Market participants have lot of assumptions or pet theories, you should challenge these assumptions and form your opinions based on only what you personally can verify.
As you develop more skills and become ware of lot more steps you must regularly challenge old assumptions.
If someone says only buy stocks at 52 week high or only buy stocks above say 50 MA, you don't get into argument with them , but find out for yourself whether that assumption is true. Many times that condition is part of the setup they use, but that does not mean it is true in all conditions.
As you grow as trader you will find challenging old assumptions leads to new setup ideas and different profit opportunities. Many times as a trader you start trading a setup and gain expertise on it and gain confidence and then you become dogmatic about it. having invested lot of effort in making that setup work, you are too invested in it to challenge certain core assumptions.
That process is important to broaden your choice of setup and have conviction in your setups.
Good timing reduces risk and gets you in to fast part of a trend or a swing move.
While there are others things like equity selection and risk or leverage that determine your returns , crux of active trading still boils down to timing.
Momentum burst kind of swing trading methods try to time entry as soon as momentum is established. And the expectation is the momentum will continue immediately and accelerate. Or they buy just before the momentum burst anticipating start of a move.
If you time your entry after a move has started chances of trade failure is high. Especially for momentum burst kind of impulse short term moves of 3 to 5 days there is an edge in timing of entry and exit. If you enter a swing trade say on third day instead of first day of breakout, sometime it might work but then you do not have much edge.
Different setups and different kind of instruments require different kind of timing edges. The Lemonade Strategy for 401K I trade is at the heart a timing strategy. It times entry near extreme weakness in breadth. That ensures you are getting in at end of established bearish trend and entering at beginning of a new bull trend. Same way it exits near the end of established bull trend and avoids the down move. That is the only reason the strategy has avoided losses in all 14 years of use.
Timing entry and exit creates edge for traders, if you want to make money trading find right time to enter and exit.
CHE was a stock highlighted couple of days as in range contraction zone (RCZ). I bought it on that day in anticipation of possible range expansion and it had range expansion yesterday.
As I have explained in last couple of days stocks undergo range contraction and range expansion. Buying in range contraction zone in anticipation of range contraction can give you a low risk entry as you can quickly move your stop to break even on first range expansion day.
However not every range contraction zone immediately breaks out and also there is no guarantee it will resolve to upside. From range contraction zone the stock can also have range expansion in opposite direction.
Lot of people are attracted to the concept of trend following . Often trend following methods are promoted as if they are cure to all your trading problems.
The reality of making trend following work for you might result in large drawdowns unless you know how to make it work.
If you want to be trend follower study long running trends that last months or years on thousands of historical stocks and identify key characteristics of stocks on which trend following works.
Long running trends have one key characteristics. They tend to be less volatile. Highly volatile stock that move in momentum burst moves may not be best candidates for trend following methods. Less volatile stocks are best.
Test this for yourself and research it further if you want to be long term trend follower. There is a big edge and idea in it if you can find systematic way to identify the less volatile stocks.
I personally like more volatile stocks that move in sharp momentum bursts.
"We have tested every system under the sun and amazingly, we have found one that actually works well. It is a very good system, but for obvious reasons, I can't tell you much more about it. The basic premise of the system is that market move sharply, when they move. If there is a sudden range expansion in a market that has been trading narrowly, human nature is to try to fade that price move. When you get a range expansion, the market is sending you a very loud, clear signal that the market is getting ready to move in the direction of that expansion." - Paul Tudor Jones
Paul Tudor Jones is worth about 4.2 billion and he has made that fortune trading and running a hedge fund, so he knows what he is talking about.
What does he say, he says look for sudden range expansion from a range contraction zone (RCZ) , when that happens market is likely to move in that range expansion direction.
It immediately gives you two directions to focus on . Find stocks which are currently having range contraction zone (RCZ) and everyday look at stocks that are having range expansion after RCZ.
Think about this. If you want to make money trading he has given you a clear setup idea. And it is worth billions in the hands of smart trader.
Once you have trading methods with edge the day to day task becomes easy. But you still need to organise yourself for trading . A well organised thought process and workplace is what I strive to bring to my trading daily.
Setting up daily routine and modifying it to fit your trading is key to long term survival and prosperity in this game. You don't want unnecessary distractions of messy process and messy tools to distract you.
The starting point for my daily routine is Situational Awareness (SA). SA involves taking good look at current conditions and be aware of them and tactically change your plans in line with current market conditions. For example if you have open positions and you see unexpected 10% gap on them then you need to work out your plan as to what you are going to do about it.
The kind of swing trading setups I use work (I have been using them for 14 years successfully) , 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. Depending on SA you need to change small tactics.
Question I ask daily for SA:
What is my market bias today
Is there a plan to exploit it
Is there an alternative plan
I was for many years primarily a breakout trader but as my account size has increased a lot through compounding and because I help family members and friends with their investments, the capital I trade now is significantly larger. So I have started using anticipation setups to get favorable entries.
Anticipation allows you to control risk and get in to setups early or as they are breaking out or before breakout. 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 I 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
While focusing on current setups and
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 I 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 and the brokers and other tools we use for trading can sometime fail or have glitches and it can be distraction. For a trader who make living from trading income I ensure my trade factory is working smoothly daily. This involves some proactive planning and replacing hardware on regular basis and building backups.
All our good plans or intentions or setups are of no use if our hardware or software fails or is not optimum for trading.
Questions to ask daily for tools
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 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. Trading is not in isolation. It is part of your life and other things like doctors visit, school parents meeting , others tasks at home can interfere with trading.
Are you calm, excited, harried , or confused today?
Are there distractions likely to affect your trading today?
I use number of techniques daily to remain focused on trading.
While current setups are being used every trader must also work on new set of setups , new markets, new scans to add to his repertoire. Markets can evolve as technology and market participants change, so you have to do continuous R&D on your own to develop new ideas. And you have to do it proactively before your methods stop working .
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 is key question I ask myself daily.
Do I have resources to get there?
Do I have the burning drive to get there?
Everyday using this kind of framework helps you improve your trading. Trading is a lonely business as independent trader and unless you have drive to persist with your trading plan and work on yourself as a trader it is unlikely you will find much success.
A period of range contraction in established trend is followed by range expansion. The range expansion often is followed by 3 to 5 days of follow through in the direction of range expansion.
To find these range expansion you can run any basic range expansion scan and you will have many candidates to swing trade on daily basis. Another way to do that is to identify range contraction zones in established trend. Then anticipate a range expansion and enter in anticipation or just as it is having a breakout.
I use a combination of both approach to find swing trades.
Let us look at RAIL which is showing up in swing trading scans today. It had a range and volume expansion today.
As you can see it ended up 5% today and prior to today had orderly 10 days consolidation. These are the kind of setups I look for both anticipation and breakout buy.
If you look at RAIL as of yesterday it was setting up for a range expansion. To find these kind of anticipation setups you can use the process I detailed some days ago. RAIL is thinly traded stock and has low float. That kind of stocks tend to make explosive moves.
Like RAIL you will find around 20setups today showing up in scans.
These kind of setups are bread and butter strategy for swing traders like me and many others. They offer steady stream of opportunities on regular basis to capture 3 to 5 days move.
To trade these kind of moves you need to be well set to find and exploit them. If you are serious about making money trading these kind of moves setting daily process for finding these kind of moves is first step.
Surround yourself with successful traders. Stop hanging out with whiners and bears.
If you can do that then it will change your thinking. Hanging out with successful traders will improve your aspiration level and skills. It will help you improve your motivation.
Successful traders are constantly trying to improve their game, they handle setbacks better, they are process oriented. That will help you improve your trading.
If you spend your time with bunch of whiners and low aspiration level traders who complain all the time about market and other things, no matter how much you try you will be dragged down to their level.
As the saying goes you're the average of the 5 people you spend the most time with. Have a good hard look at people you surround yourself and the kind of sites, blogs, social media forums you hang out with, and if you are not happy with that situation change them. This is completely under your control.
Visualize your ideal trade several times in a day.
This is a very powerful way to train your mind to find the right kind of trade. I use this technique daily multiple times in a day.
I have templates for ideal trades on each of the method I trade and know exactly what to look for either in a breakout or anticipation setup. I mentally rehearse these trades several times in a day , hundreds of times in a week , and thousands of times in a month. So when I see an ideal situation the decision is instantly made. This also helps you avoid marginal setups.
In early years I had booklets of hundreds of historical patterns I would like to trade identified and printed. I use to carry these booklet everywhere and review them at least 10 times a day. That kind of memory training exercise helps you shorten your learning curve.
Obviously to do something right this you must have a very clear idea of what to look for in a good setup. Else you might end up practicing the wrong things.
If you are serious about making money trading then use these practical psychology tools to enhance your trading. There are bunch of these kind of simple techniques you can use to increase your profits.
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.
Visualize your ideal Episodic Pivots (EP) trade I am looking for
These are the kind of Episodic Pivots trade I look for.
Every successful trader will tell you that. They discovered their method through self education.
No book, no trading course , no amount of training is substitute for self education. Through self education you create unique trading methods that give you an edge.
If you look around on the Stockbee member site or on this free site site you will see several methods have been shared. On the Stockbee members site successful traders have shared their methods and all of them have developed them through self study.
If you look at a method called Bid Back by one of the long standing Stockbee member that does not buy breakout on breakout day but bids back on those share at more favorable price. The method involves only after hours around 30 minutes of work and has produced results which are outstanding beating market consistently multifold. For the amount of effort involved it is one of the most outstanding method I know of. If you ask the member how he developed it he would tell you it came about after 5 to 6 years of trial and error. It is his signature recipe and he has confidence and conviction in it. That confidence and conviction can not be replicated by just reading about it or asking him thousand questions.He has offered you a template to show you how it is done and what results he got. Now it is up to you to build your own version of it . That might involve months of efforts.
Similarly many members have shared their methods and if you go through the archive you will find several dozen unique methods shared by various members. They all developed them based on some idea or template they found. In fact many members on Stockbee site have better returns than many Market Wizards. They may not have the market Wizard fame but they can beat the pants of many of those featured in that book. If you spend effort investigating methods of some of the members you will find many many ways to trade to suit all kinds of lifestyles. Some are full timers, some just spend few hour daily and some just do it mechanically.
Same way you don't need to be member to find good methods. On this site I have shared several methods to profitably trade. If you are motivated and really serious about making money trading you should study the posts highlighted in the sidebar posts. You will find several template which you can build on to find profitable trade and manage them. They all are free.
Look at just say top 25 winners on weekly basis or yearly basis to start with so that you do not get overwhelmed. . Analyse their price action . Study what was the setup before the move. What was the breakout like. What was the trigger. How did the move progress. How can you find moves like these. Is anticipation better to find these move. Or even if you buy the breakout can you capture the move. How many days does the move lasts. What is the float of the stock. What capitalization. Did it move because of fundamental or some other reason.
When you study these moves always remember our objective in doing this study is to find ways to make ton of money. Our objective is not to be scientist or to develop pretty and complex way to document our finding. What we are after is finding recipes to trade these stocks and make lots of money.
Do this important thing today if you want to make money next week, next month, next quarter or next year.
The number of setups like I detailed in my last post about SSYS and HIMX can depend on market conditions. But on daily basis you will find more than you can buy.
For example today besides SSYS and HIMX as of now I have following good stocks showing up in scans:
For trader serious about making money trading all you need to do is setup your scans and wait for setups like this to show up. There is always next train if you are trading these kind of setups. You don't need to know anything about these companies to make money from these setups. I do not know anything about what SSYS or HIMX does. What is important is quality of setup.
Setups like these work because structurally range expansion tends to attract more buyers in next shorter timeframe. Obviously there is a bit of artistry involved in trading these and more you trade it better you become at finding the right one to focus on.
SSYS and HIMX are example of kind of setups I look for and the scans and process I use throwup.
I like stocks with established trends. To find trending stocks I use trend intensity. a stock with trend intensity (TI) above 1.05 is what I look for. On the chart the bottom panel with green area shows TI65 above 1.05.
Once a stock established a trend I look for an orderly trend pause where the stock either has orderly pullback or consolidation of few days to weeks . During the consolidation I like to see very compact low range kind of action like you see on both these stocks.
I like to see a stock setup well for a swing move. These kind of setups on breakout lead to quick 8 to 40% moves of few days. Entering them as soon as they start breaking out gives you fairly tight stops. I put my stop at low of entry day.
If the trade works you quickly see a follow through of 3 to 5 days. Like this you can find hundreds of setups in a year. Some of them work like charm , some do not but for me 58% of them are working with 2.05/1 risk reward.
Once you understand the concept of swing trading and setup properly all scans and logic you can makea decent living trading these kind of setups.
Today the man was in neon bright orange tracksuit.
Everyday morning I go for a hour long walk around our neighborhood. Everyday I see one gentleman who walks without fail exactly at same time and same manner and everyday wears a different color track suit.
He has 7 colored track suits , matching colored T shirt, socks, and I am sure his undies must be orange too.
I would not even want to be seen dead with those kind of bright neon colored track suits he wears and I wonder where he finds them.
He walks everyday at same time , same route and on same side of road. He never says hello or smiles if you say hello to him. I am wanting to talk to him for long time. I see him daily from spring to fall walking.
Running your setups and doing same things day in and day out is similar boring task, and may be I am thinking having 5 multi colored shorts to make it more interesting and add some color to my trading.
Everyday I look for two types of opportunities, a swing trade opportunity which can make 8 to 40% move in few days and an Episodic Pivots kind opportunity to find a stock likely to make big 100 to 300% plus moves.
Everyday I go through my anticipation scans to generate ideas for next day that might breakout.
Everyday I have a set routine to go through opportunities generated by these scans and to if a god candidate shows up there is set routine to enter and manage that trade.
Every Friday I have set routine for 401k. I run my scans and spend less than 5 minutes deciding if any changes are needed.
Everyday I do a summary of IBD in the morning looking for big growth stories and compile my watchlist.
Everyday I go through past one week winners to look at what has worked in past week and what tactical changes need to be done to account for current market changes.
Everyday i look at stocks that has doubled from 52 week low and study them to find common characters to look for in future winners.
Once you get into that routine you develop a expertise on trading that particular setup.
Many times you will hear traders making big multi million profit in a year or less. One of the key ingredient in those explosive returns is size of bets. explosive returns require very concentrated bets. Along with that use of margin play an important role in those explosive returns.
When you hear explosive returns story you hear of like Dan Zanger , Jim Roppel, Jesse Stine, Nicolas Darvas, Gil Morales, Chris Katcher and others always investigate what kind of bet sizes they used. You will see that during those periods they used big bet sizes. Some of them risked entire account plus margin on single trades.
That is a high risk high reward approach. If you survive and make big money you can tell stories, if you do not survive no one hears about you.
not everyone can and should do big bet size. You need lot of conviction to do big bets. For a trader just starting out big bet sizes might be end of the trading adventure. But once you have sufficient experience periodically betting big on select few high quality setups is the key to enhancing returns.
If you see all the really extremely successful traders who have made big billion dollar or multi million dollar fortune trading , they built their fortune on making one or two big bets.
George Soros bet everything on British Pound short and made 2 billion on the trade. Without that one big trade he would not have possibly become a billionaire. Paul Tudor Jones became "the Paul Tudor Jones" by betting the farm on likelihood of market crash in 1987. His bet made him 100 million in few days. Stanley Druckenmiller bet the farm on German Mark and it made him a billion dollar profit in few months. Jesse Livermore bet the farm on likely market crash in 1929 and made 100 million (which will be equivalent of several billion now)
This you will find as recurring theme in those who made really big money. few concentrated bets on high conviction trade.
While swing trading makes us money and keeps us in game once in a while when high conviction Episodic Pivots kind trade show up betting big can make the big difference. If a high conviction trade shows up I am willing to bet big on them.
If you want big explosive returns study bet sizing of those who made explosive returns in short time period.
"If I have the belief that I can do it, I shall surely acquire the capacity to do it, even if I may not have it at beginning." Mahatma Gandhi It is interesting to read some of the emails I get from readers of the blog. Some people are looking for perfect course for traders or are wanting to find someone who will baby seat them while they try to develop their trading skills. The short and simple answer to that is they are unlikely to find it. But more importantly the quest itself tells you something about likelihood of that person succeeding in trading. It shows lack of self efficacy beliefs.
The most important determinant of your success in trading or in your personal life is your self efficacy beliefs. I have talked to several successful traders and interacted with them on regular basis and one of the most compelling reason why they are successful is they have high self efficacy beliefs.
And because of their self efficacy beliefs they figured out profitable ways to trade. No one gave them a 1000 pages manual on trading or held their hands when they were taking baby steps in trading. They figured out things for themselves.
Almost every successful trader I know of has developed their unique style on their own. The days, the months , and the years they spent trying out different things and failing at it or losing money further enhanced their beliefs in their own capabilities. Yes they borrowed from some other traders ideas or books or courses but that is not the key to their success. Thy are self made traders.
The most important determinant of your trading success will be your self efficacy beliefs. It might take some few days to understand that and some years. But once your self efficacy beliefs about trading change things start to happen.
Once that is in place your self talk will change to "hey I can do this", "hey I don't have all the answers but I am confident of finding the answers", "hey I know how to bounce back from setbacks" .When you attempt trading some find early success and some find early setbacks. That experience sets your self efficacy beliefs. Some people give up believing markets are too difficult or manipulated or beyond my understanding . Their self efficacy beliefs dictate their behavior.
In the beginning year I spent almost 18 to 20 hours trying various things going through hundreds of trading books, testing hundreds of ideas. The intense effort ultimately started paying off as more and more market and setup clarity started to show up and then I put my own method together and over the years modified it.
The same story repeats for most successful traders. If you read the Jesse Livermore book it details how he developed his unique style after several efforts. The Darvas book again details his struggle to develop his own method. Every trader goes through same phases as Livermore or Darvas or any other market wizards or successful traders like George Soros, Paul Tudor Jones, Stanley Druckenmiller have also gone through same learning curve and figured things on their own.
Once your self efficacy beliefs specific to trading change you will start experiencing success. That does not mean you will not have setbacks. If you have high self efficacy you will find a method. If you don't have it, even the most profitable method will not work for you and you will keep finding faults with methods.
Self efficacy beliefs is the biggest determinant of your trading success. Unless you work on self efficacy you will find many inhibitors and will be constantly dissatisfied with any method, guides, videos, or instructions, or site. You will constantly chase new methods, new scans, new claims, new gurus, new newsletters, and so on.
Psychologist have found that self-efficacy beliefs help determine how much effort people will expend on an activity, how long they will persevere when confronting obstacles, and how resilient they will be in the face of adverse situations. The higher the sense of efficacy, the greater the effort, persistence, and resilience.
Profitable trading involves all these challenges. You need to put in lot of effort to understand and internalize key concepts like equity selection, entries, exits, risk, risk/reward and then put it all together. In the process you will have several setbacks and false starts. If you have enhanced self efficacy beliefs you will persist in face of such adversities. If you have high sense of self efficacy beliefs then you will spend time mastering trading software, and mastering trading setups and make them work. Absent that you will abandon your effort at first hint of failure.
Learning to trade is not an easy task. It is one of the most challenging task you would handle in your life. Some are lucky and they find success instantly. For rest it is a big battle.
People with a strong sense of self efficacy beliefs approach difficult tasks as challenges to be mastered rather than as threats to be avoided. They have greater intrinsic motivation. That helps them to engage for long periods in activities and helps them overcome repeated obstacles. They do not have discipline problem.
People with high self efficacy beliefs set themselves challenging goals and maintain strong commitment to them, and heighten and sustain their efforts in the face of failure. People with high self efficacy beliefs quickly recover their sense of efficacy after failures or setbacks, and attribute failure to insufficient effort or deficient knowledge and skills that are acquirable rather than external circumstances.
Your self-efficacy beliefs also influence your thought patterns and emotional reactions. This is critical in trading. You should not be overly excited by profit on single trade and same way not get depressed by loss on single trade. At the end of the day trading is probability game. High self-efficacy helps create feelings of serenity in approaching difficult tasks and activities and activities where outcome is uncertain.
If you have low self-efficacy beliefs then often you believe that things are tougher than they really are. As a result this belief that fosters anxiety, stress, depression, loss of discipline, over trading and a feeling of being lost. You are unable to solve your own trading problem.
Psychologists believe that self-efficacy beliefs influence the level of accomplishment that one ultimately achieves.
Self-beliefs can also create the type of self-fulfilling prophecy in which one accomplishes what one believes one can accomplish. This further enhances self efficacy beliefs. This leads to higher performance this in turn leads to higher effort and higher accomplishment which in turn further enhances self efficacy.
The goal for new trader should be to enhance your beliefs. The goal should be to constantly work on your self efficacy beliefs. Goal should be to challenge your existing beliefs through testing and past winners studies.
If you do that then you will achieve your trading goals. And you will not need this site, or alerts, or alerts with sound effect.
Everyday think of how you can enhance your trading related self efficacy beliefs.
How do stock move from one price level to another price level is one of the most important understanding a stock trader needs to have to make money in the market.
Every successful trader has either a explicit understanding of this or an implicit understanding of this. Edges are built around this kind of understanding.
How do stock move question has different answer based on whom you ask. A trader who primarily trades a breakout will say stock move from one level to another in series of moves . As against that a mean reversion trader will say stock bounce back sharply from sell offs.
The question has multi layered answer depending on time frame you trade and frequency with which you trade. Active traders are more interested in how a stock moves on few minutes , hours or days while position traders are more interested in multi month or year moves.
Different stocks move in a different way. Growth stock moves have certain distinct characteristics and once you figure that out you can build a trading strategy to exploit that understanding. Turnaround stocks move very differently from growth stocks and the magnitude of moves are different based on level of distress accompanying turnaround. Highly distressed turnaround stocks can have ferocious move of few hundred percent as soon as turnaround becomes apparent. Cyclical stocks move differently and knowing how they move can help you avoid buying them at wrong time.
One of the beauty about the stock market is different participants can focus on different part of the stock move and be profitable.
If you are struggling with your trading your first starting point should be to study how stocks move on timeframe you want to trade.
Nicolas Darvas was a dancer who made a small fortune in the market during the roaring bull market of 1957 to 1958. He made 2.45 million in 18 month using a simple strategy. He wrote the famous book " How I made $200000 in stock market" detailing his strategy.
He used to go through stock table to look for stock whose current price was double its 52 week low. His logic was they are proven horses. Once he had list of stocks that doubled from 52 week low he would further reduce the universe of stocks that doubled by looking at stocks that have made all time high.
The next criteria Darvas used to reduce the universe was sector. He was interested in what he called "infant industry". His logic was a stock making all time high in a static or dying industry was not worth his time and effort as it is unlikely to make a big subsequent move. He was interested in a young sector with potential for substantial growth.
Within the infant industry he was again only interested in stocks with best earnings growth or stocks with great earnings expectation in future. Having reduced his list to handful stocks he would further reduce the list using criteria like float and capitalisation.
He would also look for volume during the doubling of price and was interested in stocks that had substantial volume surge during their up move.
Applying all his criteria would leave him with a dozen or so stocks to focus on. Nicolas Darvas was basically playing a probability stacking game. Each of his criteria increased the probability of finding a big mover. Combined all those probabilities and you have a very high probability stock with potential to make big move.
Nicolas Darvas Criteria List:
Double from 52 week low
All time high
Current earnings growth or expected growth
High volume surge
Box or range near recent high
Once he identified a stock like that he would wait for it to form what he called a "Darvas box". Darvas Box was nothing but a sideways consolidation of few days to weeks or months on such stocks. He would buy the stock when it broke out of that consolidation on high volume. He would use a limit buy order to enter above the consolidation. Once in the stocks he put his stops near the box high. His logic was that if the high volume breakout out of the box indicates start of new up leg then the stock should not go back in to the box.. If that happened it was a mistake to buy the stock. He was willing to get stopped out several times with small loss.
Once the stock started going up he would put his stop near the new box low and keep raising it as the stock moved from one consolidation area to another. He would also keep pyramiding in to stock along its up move. He aggressively used margin. At some stage the stock would reverse and take out the box low and he would be stopped out of his open position.
Dravas called his method "Darvas Method in Rising Market". He traded it only in bull market. He sat out bear markets. It is a good method for working people or people who can not watch market in real time.
It is a good method to reduce number of stocks to focus on. If done correctly it will help you find some explosive winners.
If you want to make serious money trading you need to have some sort of an edge. Most active traders have a small edge but they exploit it using good risk management and compounding.
Successful traders who have survived the market for decades and made serious money will tell you that their edge is very specific and it is their ability to exploit it is the key. They find many ways to exploit that edge. They find bunch of small edges and trade them together to extract money out of the market. If the market changes and their edge blunts they find another kind of edge.
Beginners and less skilled traders are in search of big edge that will find them stocks that will double or triple in few months and preferably it should happen with minimum effort and should not involve day to day involvement in market.
If you are serious about making money find small edges to begin with. Once in a while you might get big winners but that is not what professional depend on .
Most of the edges used by successful traders are not very difficult to find in todays age of blogs and youtube and twitter. But because they are small edges new traders do not understand or appreciate it.
Everyday I prepare a list of stock likely to breakout that day or in next few days and publish it on the Stockbee members site. Today i have following stocks on my list.
Anticipating a breakout gives you an early entry into a breakout. As my account size keeps on increasing I am now spending more and more energy on trying to anticipate breakouts and entering very close to breakout level. Infact I am currently working with someone to make the entire process fully automated so that entry happens as soon as breakout is detected.
In order to generate this list I use a simple 15 minute process flow. The starting point is two scans I run in Telechart .
DOUBLE TROUBLE 1% MOVER SCAN
US common stocks
c/minl252>=1.8 and minv3.1>=100000
Price % change Today between 1 to -1%
TI65 1% MOVER SCAN
US Common stocks
avgc7/avgc65>1.05 and minv3.1>100000
Price % change Today between 1 to -1%
After running these two scan I merge them together as some stocks will be common.Then I go through the list to find setups that are setting up for possible b/o
WHAT TO LOOK FOR IN GOOD ANTICIPATION SETUP
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
Once a list is generated I reduce it to 3 to 5 candidates to focus on. For them I pre calculate price at which I want to enter the stocks. Then I create orders at those levels if there is capital in account for new position. Or else I create an alert.
If you want to make serious money swing trading following a simple process like this will find you daily opportunities.
Range expansion offers swing traders good opportunity to find 3 to 5 day hold trades. Once you setup your process for finding range expansion you will see lot of opportunities from pre market to market close.
Today was a good day for range expansion setups and several showed up during the day. In fact there was a choice of many good setups.
When trading these kind of setups early entry allows you to profit from the intraday move. If you looking to profit from these kind of swing moves getting well organised to capture these moves is the key.
For motivated traders there are lot of opportunities for swing trading.
INSM is a good example of how the swing moves in market happen. On June 18th it had a gap open due to news about drug trial. That was the entry point. In 10 days the stock went up 25% before losing momentum and subsequently went down.
These kind of momentum burst moves of 3 to 10 days are common in the stock market. If you understand the nature of these kind of moves and develop process to find these kind of moves you can find lots of these kind of moves in a year.
In this kind of momentum burst move in a stock , the first day is range expansion which is immediately followed by follow through.
The sequence looks like:
Range expansion day
Up day (follow through)
Up day (follow through)
followed by end of momentum
That is the bullish sequence. Variation can be 5 day burst. In rare cases you will get a 8 to 10 day burst.
Sometime it will be variation of the 3 days with inside day or negative day after first day of range expansion.
WLH is example of the above described sequence. A range expansion day was followed by 7 days of momentum burst followed by loss of momentum and reversal.
During this 3 to 10 days period stock would go up 8 to 40% , lower priced stock and low float stocks can have big bursts in few days. Such bursts moves may or may not have clear identifiable catalyst. You need to know nothing about the company to trade this kind of burst.
This is a pattern and probability based trade. It is largely mechanical way to trade for 5 to 20% profit potential moves.
All such momentum bursts start with a range expansion. The first day of the move is range expansion day. Often there is also volume expansion along with range expansion. If you scan for range expansion everyday you can find such moves.
Not every setup works perfectly. sometime you see range expansion in the early morning and you enter based on that but stock gives up the gain during the move. LEJU trade is an example of that kind of a action. yet the trade was profitable.
When there is range expansion early in the morning or during the day it attracts breakout swing traders like me and many others who scan for these kind of moves, it attracts other momentum players, day traders, quants and so on. That results in continuation of move for few days.
If you keep holding after the 3 to 10 days period, you would often see the stock ends up giving up all the burst gains and may not have another momentum burst for several weeks or months.
Once you understand this nature of swing moves you can find many such moves .For a mere 3 to 5 day exposure to market you capture the most explosive part of the move and you are not seating in dead periods holding stock waiting or anticipating a breakout which may or may not come.
Trading this kind of setup requires extremely good ability to ruthlessly cut losses if a trade does not work immediately .It also requires skill to exit when things are still in explosive phase and not wait for reversal. It requires skill to identify right setup. All those skills are relatively easy to learn for motivated trader.
Per trade profit on these kind of trades will be on an average just 5 to 20% as you are only going to get part of the 8 to 40% move. By the time you enter on breakout day the stock might be up 4 to 10% , so you will not be able to capture that part of the range expansion move.
To trade this kind of setup you need to be willing to do 200 to 1000 or more trades in a year. You make money by compounding these small gains.
If you are motivated to make profit swing trading learn and master the momentum burst kind of swing trading, it allows you to grow your account with very low risk.
Developing your own unique understanding of the market is key to profitable trading. Studying immediate past winners tells you what is working in the market and what kind of setups to look for to find those kind of winners.
This kind of study should be regular habit. Knowing what worked ten years ago may or may not be useful, but knowing what is working in last one week, month, quarter or year is more helpful as it reflects current market situation.
Historical precedent analysis is a common theme you will see in most successful traders journey to profitability.
Prioritising this kind of study is important. Lot of time we get caught in day to day trading and do not spend sufficient time on developmental work that will generate new setup ideas and help us to be in tune with the market.
I prioritise this kind of an effort at start of the day. First thing in the morning I obsessively study stocks that make 8% moves and 5 dollar plus moves in 5 days and study stocks up 80% plus from 52 week low. This is a daily habit.
Doing this regularly alerts you to subtle changes in setups or market environment. doing it daily also helps you see new setup variations.
As i trade two types of setups, one looking for big moves and another looking for short term moves, I focus my efforts on studying that timeframe and magnitude move. Those are the kind of stocks I want to be in next week or next quarter.By studying them daily, I remind myself of what works and what to look for in swing moves or longer term moves.
When you do it over and over again you start finding small nuances to look for in successful breakouts. The process also help to embed in your brain these setup patterns. 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. Unlike that you see lot of commonly touted patterns are based on this that may have stopped working.
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. Then it can become a project to develop new trading setups.
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.
In order to do this I run 2 scan for 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
Stocks up 80% plus from low
c/minl252>=1.8 and minv3.1>=100000
Bearish 8% plus or 5 dollars plus in 5 days
c/c5<.92 or c5-c>5 and minv3.1>100000 and c>=5
Stocks down 50% plus from high
c<=.5*maxh252 and minv3.1>=100000
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.
A daily study of past winners can substantially improve your trading.
14 years of full time trading profitably has been possible for me because of everyday focus on risk control. In 14 years there have been gang buster high triple digit years and some sub par positive year but never a negative year. And one of the key to that is playing good defense through risk control.
Good risk management keeps you in the game and if you remain in game you get lot of opportunities during some periods in the market. Also if you do not have negative years compounding works in your favor as you keep on adding to your gains.
In last 8 years I have been actively blogging and have interacted with hundreds of traders and seen hundreds of beginning trader give up or blowout before they even had chance to find a profitable method and master it. If you see many trading blogs that existed 8 years or 5 years or 3 years ago are dead today as the trader lost money or gave up.
Many attempt this game but if they do not focus on risk management from get go they soon vanish. It is difficult to understand the importance of risk management when you are starting out. Most are excited by the prospect of how much money they can make.
I use a % risk model. I risk anywhere from .25 to 4% on a trade and in rare very high conviction trade higher than 4%. . But most trades are around .25% to 1% risk.
What does 1% risk means? It means how much will be the loss if my stop is hit. So 1% risk means if my stop is hit I will have 1% loss on total capital. It does not mean that I have 100 positions open with 1% risk. In a 100k account a 1% risk means 1000 dollar loss if I get stopped out.
In my approach I first determine % of risk to take on a trade. So let us say if the account is 100k and if I decide to risk 1% then the amount to risk is 1000USD.
Let us say for example, I see RH in my swing trade scans today early and want to enter when it was around 83. The low of the day is 81.50 . That will be my stop.
If I want to risk .25% on this trade in 100k account then once I plug in those numbers in calculator
So I will buy 166 shares at 83 and stop will be at 81.5. If my stop is hit I will lose 250 dollars.
Let us say I want to risk 1% on this trade then
55% of account will be invested but risk will be 1%.
There is a handy calculator to do this here if you want to use it.
In this kind of an approach you can get fully invested in 3 or 4 positions by just risking 1% per trade. If you have 4 positions open with 1% risk each then you have 4% at risk.
If you find a situation where the distance between stop and entry price is small then you can have a big position in a stock with just 1% risk. If you see some of the trades I do, where I had anywhere from 50% plus to 105% plus on single trade but my risk was below 1%.
The basic assumption in this calculation is that you will be able to get out at stop price and stock will not gap down significantly below your stop. That is where your skill in selecting stocks to trade and selecting entry point comes in.
And more than that selecting right market conditions to trade in comes in. I avoid bad conditions to trade in and sit in cash while others get whipsawed. It took me some hard lessons to learn that.
If you see my overall trades over many many trades this year there is only 1 trade where I lost .59% of equity. Overall 60% of trades are positive and because the worst loss is only .59% of equity the risk is contained . This kind of approach to risk management can help you quickly ramp up your gains under right conditions.
You can also use Telechart PCF to do above calculation instead of using my calculator. That is quicker way to find how many shares to buy once a Trade Alert is issued. For that follow following steps.
Let us assume you have 100000 in account.
Then a PCF for deciding number of shares to buy for 1% risk will be
This assumes your stop is low of the day.
Now you need to change your capital amount everyday for this pcf to work. Let us say you closed a trade and your new capital base in 130000 then the pcf needs to change to
A PCF for deciding number of shares to buy for .5% risk will be
A PCF for deciding number of shares to buy for .25% risk will be
100000/400/(c-l) You can make these as columns so you can easily see the number of shares to buy next to a ticker.
The risk approach above should be married with other things like market timing, situational awareness, stock selection, and your cumulative returns till date. I take smaller risk positions if market direction is uncertain. Similarly I risk less when market is in extreme zone and has higher probability of reversal. Same way not every idea is worth risking 2% or 5%. So very few trades have that kind of risk.
There is also phasing of risk. Once you are up 30% plus in first few months your risk strategy can either protect that profit or use that profit buffer to go for a kill. These are all variables which are under your own control and you have to use them based on situation.
A well thought out risk management strategy will keep you in the game and make you millions.
Thomas N. Bulkowski published a 3 volume book Evolution of A Trader it has some key findings which momentum traders can use to make money.
He studied data from 1990 to 2008 on stocks that doubled . He found two key things:
● Stocks that double substantially outperform the following year 53% of the time.
● Stocks that drop 50% or more outperform the following year 68% of the time
In other words, when a stock doubles from the yearly low to the yearly high (with the low and high occurring in that order), expect an unusually large gain the following year about half the time. If the drop from yearly high to yearly low (again, occurring in that order) is 50% or more, then expect an unusually high bounce the next year about 68% of the time. To put it another way, stocks that do well continue to do well. Those that make a large decline tend to bounce back. Those that don't move much tend to remain flat. Thomas N. Bulkowski
Now that is the kind of data based fact you can take to the bank if you are a smart and motivated trader. Reduce the universe of stocks to focus on for your trading to stocks that double in a year or get cut down in half in a year.
The two approaches can be developed into two momentum scans that will find you this kind of candidates.
To find stocks that double you just need to find a stock that has doubled from 52 week low.In Telechart you can do with a simple pcf
Where C is closing price today and minl252 is 52 week low
To eliminate low volume stocks you can apply some sort of trading volume filter. Based on filter you use you will get between 250 to 300 stocks.
To find stocks that dropped in half from 52 week high you can create a pcf to find them.
To eliminate low volume stocks you can apply some sort of trading volume filter. Based on filter you use you will get between 500 to 600 stocks.
Now these two scans are just a starting point to get a universe of stocks to focus on. To trade these sucessfully , you need to develop a set up around them. That should not be a big problem for most motivated traders.
Good setups have orderly behaviour. I do not like to trade stocks that jump all over the place. That is not my area of expertise.
A recent trade shows you what I look for in a short term momentum burst setup.
This recent IPO had a breakout on July 30th. It showed up in multiple swing trade scans and I entered it on that day. Prior to entry day it had low range day , which I like. The overall consolidation prior to breakout was orderly.
In next 5 days in spite of market weakness the stock went up 3 dollar plus from entry. I hold these kind of swing trades 3 to 5 days . Yesterday was 5th day of this trade and as market started to show weakness I closed the trade. In a better market environment it would have probably done much better.
This kind of trade is an example of momentum burst pattern seen in stocks. Stocks move in short term momentum bursts of 3 to 5 days and for swing traders they offer thousands of opportunities in a year.