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This 15 minute exercise will help you become a better trader

Posted on 7/01/2014

First thing in the morning I obsessively study stocks that make 8% moves and 5 dollar plus moves in 5 days.

Those are the kind of stocks I want to be in next week.

By studying them daily, I remind myself of what works and what to look for in swing moves.

When you do it over and over gain you start finding small nuances to look for in successful breakouts.

The process also help to embed in your brain a short term momentum burst move.

Sometime while going through them you start questioning some of your own guidelines for selecting trades or you start questioning commonly touted market rules.

One of the best reason for doing this is it is based on actual past winners in immediate time frame. It gives you lot of information on what is working currently.

Most days it takes only 10 to 15 minutes to do this. Some days while going through them you find something and then it can trigger a deeper study.

A 8% plus or 5 dollar plus move in a short 5 day time period is a explosive move and it is the kind of move everyday we are trying to exploit. Thousands of moves like this if traded with proper risk control and tight stops can make our year.

There are many traders who are obsessed by the index moves and you will see everyday they spend considerable time analyzing them using chart patterns or pivots or support and resistance.

But as a swing trader my primary focus is on finding individual stocks with explosive short term moves. Index is just a backdrop. Properly selected individual stocks help you beat the index many fold. The indexes have been up 5 to 6% at best this year, but we are already up several multiples of that with minuscule risk using such explosive moves. With a max draw down of just 1.33%, extremely conservative .25% risk per trade  and using absolutely zero leverage these kinds of explosive moves have made me 4 to 5 times index gains in first 6 month. 

The process of going through these past immediate winners helps us incrementally improve our trading as we gain better insight.

One of the presenter in the Stockbee advance bootcamp studied the big explosive moves and discovered that stocks that go up a lot in 5 to 30 days show some patterns in first 3 bars on 5 minute or 30 minute charts. If those patterns are present it dramatically improves the probability of stock following through. Now that is a very valuable insight to improve our success rates with swing trades.

As a swing trader we want to focus on explosive short term moves of 8 to 40% in 5 days or 5 to 25 dollars in 5 days.

That particular move we call momentum burst has certain unique dynamics to it and based on study of thousands of such past moves we have derived our trading scans and guidelines for entry, exit, risk, stops and setup selection.

If you want to trade breakout or anticipation setups , you should be your own expert on it. A book , or a blog , or a twit is not going to help you much unless you start getting in to depth of that move. And it is easy to do this once you set up time for this on daily basis.

You need to have very good understanding of 5 day time frame. Same way if you want to be position trader you need to be expert on one year time frame..

This kind of approach is very narrowly focused on a very specific phenomenon in market. It helps you to focus on most explosive part of a trend move.

In order to master a setup or an idea you need to be at it day in and day out. If you do it for few months , you see things others may not see , or gain insight others may not have. If you do this for six month on your own you will gain more insight in to markets and more importantly find very profitable setup and you will own it up as it is based on your own unique understanding of it.

Study these 8% moves closely to see how the move happens. What was the setup before the start of the move

What was the 5 day action before start of this move

Was the stock up or down before start of the move

Was it near 52 week high or low

what kind of Trend Intensity it had

what triggered the move

what kind of breakout

How much was it up on first day of breakout

what kind of volume on breakout and pre breakout and post breakout

how did the move progress

what was the magnitude of move in first 3 days

and so on...

A daily effort like this cumulatively builds your understanding of the setup you trade.

Because if you want to find 8 to 20% moves in 3 to 5 days, you must know thousands of such moves. So that when a similar setup shows up you can instinctively and instantly react to it.

There are many variations of the 3 to 5 day momentum bursts you will find if you do this for months.

Some are high tight flags, some are double bottoms near top of the range, some are bottoming setups from 52 week low, some are part of range bound action. But most share some common characters.

Moves of 8 to 20% start from some kind of pullback or sideways moves.

They most often start with narrow range days.

They are not up 3 days in a row before start of the move.

Most have low volatility phase prior to breakout.

On the first day of start of their 8% plus move they have significant range expansion.

Most moves only last 3 to 5 days before having pullback.

If you know this you can anticipate some moves.

You can figure out where to enter, where to exit, where to put initial stop, where to move stops and so on.

The best part of doing it is , you will build your own knowledge and base your trading based on your own observation and your own derived rules based on what "actually" happens in a the market.
In order to do this I run 2 scan one bullish and bearish.

Bullish 8% plus or 5 dollar plus in 5 days

c/c5>=1.08 or c-c5>5 and minv3.1>100000 and c>=5

Bearish 8% plus or 5 dollars plus in 5 days

c/c5<.92 or c5-c>5 and minv3.1>100000 and c>=5

After running the scan everyday I study these moves. The first thing in the morning I review these candidates. Write down my observations, capture images of some of them, put notes on those setups and so on.

You can use the above pcf in Telechart as Custom PCF% True indicator. That will show you periods where this condition was true for that stock. That way you can study thousands of these past moves.

You can also use the Custom date sort feature in telechart to find 8% plus movers for any specific time frame in the past ( for example you want to find say 8% bullish moves during market correction)

For longer term moves study I stocks up 80% plus in a year.

Doing this daily everyday builds incremental expertise. The recent Range expansion scan I shared is based on this kind of study.

While there is lot of noise in the market and people peddling their own unique methods, and thousands of blogs and million twits a day on stocks we don't have to fall prey to them , we can build our own unique understanding of market one day at a time with small amount of daily effort.

Methods and philosophy


Bob said...

Thanks for the great posts lately Pradeep. Much appreciated...

FX Crusader. said...

Hi Pradeep,

Can you share a article/post on your daily routine ?


FX Crusader. said...

Hi Pradeep,

Can you share a article/post on your daily routine ?


gawdar said...

Thank you for great posts, the knowledge they contain is invaluable. I don't understand part of the formula 'c / c5> = 1.08 or c-c5> 5 and minv3.1> 100000 and c> 5'. I do not understand the value of minv3.1> 100,000. I am working on amibroker and I need to change these formulas to a different programming language.

Pradeep Bonde said...

c price today
c5 is price 5 days ago
minv3.1>100000 means minimum volume in each of the last three days not counting today was more than 100000

gawdar said...

Great, thanks for the explanation