6/30/2014

Why do active traders focus on swing moves




James Simons is considered one the most successful hedge fund manger of last few decades. He pioneered high frequency trading. Some of the brightest brains work for him.

He has 80 or so PhD in Physics and Maths working for him. They have tested every single imaginable variables.

Before getting in to hedge fund business he was code breaker for CIA

Simons is extremely secretive about his strategies and largely avoids answering questions about it. But Simons was asked in one interview with so much brain power and insight in to market why don't they find long term opportunities.

He said look at it this way , we have tested everything , what we found is if someone says New York as first word of a sentence or thousand page novel. It is easy to predict what next 3 or 4 words he will say after New York but it is very difficult to predict what the next 1000 pages would be about. So it is better to bet on sure outcomes.

That is one way of looking at swing trading. It is easier to predict next 3 bars than to predict next 250 bars. It is easier to predict 8 to 20% move than 100% plus move. Also in sheer number terms there are large 8 to 20% and 3 to 5 days moves.



6/29/2014

Are you a trader or investor


These are completely two different approaches.

Traders use several tactics to reduce risk and increase returns.

Investors need different set of skills.

Traders need different set of skills.

Traders have spent considerable time developing an edge.

Investors in most cases have very little edge or have made any attempt at developing edge.

As Steve Cohen said in one of the interviews "You have to know what you are, and not try to be what you're not. If you are a day trader, daytrade. If you are an investor, then be an investor.'

Role conflict is a big issue for those who do not clearly understand difference between trading and investing.

They enter position as traders and hold it like investor, which leads to conflict and losses.

They do not exit like traders, they hold it like investors and see quick profit disappear.

Lot of time the issue for investor is lack of skills, knowledge and misconception.

many of them have disdain for active trading, they do not understand why active traders do what they do and how they do it.

They have misconception like active trading increases commission costs. Or it is bad. Or most traders fail or do not beat market. Besides that they do not have right tools, brokers, scanning software and do not understand the need for it.

Obviously trading is not for everyone. If everyone becomes trader there will be no profit opportunity to exploit. Most traders exploit the behavior of individual investor to profit from it.

Think about this and clarify your own role, are you a investor or a trader.

If you chose to be investor then build expertise in becoming good investor by studying commonly used techniques used by investors. Don't rely on half truths and misconceptions. Educate yourself and then devise your strategy.

If you chose to be trader then build expertise in trading. Understand why traders do what they do. What kind of opportunities traders have been exploiting for hundreds of years ( tactics have changed but basic ideas remain same). What do swing traders do. What do day traders do. What do position traders do.

If you decide to be trader understand it requires skills and effort to develop and edge. It is not going to happen instantly and requires time and effort commitment. You can shorten your time frame by basing your trading on someones system, but at some stage you need to develop your own edge based on market tendencies.

I am a  active trader and it suits my tendencies, I became a trader because the returns I was making as investor were not attractive.

6/28/2014

How swing traders make money


Swing traders look for 2 to 20% kind of moves in a short period of time. They look for hundreds of them in a year. alternatively they look for 5 to 50 dollar swing moves on higher priced stocks.

In order for these moves to make a difference to your account you need to understand the maths of returns.

Let us say you hold 20 positions of same size in your 100k account. Then each position becomes 5k. Let us say a stock you buy goes up 10% after entry , how much is it going to contribute to your overall profit.

Only .5%. You will need 200 such trade for a 100% returns.

But wait a minute for most traders the success rate of a trade actually working is going to be around 50% only. Which will mean 200 trades will not get you to doubling.

Supposing you risk 25% on each trade instead of 5% of capital. Then a trade with 10% potential will give you 2.5% overall return. If it is 20% return trade it will give you 5% overall return on your capital. You will need roughly 15 consecutive trades of 5% overall profit to double your money.

And you can keep on doing this math to understand the maths of swing trading better.

The implication of that is in order to make big returns in a year you will need anywhere from 300 to 1000 trades depending on how much you risk per trade.

Which most people do not understand and that is why they are looking for position trading method which will give them that kind of return in 4 to 5 trades.

That is possible, if you are extremely selective in selecting your trades. And if you have extremely well developed expertise in identifying those 4 or 5 sure winners. Very few people in the trading world will have that skill.

The easier path is to swing trade and expect to make 400 to 1000 trade if you are looking for triple digit kind of gains.

But everyday look for opportunity where you can put in 25% or more of your capital in one idea. In a year if you get few of those big wins of 4 to 5% or 10% returns on your capital, it then drives your returns higher.

If you understand this maths you will also understand why good day traders make big returns. It is simple maths, there per position risk is higher. A day trader often puts in significantly large part of his capital in one single trade. So even a small 1 to 4% profit move contributes more to his or her returns. Add to that leverage and you are looking at magnified returns.

So let us say a day trader with 100k capital buys 1000 shares of 50 dollar stock and get out same day for 2 dollar profit , he has made 2000 dollars or 2% on his capital . Even catching a 50 cents move with 1000 share lots makes them 500 dollar or .5% returns on total capital. And then they make 20 to 25 trades like this in a day where they might just make 100 to 300 dollars , and lose 100 to 300 on some , in the process ending up with say 2500 dollar for day.

A swing trader will not be able to match a good day traders profit unless they find very big EP kind swings and risk big.

Now let us suppose you understand this maths , how can you use it in real life trading.

Look for opportunities to put bigger amount of capital per trade while managing risk. If your stop is very close to entry you can with just .25% or .50% risk put in sometime 60 to 70% of capital in one swing trade.

If large trades are not available then look for several small trades. A stockbee member who took his account to 92 million using Episodic Pivots (EP) as his main strategy also trades actively and he told me he does 25 to 30 swing trades per week. That is around 1000 trades a year. Once in a while he finds good EP then he loads up.

Strive to keep per trade loss as low as possible. If you can keep your losses small you will have better mood to trade and can take several trades without going through emotional ups and downs.

It does not matter if you have lot of wash trades you close immediately if they do not work. Especially if you are trading a momentum burst kind phenomenon you want the trade to rocket off immediately.

Focus on dollar breakouts, they offer you opportunity to risk bigger per trade.

Stop dreaming about doubling money in few trades (if that happens that is bonus, but you do not base your method on that). While it is possible and one must everyday focus on finding them at same time keep on collecting small profits. it will give you the ability to risk big on select few trades.

If you are holding 40 to 50 small positions, realistically look at the probability of you making big returns. It will be low. Mutual funds do that and that is why their returns suck.

Most importantly understand the maths of swing trading means finding 20 or so big swing trades where you can risk big up to 25% of capital and try and make 20 to 40% on them...... But frequency of those trades largely depends on market conditions

Go back and see all my trades in last year and calculate how much would have been the returns if all trades were risking 1%. Exactly same trades if you had taken with higher per trade risk the returns would be much higher.

Your returns are also function of your ability to take bigger risk. For same % return trade a bigger size obviously magnifies return. A 5 dollar profit on 100 shares position is 500 dollar but someone willing to take big risk like Dan Zanger it might be 5000 dollar profit on 1000 shares.

If you want big returns, once you perfect your setup and have track record of over 100 to 200 trades with 2:1 profit and 50% kind success rate then you can increase your per position risk to 1 to 2% per trade and your returns will improve.

But when you do that number of trades you do will automatically decrease as you will not be able to take as many trades...

While most traders highlight carefully selected example of what has worked to show their greatness, reality is they also have many small profit trades. They might be doing 200 to 400 trades but then they just highlight the 2 or 3 that gave them most profit to highlight their method. But that is reality distortion.

Many want to do very few trades. But then do they have the edge to find those kind of big winners. I would also like to do only one trade in a year and make triple digit returns.

The reality is then you have to be damn good at picking that one shot and risking 100% of your capital. It is a fantasy which many people have.

You might get something like that in a year, but you do not base your strategy on it. That is my view. Everyone has different view.

Understand the maths of swing trading and active trading and you will know which variable to control....

If your win rate is low focus on setup quality

If your per trade profit is low focus on either improving it or increasing number of trades.

At the end of the day most swing traders try and make money by doing several hundred trades that give them .25% to 5% returns on total capital per trade

If you look at actual trading transactions of swing traders with the amount risked per trade you will see how they make money... If you want to understand how swing traders make money get hold of actual transaction log of their trades and not rely on carefully selected successful trades they highlight in books or blogs or on Stocktwits....

That will give you more insight in to actual sausage making process...

6/27/2014

What to look for in good breakout anticipation candidate

I am primarily a breakout trader and it works for me. It has helped me build a big fortune in last 14 years so I stick with it.

As a breakout trader I look for area of consolidation or weakness from which stock is likely to breakout.

Not all breakouts can be anticipated, but some can be .

What to look for in good breakout anticipation candidate
  • series of narrow range days in pullback/consolidation
  • orderly pullback with no 4% b/d during the pullback or consolidation
  • low volume pullback
  • low volatility during pullback
  • linear first leg if looking as continuation setup
  • Stock should go up smoothly and not in volatile manner
  • 3 to 10 days consolidation/pullback
  • not up 3 days in a row

Some good anticipation candidates

CNQR
EPAM
INCY
MNKD
NBIX
OEH
RCPT
RDNT
SGMO
ULTI
WAGE
XOOM

6/26/2014

How to develop your own trading system



Let us say you are a highly motivated new trader and read several books, blogs and have found some things that works. The next critical step is to put together a complete working method.


This involves a step by step approach. It is an iterative process and once you master that you can put together several systems or variations of the setups. Once you understand the steps involved you can create your own system based on what a market wizard says in an interview or any other idea you come across.


Many time Stockbee members or readers of this blog traders share a concept with me and all I do is put together a working system by using interchangeable parts like entries, exits, entry set ups, exit set ups etc.


Vehicle Selection

Entries

Exits

Stops

Risks


Think of these as lego blocks. Your task is to assemble them together in a functional coherent unit and make it work.

Vehicle selection


We need some valid way to select the universe of stocks we would be trading. We want to select the most profitable markets to trade. Because market is dynamic, we want to do this process dynamically as against using a static framework.


There are many ways to do these. Professional traders use dynamic vehicle selection strategies based on momentum , volatility, range contraction or range expansion.


Investors use attribute based model to select stocks. Value investors look for attributes like p/e, cash flow, book value, discount cash flow. Based on these attributes they select the stocks to invest in. Growth investors select vehicle based on earnings , sales, or margin growth or combination of factor. Momentum investors select vehicles based on momentum or lack of momentum.


You can choose vehicles based on attributes like market cap, size, trading volume, price, fund ownership, insider buying, year of IPO, country of origin, sector, short interest and so on.


Many of these attributes have been studied to death in last 50 years . There are many books published on these every year and most of the well known attributes that work are no secret.


We should only select attributes for vehicle selection which will give us most profitable opportunities.
There are potentially thousands of ways to select vehicles. Now this step is very critical because if we select more profitable markets to trade with then, we increase our probability of being profitable. 

Vehicle selection is also a function of time scale you want to trade. If you are day traders, the attributes you would look for in a vehicle will be a combination of high trading volume, clear direction, large intra day range and enough volatility to make potential trading profits worth the risk and expense of trading. Or it can be stock with immediate news likely to lead to volatile moves during the day.


Swing traders look for vehicles likely to make explosive move in 3 to 10 days time frame. As a swing trader I look for explosive movers like WLH. That is my primary focus area for vehicle selection. WLH is up 15% in 3 days.




Entry Selection


Selecting right vehicle is just one part of the equation. If you select right vehicle and enter it at wrong time you will have losses.


Once we select vehicle we select entry method. What kind of entry we want to make on this vehicle. Breakout, pullback, scaled, timed , etc are some of the entry choices we have.


Some traders use breakout based entries. They buy based on breakout of N days. Breakout based entries are very popular and there are hundreds of tactical variations of these used by traders and investors.


Some use non breakout methods like pullbacks to enter. Again several hundred variations of this are used by traders.


Again you can put together hundred way to enter a stock but the objective should be clear, to enter a properly selected vehicle at the start of a potentially profitable stage.

Exit Selection



If you select right vehicle and right entry , your job is not over. You need to exit it at right time to be profitable.


Exit strategy has multiple considerations.


Your first exit is based on entry setup failure. This helps us protect our trading capital in event of the failure of entry signal.


Our second exit is based on meeting our intended profit objective or at level where the trade has achieved its objective.
There is a false belief among many traders that exit is most important part of trading.


Exits are also dependent on your trading time frame and style. A day trader by very definition enters and exits a position in a day. Swing traders enter at start of swing and exit at end of swing. Trend traders exit on trend change. Value investors exit on valuation reaching their objective. Growth investors exit at first sign of growth slowdown or at peak growth.


As a general observation, I have found that professional traders tend to exit into strength while ordinary investors exit on weakness and often are way late on exits.
Stops

Stops is important part of your trading mix and is used to enter, exit or manage risk.

Entry based on stops can help us enter a position at pre determined level . Same way exits based on stops can help you exit at predetermined levels or at certain profit levels.

Stops also allow us to control risk by avoiding catastrophic losses.

Risk selection


Once you have the above four elements of trading mix together, then you add risk selection to the mix.


Risk selection strategies are designed to manage risk of capital loss, to avoid catastrophic losses, to manage open position risk, to increase returns by use of leverage, or to decrease volatility of returns.


Your risk strategy determines how much you will risk per position. How many total positions you will have. What setup conditions will lead to you risking higher amounts or reducing risk.


For exactly same vehicle , entry and exit one trader can make 5 to 10 ties more profit on the trade if he risks bigger amount.





All these elements of trading mix are equally important and needs to be looked at in totality. When all elements are properly put together, you have a working profitable trading system. The process is iterative and testing and back testing, and trading them in real time over years can help you fine tune each element of the mix.





Most of the effort in such designing is one time and after that you need to fine tune it from time to time. If you understand this process you can develop your own profitable method based on many widely known setup ideas.


This is how most traders develop their trading methods. In the beginning they base their method based on someone else's ideas , but as they do more trading , they tinker around with several of the variables in vehicle selection , entries, exits, risk and in the process develop their own unique style.

Methods and philosophy

6/24/2014

Work on procedural memory to improve your trading



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.

Yesterday I dropped my neighbor to the airport in his car. Because I had never driven that kind of car before I was conscious of the process and paying close attention.

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.

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

Procedural memories are implicit memories. They allow us to lower cognitive load. They are learned intuitions.

Procedural memory is memory about how to do a process. 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.

Procedural memory helps free up the brain to do other things.

It frees the brain by reducing cognitive load. We have thousands of procedural memories developed over our lifetime. They make our life easy.

As a infant we have very few procedural memories but we quickly build them as we grow and they become part of us.

For example take a simple skill like swimming, it is a procedural memory once you develop it you can perform it without thinking or without focusing on a step by step sequence. But it takes us some time to develop.

Same is true of trading . 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.

Procedural memory also allows us to do vast number of day to day tasks. Imagine if you had to learn to drive everyday, or learn to walk everyday. Life would be impossible without well developed procedural memory.

Same things happens in trading. As a trader you develop hundreds of procedural memories to make your trading effortless. Where to enter, where to exit, where to abandon a setup without waiting for stops to hit, how to determine risk are all procedural memories developed through practice.

Finding anticipation setup is procedural memory. Once you develop it , you can quickly go through 400 to 500 stocks and identify those 5 to 6 good setups. No amount of instructions and manual can make you learn that skill unless you do it daily for say 90 to 100 days.

Most successful traders who survive the market for many years have developed a procedural memories specific to a style of trading or a setup.

They can instinctively trade those setups without thinking about individual processes or steps involved in that setup. They are not conscious of the steps.

A novice watching them trade many times do not understand their decisions. Many times they get out of a trade just before it hits a pothole or avoid certain trade that novice will take. Lot of it is instinct developed as a result of procedural memory development. It is like a driver instinctively hitting breaks at sign of something on the road.

For discretionary trading it is all about procedural memory development on a specific setup.

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.

But it is difficult to develop procedural memory on another instrument or style. That is why you will see many successful traders focus on very narrow niche in the market.

Some focus on growth investing , some focus on value, some on options, some on futures, some on currencies.

Within that they focus on very niche setup. Some trade say growth stock as swing trades, some trade them as position trades. These two setups require distinct procedural memories.

Most successful traders learn by trial and error that sticking to their setup is best because when they do it the procedural memory automatically kicks in.

As against that novice traders are ambitious, they want to trade as many setups as possible. They don't want to miss out on any style or instrument like option or futures. So they try and simultaneously develop procedural memory. That obviously leads to failure.

If we know that the key to discretionary trading success is procedural memory then why is it difficult to develop procedural memory?

To develop procedural memory you need highly structured environment.

When you learn to drive, it is done under structured environment. You learn it in stepwise manner under close supervision. There is someone sitting next to you closely supervising every step and also ensures you don't get killed.

Every month you will see some young kid getting killed in car accident, and the reason is largely to do with lack of well developed procedural memory and bravado.

As against that much of learning to trade on your own is unstructured and unsupervised process unless you join a trading firm or a Wall Street trading house or bank.

You are your own instructor and you need to create your own structure and you need to give yourself correct feedback and you need to ensure you do not get killed by blowing up your account. And more importantly you need to persist for months in learning stage still it becomes effortless exercise.

Everyday I get around 10 to 15 emails from people asking for trial and I most of the time even do not answer those emails now days. Those people have no idea about how trading works.

If you want to develop trading procedural memory and make thousands or millions the first step is to put all your effort in developing procedural memory. It is not about trial, it is about the 500 th attempt and the thousandth and three thousandth attempt that makes you effortless. That is what develop procedural memory. You can not do it in 15 day trial.

If you read the classic Wall Street books like How I made 2 million dollars in stock market by Darvas or Reminiscence of a Stock operator, you will see that much of the struggle depicted in those book is about trying to find a setup and a process and sticking to it.

Once Darvas found his setup and developed a process it was easy. In Livermore case he went from setup to setup and from day trading to position trading before making big money.

It is the same thing that happens on Stockbee site hundreds of novice join every year. Some give up in few months , those persist for months , six month, a year at some stage develop procedural memory and then they develop their own setups .

Some still stick around , because they find the environment enriching and motivating. They like learning from others and continue to improve.

Some become very good at particular style or timeframe like day trading . They start their own site. Some are scared of sharing their setup and secretive, they spend time talking in riddles. Some do not want to help others. But that is what makes the world interesting . Not everyone is motivated by helping others.

The Stockbee site fosters such ecosystem and survives the process as new traders bring in new ideas and new energy . And some old traders here take on mentorship role to guide newcomers.

As a novice trader if you understand the role of procedural memory in trading you would approach the task differently. You will set process goals as against monetary goals.

You will focus on well developed setup idea with step by step instructions.

You will try and find someone to supervise your process and ensure you do not get killed during the earning process.

In most procedural memory development situation a apprentice model has shown to be most effective for learning.

When you attempt to develop procedural memory on your own, unless you are extremely motivated and driven (or the correct word according to psychologists is you have very high self efficacy beliefs) the task is difficult. That is why you will see few extremely motivated individuals make it in this field.

This is the reason most ordinary and less motivated traders fail before they can achieve profitability.

They blame markets or other things for it but in many cases the fault lies with failure to train procedural memory.

In order to develop procedural memory for any given time frame or style or set up first you need to start with well defined setup with clear step by step process led out with clear explanation for each step.

For example if you were to decide to trade a swing trade setup, you need clear well defined highly structured process that you can follow and master till you can do it on your own without supervision. That is why I and many other traders here repeatedly share processes, setup and repeat things till people get it.

That is why this site puts so much focus on becoming process oriented. The daily posts like Night Time is right time, Good Morning Wall Street, Anticipation as your tool box and so on are designed to drive the importance of procedural memory.

Develop process flow and develop procedural memory. Once you do that you are on your own.

6/23/2014

High short interest stocks showing good breajouts


In last few years high short interest stocks have made big moves. Many of them have questionable fundamentals , but when they squeeze , they squeeze big.

So make high short interest stocks as your focus area. For that you can use Finviz free scanner and scan for stock with 20% plus float short and volume above 100k.

In this better anticipation candidates are often near bottom . Make this part of your tool box.
Steps

Finviz screener settings

Current Volume over 100k

Float Short over 20%

http://goo.gl/3Pe8vf

once scan setup go to Tickers tab

copy all tickers

paste in telechart

Identify anticipation candidates

You can also use it to scan for b/o 

Breakout Anticipation candidates from high short interest universe


MNKD
GALE
CIEN
ANGI
SRPT
AFSI
DDD
NQ

image
this is the best one

6/20/2014

Visualize your ideal trade several times in a day



Visualize your ideal trade several times in a day Sports uses this technique extensively as it has shown to improve your performance.

Use practical psychology tools to enhance your trading.

Visualise what would be your ideal trade. How would you enter. Where would you put stop. Where would you exit.

Simulated practice helps you build automaticity and helps with discipline. But for that you have to do it many times.

This is a practical way to improve your trading psychology everyday.

6/18/2014

Look for game changing news



There is news and then there is game changing news. 

We are primarily interested in game changing news.

And when a stock with game changing news shows up you enter it as soon as possible.

INSM is example of that today. I entered pre market at 16.05. 


The stock just kept going up after that and closed at 17.78. And has more upside ahead. 

Many news based moves can be just one day affair. In some cases they can signal the start of multi day/week/month moves.As swing and position trader you want to focus on those kind of situations.

Game changing news is news that leads to market participants fundamentally re evaluating the prospect of the company for longer term holding. If such news is a major surprise to market, then you will find a big multi week or multi months move in a stock.

INSM had game changing news today.

6/17/2014

Focus on high short interest stocks




In last few years high short interest stocks have made big moves. Many of them have questionable fundamentals , but when they squeeze , they squeeze big.

So make high short interest stocks as your focus area. For that you can use Finviz free scanner and scan for stock with 20% plus float short and volume above 100k.

Following stocks meet that condition today:

SCTY KWK DXM SQNM TXTR KNDI GME GALE XONE HZNP ERII TTS ONVO RBCN CONN SYNA PLUG ADT WBMD SPWR ATHN LTM INO CSUN HGG EOX VEEV ALJ WWE WLT TSLA UNIS DDD SUNE CYTR OPK IRDM QCOR IPI JCP JAKK X LE DVR NLNK ANGI BGG PRKR NQ TEAR DLIA TRLA AMRI ARO VECO BIOS EXAS WRLD WPRT HK NTLS EXEL THRX OLED OUTR NMIH INVN UBNT AKS SNTA VRA EBIX SODA AUXL MELI ECPG TPH BBRY SZYM BRLI IRBT MOH MNK BKE HPY NSR CLNE JBLU ATHM GTAT VPRT CLF ANF LULU BONT AEGR HAWK BKS CHE CNVR CAB SHLD MACK GOGO Z MILL IMAX MDR TFM ABMD OMEX CALL JCOM WNR PPO ACTG JOY NEON DNDN SFXE CIEN SRPT FWM PETS MYGN ZU RPTP KEYW GEOS HLF CRTO GY RMTI NOG JOSB KERX PHH SFY MCP AFSI SWHC VVUS ONTX MITK IBB RGR AIRM MNKD CRR EGLE SPPI VHC RMD COCO BTH SWFT ANR RVLT AFOP CVC ESI HE ARIA MED ARNA TITN ABIO RSH ANV VRNG LIVE AMAG DRL NES GTXI GDP ACHN PVA NIHD TC TWGP END CSLT UNXL BODY

Anticipating breakouts on these will pay you rich dividends in case they breakout with high volume.

See how many recent big moves are from this universe.

If you do not have a exit strategy


If you do not have a exit strategy it means you do not have a valid setup idea.

You often hear that exit is more important than anything. The person who wrote that is a book writer and not a trader.

How many professional traders who trade for living and make money consistently you know who will say exit is most important. I have been in this business for 14 years and have made lot of money and talked to hundreds of successful traders. None believes that exit is more important than other elements of trading setup.

Exit is one of the element of a full setup. a setup consists of many elements and all those elements work together to create a full setup. All elements of setup are equally important. Setup has entry criteria. Setup has equity selection criteria which will define what kind of stocks to be traded using that setup. A setup has stop strategy built in to it. A setup has risk strategy built in to it, which determines how much to risk per trade. 

A setup is a complete package and it works if all elements work. A setup does not exist if you do not have an exit strategy.

A scalper by very definition of setup has exit strategy.

A swing trader by very definition of setup has exit strategy. (entry at beginning of swing and exit at end of swing)

A day trend follower by very definition of his setup has exit strategy ( entry on trend change , exit on trend change)

If you don't have exit strategy, you don't have a valid setup

If you study professional traders who do trading for living you will find majority of hem exit in to strength no matter their time frame of trading

Exit in to strength is the best exit strategy on the street for hundreds of years.

Professional traders exit in to strength while amateurs exit in to weakness. Professional understand the structure of market and are not bothered by living money on table when they exit in to strength.

Amateurs are fascinated by trying to exit in to weakness or on pullbacks or on trailing stops.

6/16/2014

Organizing yourself for trading



Everyday do the same thing over and over in a systematic manner. Once you have a well thought out method the day to day challenge is largely about implementing your plan. That requires setting up a daily routine and adhering to it as far as possible.

Situational Awareness

 We know swing setups work, but overall market conditions can have impact on the % of trades likely to work. So SA helps you in controlling your trade pace. In good environment you want to be more aggressive. In bad conditions you want to focus on risk management.

Question you need to ask daily for SA:

What is your market bias today

Is there a plan to exploit it

Is there an alternative plan

Anticipation


Anticipation allows you to control risk and get in to setups early or as they are breaking out.  Anticipation is also useful on current open positions. If you have thought through what you will do under different circumstances on your open positions you are in better position.

Question you need to ask daily for Anticipation:

What homework have I done to identify good opportunities ?

What are the 3 to 5 very high probability opportunities I must focus on today

What is my plan for existing open positions

What is working currently
------

Different phases of market favor different kind of stocks or setups. Some time beaten down stocks do well. Sometime stocks with momentum do well. Some time value or growth is in favor. Knowing what is working helps you focus on hot opportunities.

Question you need to ask daily for What is working:

What is working in the market currently

What stocks and sectors are leading the market currently

What style and setups are working currently

What kind of follow through is happening

The hardware and software


All our good plans or intentions or setups are of no use if our hardware or software fails or is not optimum for trading.

Are you setup for today

Is your hardware in proper condition

Is your software working without glitch

What is your backup plan in case of failure.

Your mental state


Your mental state affects your trading. If your are well organised and in proper frame of mind for trading you will be successful. If you are excited, harried, angry, disorganized you will find same thing in your trading.

Are you calm, excited, harried , or confused today?

Are there distractions likely to affect your trading today?

Continuous improvement


As a trader you need to focus at least 25% of your daily efforts on developing new trading setups and ideas and on enhancing your trading skill and knowledge of market. A purposeful plan to do this will cumulatively help you transitions in to new setups and ideas as market changes.

What is your plan for enhancing your market knowledge today

What is your plan for enhancing your trading skills

What is your plan for enhancing your trading mindset


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?


Everyday using this kind of framework will make you a better trader . If you rigorously follow these kind of checklist you will see improvements in your trading in  90 days.

6/13/2014

Protect your gains and grow

image


They key to survival in this business is simple. Keep drawdowns below 10%.

Some people like to play the hero complex, they like to get in to big drwadowns and come back and go back in to it.

They are primarily motivated by the drama of it and their need to prove that they are heroes.

When they get big draw downs, they spend enormous time coming back to break even and then the cycle repeats.

Your objective is to make big returns with least amount of draw downs. That involves trying to keep gains and then building on them. If you see the trading patterns for last several years on this site you will see that the draw downs are minuscule and recovery from them has been quick and yet the account keeps growing. 

There is no point in making 100k and then giving it all back and also some of your original capital and then trying to come back. It is a waste of energy and time.

Some draw downs are unavoidable, but you must make every effort to keep them small.

In same category falls the often given advice that best thing that can happen to new trader is to loose his entire capital. That is bull shit. If you lose your capital , unless you have ways to rebuild it, you are out of this game. Your number one priority if you are learning to trade should be to protect your capital and learn to make money.

The other big myth in the market is you need to be willing to loose big to make big money, that is again popularized by people who like the drama of big drawdown. Don't fall for that. 

Sucessful trading is about accumulating profits without giving up gains or losing your capital. 

6/12/2014

What is your style

Two basic styles are used by most traders.
  1. High expectancy Low frequency
  2.  Low expectancy High Frequency
High Expectancy Low frequency

In this style traders look for big moves and infrequent trades. Buy and hold is an ultimate High Expectancy and Low Frequency strategy. And for investors they are very popular. Many 401k strategies follow that approach along with asset allocation.

Trend following strategies also fall in this category. trend followers look for big moves and because such big moves are infrequent they have comparatively low number of trades. 

Value investors typically follow these kind of methods as it often takes time for market to recognise value. 

Some growth investors also follow this kind of approach , they find growth stock very early in its growth cycle and hold 

Part of the IBD strategy which focuses on holding big stocks for long term moves falls here. Rest of IBD strategy is primarily swing trading strategy where they look for 20% gains.

To trade such strategies you need extremely high skill. Unless you are very right on your infrequent trades you can have hit or miss years.

Low expectancy High Frequency

In this style traders look for small but frequent moves.

Swing trading, day trading, high frequency trading, quant strategies are primarily focused on this.
In last 10 years these strategies have become very popular and widely used.

Transaction costs have dropped dramatically in last 10 years. When I started trading a trade used to cost 39 dollars one way. Now you can do a round trade for around 1 to 10 dollars.

Large scale use of quant techniques have also contributed to this. High frequency trading has become the biggest trading style on the street .

All factors being same it is easier to forecast a next small move than to forecast a large move.

Trader can decide to use either of the approach and make money and lots of money. Day traders using high frequency trading make millions and same way a low frequency trader who catches biggest move in a year can make millions.

But the important caveat is that to do both you need very high degree of skill or market understanding on your chosen holding period.

Depending on your choice of strategy your development path will be different.

6/11/2014

When breakout fails

Breakout failure is something you have to deal with in swing trading. How you deal with it is important to your success and trading psychology.


GMCR is an example of recent breakout failure. It was an a anticipation setup trading days ago. As a result I got very early entry on breakout day and stock went up 6% after entry on same day. In my way of trading I exit these kind of trades on 3rd or 5th day of entry. 

But GMCR next day went on to give up all its gain. I did get out of the trade with very small profit . Breakout failure like these happen and contrary to what people believe they do not happen as often on well selected setups.

Breakout can fail is no reason not to buy breakouts. Because ultimately it is a probability game. As of now 56% of the trades have worked, so obviously there is positive expectancy to kind of setups I trade and on a longer term 14 years time frame also the batting average of kind of swing trading methods I trade is above 50%. So I can be wrong 50% but still make money as the winning trades make bigger returns than losing trades. 

You can not completely eliminate breakout failures as some of it is just random luck but careful setup selection can reduce the rate. For many people a b/o failure and especially series of failure can lead to loss of confidence in putting on next trade. Some people completely give up trading breakout because of that.

Anticipating a breakout can help in avoiding some failures but as GMCR shows it does not necessarily help. 

6/09/2014

GMCR was anticipation setup


GMCR was one of the stocks in the anticipation list I posted on Friday. It triggered during the day giving good entry for possible 3 to 5 days swing trade.

Anticipation requires a bit of effort but is good continuation setup for stocks with established momentum.

The list I am watching for today
AGN
BAP
BWP
CI
CLMT
EA
EL
GILD
GLNG
H
HNT
HOLI
HZNP
IDTI
KOF
LIVE
LNG
LVLT
ODP
SBAC
YELP
Z
Out of that 2 or 3 are my real A class ideas that I already have predetermined buy stops on.

If you are serious about your trading , developing a step by step process and following it for 90 days will give you more buying opportunities than any thing you will do flirting with. To develop a setup expertise it helps to focus on one thing for extended period of time.  

6/06/2014

To be good at swing trader understand volatility and range expansion cycles



To be good at swing trading on any time frame understand volatility and range cycles...

Momentum burst leads to volatility expansion. A momentum burst lasts 3 to 5 days before momentum reverses or slows down.  During this period there is range expansion. 

A consolidation or volatility contraction follows some of these momentum breakouts. During that period the stock might setup for next breakout. It will show series of range contraction days. If the stock again breaks out there is volatility expansion and range expansion. This cycle can continue with another  consolidation and so on.

Swing traders try and identify such cycles and want to participate in the high volatility phase.In a trend move this can happen several time. Same thing can happen in a range bound stock.

You want to find the consolidation or range contraction  or volatility contraction phase and enter at an interface between contraction and expansion. Not too early or too late.

Range Expansion, range contraction, Range Expansion, range contraction. that is the cycle. If you understand that you will be able to find anticipation setups.

The more you do it better you will become at it.

Anticipation setups for today I am watching:

Link to Charts
UEPS
SUMR
RAX
ODP
NFX
MOH
JWN
IDTI
HUM
HNT
GWPH
GMCR
GLNG
GBX
FLT
EA
CI
CDNS
BWP
BAP

6/05/2014

Anticipating a breakout helps you get an early entry

image
TSLA is one of the stocks on my breakout anticipation list today. Everyday I along with some Stockbee members  create a setup anticipation list

Anticipating a breakout helps you get an early entry and can improve your per trade profits. It also can lower your risk as your stop is closer.

It can help you profit from even smaller moves.

Anticipation requires more pre planning and effort than buying a breakout. You need a process flow to do that. The process should be efficient and done daily after the market close.

A stock in established uptrend having a "A" grade pre Momentum Burst setup should be your first priority and those breakouts are easier to anticipate.

Same logic applies on bearish side. Anticipating a breakdown helps you find low risk short entry.

In order to do anticipation a daily process flow must be followed consistently.

If you do a thing daily for 90 days it becomes part of a habit. If you want to build an enduring habit committing to it publicly helps. Doing it publicly is even better , it forces you to be disciplined.

Everyday a post is made on Anticipation breakout in the morning on Stockbee members site. If you want to build your own skills , you should develop a skill for anticipating a breakout.

If you a motivated enough trader interested in making millions then you should develop a anticipation based setup.

For both discretionary as well as mechanical traders , development of process loops is important skills.

Many new traders or investors have no set process loop for making their decisions and as a result they jump from one thing to another.

Hallmark of successful traders in the Stockbee Advance Boot Camp was their focus on process flows. It had traders with 5 years plus trading expertise who had cumulatively made big returns. They presented their trading setups and steps to their success. 

All those who made big money trading  had mastered a process flow and as a result become efficient. All the good presentations in Advance Boot Camp had simple easy to explain and follow process flow and they had taken an existing setup ideas like EP or momentum burst or anticipation and created their own process flow to suit their personality and working constrains.

If you have a good process flow and setup you can explain it to five year old and he or she will understand it.

For breakout anticipation you need to look at a universe of stocks based on some criteria. For example growth investors look at universe of growth stocks and then try and find stocks likely to breakout from it.

IBD kind of investors look at the 85/85 scan and the list is published in Friday edition to anticipate breakout. The IBD method stresses anticipation as key element of their strategy. IBD kind investors go through 1000 plus stocks to identify pre breakout patterns. Essence of the CANSLIM method is to find a good growth stock with momentum and that is setting up and enter few cents above buy point. The anticipation skill is key to success for that.

Some traders scan for stocks within 10 to 15% of new high and then look for a stock setting up for possible breakout. Again this is based on momentum as fundamental way to scan for stocks and then look for a good entry point.

Darvas used to look at stocks that doubled and are within 15% of all time high and that had something revolutionary  and then enter orders in anticipation of  a breakout above the box base.

Jesse Livermore used to look at stocks that have gone up 20% plus from the bottom. He also had other setups near high or long term range breakout. But again his emphasis was anticipating a breakout and also anticipating a possible big move and entering as close to breakout as possible.

Many  look at stocks that had earnings surprise  in last 40 days or stocks that have analyst predicting a surprise and that  have pulled back and then they anticipate a breakout on them and enter as they breakout.

There are many ways to skin the cat if you are serious about your trading. But the first step starts by developing process loops for structural setups. 

6/04/2014

What happens to top ranked momentum stocks

What happens when a stock gets ranked in top 50 by One year momentum

When a stock makes a big move ity can potentially double from that level OR it can get in to trouble and drop more than 40 to 50% from the high

I have been publishing this list since July 2013.



I have been publishing this list since July 2013.

Have a look at the stocks that made it to number 1 to 10 in it and see what happens to them in next 6 month after them make it to number one .

Majority of them go down 40 to 50%.

Similar thing happens to stocks ranked number one by 65 days  or 21 days. They go down 20 to 50% in next six month. And you can look at any popular list of ranked stocks like IBD50 or some copy cat lists like that and most will show this phenomenon. When a stock makes it to number one rank in IBD 50 you should put it on short watchlist. 

Very few stocks that make it to top momentum rank continue that move for longer periods.

If you understand this structural tendency of stocks ,  that is a good starting point for a short setup.

Rest is about developing a actionable set up around it. If you are smart you should be able to do it relatively easily.

6/03/2014

Breakout Anticipation watchlist For June 3, 2014

When trading momentum burst setups it helps to anticipate some of them. That way you can capture larger part of swing move with tighter stop. 



ARII
ZHNE
SU
DXM
HUBG
AAN
TESO
UHS
WLB
PNK
RES
SAH
AER
CLH
BWP
NM
SANM
MTOR
HNT
JAZZ
RDNT
EXPD
JWN
LTM

6/02/2014

Fundamental nature of stock moves



Stocks spend large part of their existence going nowhere. But when they move up or down , they move in momentum bursts.

This phenomenon was observed once market started trading . Technology has changed, program trading , quant trading , algo and you name it , but this basic tendency has not changed.

Swing traders have observed this tendency and developed methods to profit from it. The art and science of swing trading has been passed on from one generation to other and along the way there have been many refinement.

But essence of swing trading is still same , to find the 3 to 5 days momentum burst moves . These moves stat with range expansion. The range expansion is followed by 2 to 4 days of follow through. During that period stock can make 8 to 20% move. Swing traders try to capture half of that profit of 4 to 10%.



This kind of momentum bursts appear frequently and in a year you can find over thousand such moves. This is a number game. You have to capture hundreds of such 8 to 20% moves to make good returns. Occasionally you get a bigger trade but that is a bonus.

Traders have studied this phenomenon in details and have developed scans, indicators, chart patterns, quant methods to capture such moves. Some spend lot of time anticipating such moves. Anticipation can help you capture bigger part of the 8 to 20% move. Some react to these moves and buy breakouts, which leads to capturing smaller part of the move.

Once the momentum burst is over the stock can go in to range, reverse or have orderly pullback and have another burst. Some traders try and capture the two to three burst moves , that leads to higher per trade profit but involves seating through a consolidation period.

Some focus on momentum burst in existing trends. So they first look for established trend and then trade a momentum burst on those stocks. By trading in direction of trend they improve the probability. Some traders focus on momentum bursts near trend change or trend fade areas. In other words they try and play a countertrend move. Fancy name for it is mean reversion.

Some focus on stocks with low price as they tend to be more volatile and often make 20 to 40% moves in 3 to 5 days. Smaller cap stocks and stocks priced below 10 fit this kind of approach.

Some select stocks with high short interest to trade momentum burst . The high short interest leads to explosive move if it results in short squeeze.

Some focus on low float stocks. Stocks with float below 25 million and especially with less than 10 million tend to be more explosive during their swing moves.

Some select stocks based on sector trends to trade the momentum burst. This again is in line with trade in direction of trend approach.

Some focus on value stocks , some on growth stocks.

No matter what specific techniques traders use , the phenomenon of momentum burst is structural in nature and is fundamental to the nature of the stock moves. Once you understand that you can find many ways to trade momentum burst.