period price gains or loss get additional importance. ROC 3 month+ ROC1 year. Now you can vary the importance you give to the periods. So you can give say double the weight to recent price action. That will make the above formula 2*ROC 3 month+ROC 1 year Investor's Business Daily (IBD) uses a front weighted ROC to calculate its Relative Stregth ranking. It adds up the ROC for a quarter, 2 quarter, 3 quarter and a year and gives double the weight to recent quarter. IBD advise focusing on top 20% stocks using above ranking or stocks with 80 plus momentum ranking which it call Relative Strength ranking. On those 20% stock it uses other fundamental factors to narrow down the candidates. On that narrowed down list it uses chart patterns to time entry. What does a weighted ROC like this does is it gives you stock with trending characteristics. They have high momentum on all four time frames. When you buy a continuation breakout on such stocks , both probability exists: it will follow through and you will have very profitable trade it will not follow through and you possibly entered a long running trend in stock at a time where it is about to revert In order to avoid the second probability IBD also advises use of another criteria, it says buy breakouts after first or second base and avoid third stage bases. Mark Boucher also uses front weighted ROC in his trading approach. Mark Boucher in his book details his momentum based system for trading the world markets, the commodities, and the stocks. At the heart of his equity selection method is momentum. He use a weighted average ROC to rank stocks. He offers two methods for equity selection based on whether you are long term traders or short term traders. For Long Term Traders ( (2 * C * 100 / C5) + (2 * C * 100 / C25) + (2 * C * 100 / C40) + (2 * C * 100 / C65) + (C * 100 / C130) + (C * 100 / C195) + (C * 100 / C260)) / 11 He advises taking top 20% stocks ranked by this kind of ROC scan. For Short Term Traders ( (2 * C * 100 / C5) + (2 * C * 100 / C25) + ( C * 100 / C40) ) / 5 He advises focusing on top 20% stocks by this kind of ROC scan. After first using momentum to narrow the universe of stocks, he uses earnings and other fundamental criteria to narrow this universe. Within that narrower universe he uses a Runaway Pattern criteria "TBBLBG" , which stands for Thrust Breakout (TB), Breakaway Lap (BL), and Breakaway Gap (BG). If you look at his momentum scan closely, he uses a front weighted ROC. A scan like above gives you stocks which already are in rally mode and then you enter them based on chart patterns. The exact period used in such calculation and weightage used is a matter of trading time frames used. If you are say a day trader, you would use a minutes or hours time-frame and weigh them differently based on whether you want to fade the trend or ride the trend. If you are primarily a pullback trader, you can use a back weighted ROC to find stocks which are top ranked by one year momentum but are currently having a pullback. Momentum trading using Back weighted ROC Depending on your objective and holding periods, you can create various kinds of weighted ROC and test their effectiveness. One of the observed tendency in stock price momentum is that short term momentum (less than 3 month) is bad, it often leads to mean reversion. So a back weighted ROC can be designed to find such stocks. Ford Equity Research uses one such kind of weighted ROC. It is one of the well known equity research provider on the street and has been using a price momentum model since 1991. It uses the price momentum (which it calls PRM) figure to rank stocks and advocates buying top 10% ranked stocks. It is calculated as follow: PRM =PGY - PGQ - 3 * PGN PRM Price Momentum PGN (past month price gain) PGQ ( 3-month price gain) PGY (12-month price gain) So it gives negative weights to 3 month and 1 month price growth. A Weighted ROC calculated like this will give you stocks with high relative strength which have pulled back in last 3 months and especially in last one month. So this is an example of back weightedROC , where there is more emphasis on past one year price growth but less on short term price growth. This kind of approach is suitable for institutional investors who like to buy and accumulate shares during correction or pullback traders. There are limitless possibilities to using momentum. You can create various combination of time periods and weightage. Some combination work better than others. The combination you use is a function of your objective and risk tolerance and frequency of trading. There are even better ways to calculate ROC and we will look at ROC as a ratio of price to moving average as one of the better method in next post. That is what I use as one of the ways to calculate ROC in my momentum trading methods... Top ranked stocks with momentum for today AIXG AMD BONT CAAS CATM CMFO CYTX DAN FMCN GOL GY HEAT HGSI HL HPJ ICOC IO IOC KNDI MED NANO NLST NTRI OPTT REV ROY SCSS SEED SNIC THM TSTC UAUA UFS Related Post How to trade momentum

How to trade momentum

"Valuation does not guarantee price, which is what we are trying to forecast. More often, valuation is a measure of risk level. Price, as many of us , learned in Economics 101, is determined by the laws of supply and demand which are in turn bounded by the human emotion of fear and greed!
What's unique about price momentum based ranking system that no other variable claim, is that price cannot diverge from itself. Valuation, earnings estimates, economic fundamentals all have potential to move in the opposite direction of price, but price cannot diverge from itself. As a result, price momentum based ranking systems will lock on to the correct side of the trends. They also tend to get us out after a modest drawdown, thereby allowing profits to run while losses are cut short."

Being Right or Making Money - Ned Davis Research

Momentum is commonly used term in stock trading. So what really is momentum. If you try and search on Google for "How to trade momentum" you will get these 5 top links.

1. TradingDay.com Technical Analysis Tutorial - Mastering The ...

   - Dec 9
   Always trade by the numbers and not the news. Use their cold logic to painlessly exitmomentum positions and move on quickly to the next opportunity. ...
   www.tradingday.com › Technical Analysis Tutorial - Cached - Similar -

2. I Trade Momentum Stocks And Consistently Make Over 100% in Bull ...

   - 3 visits - Dec 9
   This lets me trade with amazing returns on investment – like this: 2003 ... After a bear market where there were few good trades in momentum stocks and ...
   www.crispstocks.com/ - Cached - Similar -

3. How to Momentum Trade Stocks | eHow.com

   - Dec 9
   How to Momentum Trade Stocks. Momentum trading of stocks is for the intermediate or advanced trader. Momentum trading of stocks is a spur of the moment ...
   www.ehow.com › ... › Other Business Management - Cached - Similar -

4. Momentum Trading with Discipline

   - 3 visits - Dec 9
   Momentum trading requires a massive display of discipline, ... All markets trend within any given week, and the best stocks to trade are those that ...
   www.investopedia.com › Articles - Cached - Similar -

5. Introduction To Trading: Momentum Traders

   Or will the breakout fizzle quickly, providing some limited upside but not sufficient profit to make the trade worthwhile? Whether the momentum fizzles ...
   www.investopedia.com › Articles - Cached - Similar -

   Show more results from www.investopedia.com

6. How to Successfully Short-term Trade Momentum Stocks

   - 8:30am
   Finding a sensible entry point for your stock trade is every bit as important as finding a goodtrade. Larry Connors suggests you keep these guidelines in ...
   www.tradingmarkets.com/..../How-to-Successfully-Short-term-Trade-Momentum-Stoc-81316.cfm - Cached - Similar -
7. 
   

Try making sense of them and you will be completely lost. It is lot of words and lot of non specific advice without explaining what really is involved in trading momentum. Do they answer the question which are necessary to trade momentum:

What is momentum

How is it calculated

What are different methods of calculating momentum.

What are the advantage and disadvantage of each method of calculating momentum.

How to rank stocks using momentum

How to find a trading setup in momentum stock.

How to enter, exit, put stop, take profit, decide how much to risk and so on.

How does overall market affect momentum strategies

How to trade momentum from short term, medium term, or long term perspective

And many such specific information is needed if you want to trade momentum successfully. So sometime back I wrote a multi page document on the Members Site to explain some of the above issues in great details.

In a very simple term momentum means rate of change (ROC). The rate at which a stock is going up or down for a specific period of time. If you rank stocks by rate of change then the top ranked stock is the fastest moving stock for the period of ROC calculation.

So how to we calculate ROC. We do this by calculating rate of change in prices over a defined period like 1 month, 3 month, six month, or a year. Rate of change tells us percent by which price of a stock went up or down for a specified period. To calculate Rate of Change (ROC) we need two prices:

1. Price in earlier point in time
2. Price in later point in time

ROC= [(Number at later time ÷ Number at earlier time) - 1] × 100

So to calculate a 3 month ROC for a stock today we need:

1. Price 3 month ago
2. Price today

Mathematically ROC in this case is then:
[(Price today ÷ Price 3 month ago) - 1] × 100

So in Telechart to calculate 3 month ROC we will write a scan like


[(c ÷ c65) - 1] × 100

or the same thing simplified will be
100*(c-c65)/c65
where we assume there are 65 days in 3 months of trading.

Now using same logic if you want to calculate 6 month and 1 year ROC you will get:

Six month ROC
100*(c-c130)/c130
One year ROC
100*(c-c260)/c260

Now if you sort the All Stocks list by these ROC values, you can pick top 10% stocks. That will be your trading universe.

If you are using Telechart your task is easy. There are number of pre defined ROc scans under the "System Sort" sorting function. If you look at the list you will find following ROC scans in Telechart:

Price Growth Rate

1-year
2-year
3-year
5-year

Price

Percent Change 1 month
Percent Change 26-weeks
Percent Change 5-year

You can use these ROC/ Relative Strength scans to build variety of long term and short term trading systems.

This is the simplest way to calculate ROC. But other ways of calculating ROC have many advantages. Over next week I will dig out my momentum folder and write about various ways to calculate ROC and convert them in to swing trading methods.

Top momentum stocks for today

AIXG

AMD

BONT

CAAS

CATM

CMFO

CYTX

DAN

GOL

GY

HEAT

HGSI

HL

HPJ

ICOC

IO

IOC

KNDI

MED

NABI

NANO

NLST

NTRI

REV

RINO

ROY

SANM

SEED

SNIC

THM

TSTC

UAUA

UFS

VECO

If you want to be successful trader understand the psychology of expertise

Why you need to understand psychology of expertise

The primary challenge for novice trader is of building expertise. To become a better trader you must have a good understanding of psychology of expertise acquisition. What is an expert. Layperson uses the term expert loosely to describe anyone with superior knowledge or skill. Psychologists use the term expert to refer to an individual who is significantly more experienced than others in performing a particular task. Expertise is task specific.

Ability to trade profitably is not about trading knowledge. Because trading is a performance skill. You have to perform some tasks to be a successful trader. That is a skill area. As against that say if you had to give a lecture on trading everyday, it is a knowledge game. To build performance skills in any field what is required is extensive practice. The reason many traders fail is because they start trading without extensive practice and then they quickly get discouraged. If trading was only about practice all old traders would be profitable, that is also not the case. So what really is the key.

Domain Specific expertise is key.

Trading is a complex skill. So you have to juggle several pieces of information to make successful trade. So if you can simulate the practice of trading then you build expertise. So trading is a learned and learnable skill. But to do that successfully we must consciously understand the psychology behind expertise building. Then we can consciously do things that will speed up our expertise building.

In process term if you want to learn to trade well you need to develop expertise in specific task of trading a specific setup. So having generalized skills is not enough, but you must have a very specific skill in trading a pattern, or a market anomaly, or automated trading. Studies of experts show that their skills are highly domain specific. A good pastry chef has a very specific domain specific expertise in making cakes or pastries. That does not necessarily mean that they can make other good food.

Become an expert in a setup or timeframe

What it means in practical terms is you have to narrow down your expertise building process to a method or a set up or a time frame or a instrument. Many times beginner traders want to be day trader and also long term trader and also option trader and also macro trader and also currency trader and also and also high frequency trader and also so many other things. While if you see successful traders, they mostly trade a very specific method. Warren Buffett trades only value investing and that too in a very specific niche of non technology stocks. Dan Zanger specialty is bull flags in IBD kind stocks. So a focus on a very specific domain expertise is first requisite to building expertise. If you build expertise in one specific area and consciously understand the process involved then you can increase your repertoires of skills.

The Episodic Pivots boot camp is specifically designed for developing expertise in a specific domain. If you spend sufficient time doing that then you will be able to later add more methods. I intend to do series of such bootcamps over next 6 month. They are more conducive to expertise development than a trading guide. As those who are active participants have realised that knowing does not mean you can perform a task. All of you have read my trading guide on Episodic Pivots, but when you have to actually put it in practice you realize, you do not have skills in Episodic Pivots data gathering and analysis. the only proven way to build skills is by repeated practice.

What does it take to be successful trader

Behind every performance skill there is ton of practice. To sustain that practice and to overcome frustration involved in the process of learning new skills, you need drive. You need the drive to overcome problems and critic your own performance and improve upon it. But many of us are not necessarily comfortable with that process. This is where the self efficacy beliefs become important.

Self-efficacy is a person’s belief in his or her ability to succeed in a particular situation.Self-efficacy is the most important thing if you want to be a full time trader. If you have that then all other things are manageable or you will find solutions to your problem. Independent traders, entrepreneurs, and leaders have one common thing, strong sense of self efficacy. Why do you think Barack Obama became the President Of USA and others who aspired for it for many years could not. The secret is self efficacy.


Perceived self-efficacy is concerned with people's beliefs in their capabilities to exercise control over their own functioning and over events that affect their lives. Beliefs in personal efficacy affect life choices, level of motivation, quality of functioning, resilience to adversity and vulnerability to stress and depression. People's beliefs in their efficacy are developed by four main sources of influence. They include mastery experiences, seeing people similar to oneself manage task demands successfully, social persuasion that one has the capabilities to succeed in given activities, and inferences from somatic and emotional states indicative of personal strengths and vulnerabilities. Ordinary realities are strewn with impediments, adversities, setbacks, frustrations and inequities. People must, therefore, have a robust sense of efficacy to sustain the perseverant effort needed to succeed. Succeeding periods of life present new types of competency demands requiring further development of personal efficacy for successful functioning. The nature and scope of perceived self-efficacy undergo changes throughout the course of the lifespan.

The ability to persist in face of obstacle is something which separates most successful traders from those who attempt it. If you persist at some stage there is a mastery experience and then there is significant boost in confidence and release of energy and then you can do the task easily. Most expertise building phases are not only about rational things at some stage in expertise building you emotionally also get it and then it becomes part of you.

Psychology of expertise development

Psychologists have studied expertise development and experts in various fields and today there is a very good understanding about what makes an expert a expert. Or what process can lead to gaining expertise. If you are conscious of the process you will become consciously competent. Many people are competent but they cannot explain the process behind the expertise.

As adults we have the ability and capacity to become expert at various task. During adulthood we become experts at doing specific tasks that are important to us. These tasks may be related to career, work, sports, leisure time interests, or human relationships. So someone becomes expert in cooking, or cycling, or software development, or ballet dancing, or music , or neurology and so on.

When we become expert in a task many times we are not aware of the process involved in gaining expertise. If we consciously look at the process of building expertise then we can do things to gain expertise n trading. The study of expertise examines how and why adults acquire the ability to do less and less, better and better,so much so that where the task performance appears effortless.

What distinguished experts from novice

The difference between experts and novices cannot be reduced solely to experience. Experience is defined as time invested in learning how to perform tasks. There are at least ten qualitative differences between experts and novice.

1. Novices rely on formal rules and procedures to guide them in performing tasks. Experts rely to a greater degree on their accumulated experience.

2. Novices are highly conscious of the task performance process. So they are focused on task. This task consciousness creates a load on cognitive process. The cognitive load theory shows that humans have very small short term memory. So when they try and do complex task where they have not yet acquired expertise, it leads to cognitive load. They are trying to remember steps or sequence or method rules. This is a distraction and creates additional "load" on cognitive processing. That is why they become frustrated, harried, or lack confidence.

3. Novices have not developed task automaticity. As expertise grows, performance of the task becomes automatic. This cognitive phenomenon is called "automaticity."

4. As expertise is acquired, the learner's cognitive processing system becomes more efficient at processing new information. The repeated practice transfers task specific knowledge to long term memory. That frees up short term memory.

5. Experts can see the whole picture. They are also more aware of the specific circumstances in which they are working.

6. Experts have good self-monitoring skills.

7. Experts can make even very complex, difficult tasks look easy.

8. The expert has a larger number of strategies, and more effective strategies, for performing the task. This may be the most critical difference between the expert and the novice. Experts have multiple strategies for dealing with the unexpected things and change of circumstances. This is the X factor. You develop this if you spend significant effort immersed in a task.

9. Experts are more flexible than novices. They rely on intuition in ways that novices find difficult to comprehend.

10. Experts have spent significant time and effort in developing expertise in a specific domain.

You must understand this very well if you want to become a good trader. Expertise development is a process. Study the psychology of expertise. It applies not only to trading but everything else in life.

So what is your plan for building your trading expertise................

Later

Cognitive efficiency is key to building expertise

36 stocks with momentum

AIXG

AMD

BONT

CAAS

CATM

CMFO

CYTX

DAN

EWBC

GOL

GY

HEAT

HGSI

HPJ

ICOC

IO

IOC

KFN

KNDI

MED

NABI

NANO

NLST

NTRI

REV

RINO

ROY

SANM

SCSS

SEED

SNIC

THM

TSTC

UAUA

UFS

USEG

Swing trading using momentum

For short term trading momentum based method is ideal. It keeps giving you opportunities in fast moving stocks. Those are the stocks where money is currently flowing. They are also the stocks currently in play due to either sector momentum, or earnings news or any other news.

As a trader if you cannot make money from fast moving stocks then what makes you think you will make it from other stocks which are not in play.

The list is just a starting point, after that one must look for a setup. All swing traders basically trade a setup. Setup is a set of conditions a stock must fulfill for it to be considered for a swing trade.

Swing trading has been around for 100 years or more and the basic principles are same. You find a stock with momentum and then find a low risk entry point in it for entry. You exit with a target or exit if certain setup conditions are fulfilled.

Some swing traders use pullback as a setup, some use indicator based setup , some used breakout as a setup for entry, while some use chart patterns. For exit some use fixed price target, some use channels, some use indicators, some use trailing stops and so on.

Traders give exotic names to their setups or indicators so that it sounds and feels like a secret. So some call it high frequency trading, some call it mean reversion strategy, some call it adaptive stops, some cal it lizard strategy, some call it swing action zone, some call it cross hair trading, and so on and so on. But the basic logic behind all swing trading methods do not change.

There are several books on swing trading which give details of most commonly used swing trading methods.

70 stocks with momentum...

AIXG

AM

AMD

APWR

ASIA

ATPG

AWI

BEXP

BLC

BONT

CAAS

CATM

CGA

CMFO

CNO

CPBY

CSIQ

CVVT

CYD

CYTX

DAL

DAN

EBIX

FACT

GAP

GOL

GPRE

GY

HAR

HEAT

HGSI

HL

HPJ

HTE

ICTG

IO

IOC

IPSU

IWA

KFN

KGN

KNDI

MED

MIC

MOD

NANO

NTRI

PLX

PRSC

REV

RINO

ROY

SCSS

SEED

SKX

SNIC

SOLF

SRI

THM

TRGT

TSL

TSTC

UAUA

UFS

USEG

VCI

WSII

XRA

XTEX

ZGEN

Out of this 23 stocks are on my watchlist currently:

AM

ATPG

AWI

BONT

CAAS

CNO

CPBY

EBIX

GAP

HAR

HGSI

IO

IOC

KFN

MIC

NANO

REV

SCSS

SKX

UFS

USEG

XRA

XTEX

Pre Market Movers

high volume movers

• s
• nvda
• nyb
• amd
• tra
• snts
• kers
• jaso
• akam
• asia

36 stock with momentum

Airline stocks are gaining momentum. So worth keeping an eye on the sector.

AIXG

AMD

BEXP

BONT

CAAS

CATM

CYD

CYTX

DAN

DSW

EWBC

GOL

GPRE

GY

HGSI

HL

HPJ

IO

IOC

KFN

KGN

KMGB

KNDI

MED

NABI

NANO

REV

RINO

SEED

SNIC

THM

TRGT

TSTC

UAUA

UFS

USEG

AAPL: The Magazine Cover Curse

Recently Steve Jobs was on cover of Fortune as CEO of decade, since then Apple stock has been under performing.

Google Finance launches streaming news

Google Finance is introducing streaming news. Google Finance has been Googles neglected child. They can do some many things with it to make it more useful . Now that Moneycentral has stopped offering screener, if Google Finance comes out with a good screener it would attract lot of investors.

Now on Google Finance: streaming news

12/04/2009 08:46:00 AM

Ever since we launched real-time and streaming quotes onGoogle Finance last year, we've heard from users how vital that up-to-date information has been. Especially in today's volatile financial environment, current information can be the difference between a seizing an opportunity and missing it. Today, we've taken a big step towards improving access to current financial information: streaming financial and market news on Google Finance.

Streaming keeps information fresh

Streaming real-time quotes eliminates the 15- and 20-minute delays often associated with pricing data. Streaming the quotes keeps information on the page up to date, without having to reload.

Now, by streaming news as well, you'll see stories appear on Google Finance as they develop minute by minute, throughout the day. You can view news on the Google Financehomepage, or the dedicated news page. Updated news items will appear automatically in the News section. News will be streamed from 8am-5:30pm ET, 90 minutes before and after U.S. trading hours.

AMD and VISN are top ranked momentum stocks

The momentum stocks continuously change and some drop down in ranking, some new stocks enter the list. Yesterday we had a minor dip in he market, such dip often lead to some of the momentum stocks to correct, some reverse, while some resist selling and continue to go up. VISN was one such stock yesterday. Also showing up on the list is AMD. AMD has huge float of 665 million. Typically such bi float stocks do not move fast. But in rare cases they can be fast movers. Typically such fast moves in these stocks tend to happen if they are severely beaten down prior to the move. Which is the case in AMD.

41 top ranked stock by momentum

AIXG

AMD

BONT

CAAS

CATM

CVVT

CYD

CYTX

DAN

EWBC

GOL

GPRE

GY

HEAT

HGSI

HL

HPJ

IO

IOC

KFN

KGN

KMGB

KNDI

LNY

MED

MGPI

NANO

REV

RINO

RVI

SEED

SMTL

SNIC

SVM

THM

TRGT

TSTC

UFS

USEG

VISN

XRA

12 stock to watch

These 12 stocks is what I am watching as of now besides some pre market movers. These stocks were momentum favorite a month ago and are now in pullback or consolidation phase.

AM

ATPG

CNO

CPBY

ETM

GAP

GCI

HGSI

KFN

LULU

OWW

SGY

33 fastest moving stocks

The indexes may not show it, but below the surface there have been pockets of very good momentum in last few weeks. If you were trading momentum, it was good time to catch some big swing trades.

The easy picking has been done and now in the short run I am cautious. I have taken profit on most open positions and kept some part open.

If the rally has further legs then new stocks will take up momentum leadership. In the short run I am focusing on a different momentum method which looks at stocks which were top ranked by momentum a month ago but currently in pullback.

Top ranked stock by six month momentum:

AIXG

BONT

CAAS

CGA

CYD

CYTX

DAN

EWBC

GOL

GY

HEAT

HGSI

HL

HPJ

IO

IOC

KFN

KGN

KNDI

MED

MELI

NANO

REV

RINO

RVI

SEED

SNIC

SVM

THM

TSL

TSTC

UFS

USEG

LIWA: Lihua Intl

LIWA: Lihua Intl Inc

One sector theme that is working currently is China. So this stock was on my watchlist today. I entered it at a price of 8.50 at 9.33. Within minutes it exploded. I closed part of the position in 10 minutes for 9.50 giving 11.76% profit in 10 minutes. If you know what is working in the market currently you can anticipate breakouts. CMFO was another Chinese stock I entered today and is up nicely as of now. China is currently momentum favorite and that is where the opportunities are.

Chinese stocks to watch today

Chinese stocks are where the action is currently. I am watching these stocks:

1. dgw
2. cisg
3. cmfo
4. ssw
5. chln
6. liwa
7. jobs
8. bidu
9. pwrd

Besides this I have number of open positions in Chinese stocks.

Getting in to right frame of mind for trading

Once you have a well defined method and confidence in your method, the day to day challenge of trading is to execute your plan to best of your ability. If you are a swing trader like me trading a lot in a month, on a daily basis the challenge is to remain on top of the game. As a trader we have trading life and we have other life. No matter what happens in your other life and the distraction it can lead to, we must still bring our best game on trading field everyday. We should be in a right frame of mind to trade.

The set of questions are really about orienting yourself to trading. They are ritualistic. They force you to think about issues that matter to your trading today. It is a mental game. This checklist looks at possible scenarios and preps our mind for trading. The actual situation we encounter might not necessarily align with our preparation, but if we are in right mind frame we can handle it.

Pre Market Preparation worksheet

1	What is your market bias today? Is there a plan to exploit it? Is there a alternative plan?
2	What homework have you done for trading today? What are 2-3 pre identified opportunities? What is your plan for each open position?
3	What is working in the market currently? What sectors are leading the market? What style is working (growth, value, momentum, contrarian, junk)?
4	Are you set up for trading today? Is your hardware in proper condition? Are your software's set up for trading?
5	Are you calm, excited, harried, or confused? What can you do to be in calm and controlled state? What is driving your emotional state
6	What is your plan today for enhancing your: market knowledge your trading skills your psychological control
7	What needs to happen for me to be a confident and in control trader Do I have resources to get there? Do I have the drive to get there?

Pre Market Movers

• dyax
• kerx
• nvax
• amr
• snts
• rfmd
• heat
• lcc

Stocks with over 40000 pre market volume.

The momentum trade factory

Conceptually I think of swing trading in terms of a conveyor belt. You must set up a conveyor belt for long/ short ideas. So that long/short ideas come on that conveyor belt, you inspect and take them or reject them.

Considerable thought process should go in to setting up your conveyor belt. The logic for it should be solid, so that it brings only the best ideas and only those with high probability to you.

I have around 5-6 long conveyor belts. There are two types of momentum conveyor belts I have set up. One is based on six month momentum the other is based on very long range momentum reversal. There is a conveyor belt for trading earnings and other events. There is a conveyor belt for sector momentum. There is IBD100 and 200 conveyor belt. There is a IPO conveyor belt. Each one has a logic. On a daily basis they bring several ideas to table. The speed with which they bring ideas varies depending on market or depending on nature of the strategy. By using 5-6 conveyor belt, you get strategy diversification, plus you never run out of ideas. Some of these belts are based on momentum, some on earnings, some on value, some on market anomalies.

Once you set up such conveyor belts, opportunities keep popping up. You never run out of opportunities. You utilise your time effectively and can focus on only the best opportunities in market. More than that, you can use extremely tight stops and time stops, as you know, if this idea does not work, I have something else coming up on conveyor belts.

Currently the momentum and sector conveyor belt is bringing so many ideas to table that I cannot take all of them . There were many more trades possible yesterday , I took only 4-5 out of possible 20 good ideas.

AIXG

BONT

CAAS: open position. Partial position closed at profit.

CYD: open position. Partial position closed at profit.

CYTX

DAN

DSW: open position. Partial position closed at profit.

EWBC: watch this for possible b/o

FSYS

GOL

GY

HEAT: open position.

HGSI: watch this for possible b/o

HL

HPJ

IAG

IO

IOC

KFN: watch this for possible b/o

KGN

KNDI

MED: open position.

NABI: watch this for possible b/o

NANO: closed position

NLST: closed position

REV

RINO: open position. Partial position closed at profit.

RVI

SEED

SMTL

SNIC:open position

SVM

THM

TSTC: open position.

UFS

USEG:

TSTC up 12%

• 
  

TSTC : Telestone Technologies Corporation

As expected TSTC had a high volume breakout in the morning and is up 12% for the day. The Chinese small caps has been acting very well in recent weeks and if you were positioned in them, it was very profitable.

Chinese stock up big on high volume today are:

• cagc
• tpi
• tstc
• caas
• watg
• hpj
• cga
• visn
• asia
• ej
• sorl
• fmcn
• jaso
• lft
• cvvt

Trading Psychology: Preperation Checklist

This is the kind of checklist and planning I use to get ready for every trading day.

1	What is your market bias today? Is there a plan to exploit it? Is there a alternative plan?
2	What homework have you done for trading today? What are 2-3 pre identified opportunities? What is your plan for each open position?
3	What is working in the market currently? What sectors are leading the market? What style is working (growth, value, momentum, contrarian, junk)?
4	Are you set up for trading today? Is your hardware in proper condition? Are your software's set up for trading?
5	Are you calm, excited, harried, or confused? What can you do to be in calm and controlled state? What is driving your emotional state
6	What is your plan today for enhancing your: market knowledge your trading skills your psychological control
7	What needs to happen for me to be a confident and in control trader Do I have resources to get there? Do I have the burning drive to get there?

31 stocks with momentum

CAAS: China Automative Systems Inc

As I said yesterday keep an eye on the Chinese stocks in this list. One of the highlighted stock was CAAS out of the 7 stocks on the list. The stock went as high as 20.63 yesterday before closing at 19.35. This was my existing position bought before the breakout.

If you are swing trader and looking for explosive moves like CAAS, CYD, SEED, WX, RINO, TSL, etc. then you should focus on stock with momentum. The top 2 to 3% stock with momentum offers very good opportunities for catching such explosive moves.

AIXG

APWR

BONT

CAAS: current open position (partial profits taken yesterday)

CYD: current open position

CYTX

DAN

DSW: current open position

EWBC

GOL

GY

HGSI

HL

HPJ

IO

KFN

KGN

NANO: closed position

NLST: closed position

REV

RINO: open position

RVI

SEED

SMTL

SNIC

SVM

TSL: open position

TSTC: watch this for possible breakout

UFS

USEG

WX

If you want to profit from the market study momentum. Out of all the factors affecting stock price in short run, it is the best predictive factor.

Quantitative Strategies for Achieving Alpha (McGraw-Hill Finance & Investing)

In this book Richard Tortoriello sets out find empirical drivers for stock market returns. This is a new book published last year. The author tests 1200 strategies on stocks to determine the major fundamental and market based drivers for future stock market returns.After such analysis he presents strategies that consistently outperform the market.

The author tests 7 basic categories of stocks factors:

1. Profitability
2. Valuation
3. Cash flow
4. Growth
5. Capital allocation
6. Price momentum
7. Red Flags ( risk factors)

Detailed quantitative tests for each of the factors are presented in the book. As the author works for S&P, he has access to the best database on stocks and he presents his findings for multiple factors within each of the above seven categories. The testing shows that the top single factor strategy for achieving excess return is price momentum calculated using 28/16 relative strength. The best strategy using two combined factor for excess return is price momentum plus nearness 52 week high.

Thirty four fastest moving stocks

If you look at the top ranked stocks by momentum, you will see 6to 7 of them are Chinese stocks. The Chinese stocks have some of the best relative strength currently. Many Chinese stocks also have very good earnings and sales growth rates and recent earnings acceleration.

AIXG

APWR

BONT

CAAS

CYD

EWBC

FSYS

GAP

GPRE

GY

HGSI

HL

HOLI

HPJ

IO

IOC

KFN

KGN

KMGB

MED

NANO

NLST

REV

RINO

RVI

SCSS

SEED

SMTL

SNIC

SVM

TSTC

UFS

USEG

ZOOM

Chinese stocks are marked in bold. Overall this market so far has been good for momentum based strategies in recent weeks.

24 weakest stocks

These stocks are bottom ranked currently by six month momentum:

ARP

CHUX

CONN

CYPB

DROOY

DY

GGC

ISIS

ISLE

ITMN

KSP

LAD

LEAP

PCS

PVTB

SBIB

SEAC

SMSI

SMTB

SPWRA

SPWRB

STEC

TYP

WFR

35 stocks with momentum

These stocks are current momentum leaders. Many of them are having orderly pullback and worth watching. The morning weakness has spooked many investors, but stocks which retain their momentum and are resilient to selling are the ones which tend to bounce back first.

AIXG

APWR

BONT

CAAS

CYD

DAN

DSW

EWBC

GAP

GPRE

GY

HGSI

HL

HOLI

HPJ

IAG

IO

KFN

KGN

LNY

MED

NANO

NLST

REV

RINO

SCSS

SMTL

SNIC

SVM

TRGT

TSTC

UFS

USEG

XRA

XRTX

Pre thinking can give you a edge

The time to think about a possible ambush was on Wednesday. We had a hard look at all open positions and exposure on Wednesday and was comfortable . This is part of the post I made on Wednesday at Members site. When you are active trader, planning for likely possibilities can help you stay ahead of the curve.

Trading Psychology : Cognitive Load Theory

Posted by: easyguru, on Wednesday, November 25, 2009 12:28 EST

Plan for a possible ambush on Friday or Monday. Friday will be again a light volume session.	Possibility of weakness on Monday should be seriously thought off. It may not materialise , but plan for all possibilities.
What is your trading plan for the rest of the day
What method is your primary focus till EOD
continued....................

4 IPO worth watching

ZST Digital Network INC : ZSTN

Dragonwave Inc: DRWI

Some nice breakouts in IPO's today.

1. DRWI: Canadian telecom equipment maker is up on upgrade. Should hit 10 if it follows through.
2. ZSTN: Chinese cable tv equipment provider. Has 99 eps rating. Recent eps growth rate is 100% and sales growth is 88%. Can possibly hit 9 if it follows through.
3. CEU: Chinese education sector play with 99 eps rating. This is a bit volatile.
4. TRIT: Chinese water supply play.Has doubled since IPO day trading price.