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V shaped bounce continues

Posted on 12/30/2014

In last 18 months , market has been characterised by sharp V shaped recoveries after correction. Very sharp bounces where beaten down sector lead for few days is the nature of these rallies. The rallies have lead to marginal high and then the momentum has petered out.

We have seen same kind of bounce in last couple of weeks and it is again starting to lose momentum and unless fresh buying comes in many stocks are not making much progress after their initial breakout.

A period of sideways consolidation or minor pullback can set us up for further gains. 

Hunting for momentum bursts

Posted on 12/19/2014

NLS is the kind of setup I like to look for and trade . The stocks had high volume breakout yesterday and showed up in momentum burst scans.

The fundamental nature of swing moves in market never change. Market moves in short term impulse moves of 8 to 40% magnitude. One very good thing about these sharp moves is that they happen in just 3 to 5 days time frame.

From an active swing trader point of view these kind of moves offer you ton of opportunities in a year while keeping your risk per trade very low. Catching several hundred such momentum bursts is a strategy which I use. These kind of swing trades are easy to find and trade in bull market.

NLS, LNKD, NTES HAR  LMT RSG were some of the good setup showing this kind of momentum breakout yesterday. 

Range expansion candidates from yesterday

Posted on 12/18/2014
With market bouncing hard post the Fed meeting , lot of stocks had range expansion. It was buying feast as many stocks that held up well during correction found buyers.

Data is example of kind of stocks I was buying yesterday. It had orderly sideways move during the market correction. It was not at all dented by overall market weakness in last few weeks. It also had momentum and Trend Intensity was above 105 indicating buying interest. Stock had breakout yesterday and offered good entry early.

To find candidates like DATA you have to actively look at setups from stocks with established momentum. Everyday I scan for stocks with Trend Intensity above 105 and look for stocks setting up well. During the day I run Range Expansion scan on that universe to look for stocks showing range expansion. As soon as good candidate shows up I buy. Swing trades like these offer several hundred opportunities in a year.

Other stocks I bought yesterday were  HF and INFN . Both of them had similar pattern to DATA.

Another kind of trades to look for during market corrections is pullbacks. BABA is an example of that . I bought BABA 2 days ago once it reversed slightly from an orderly pullback.

If you want to be successful swing trader you must develop your setup ideas and scan for them daily. Money making opportunities show up if you do that. 

What happens to breadth at turns

A breadth thrust starts new up or down move. A breadth thrust is rapid and dramatic improvement in breadth in short 2 to 3 days periods.

Yesterday we had 531 stocks up 4% plus on high volume. An average up day will have around 100 stocks up 4%. So yesterday was 5 times the average. If we get another big day like this in next 2 days it will change the breadth trends from negative to positive. Many times turns can have over 1500 stocks up 4% plus in just couple of days.

Big breadth thrusts are seen at most turning point and show buying pressure. Big breadth thrusts after a multi day drop in markets can be first sign of buyers stepping in big.

But in a protracted bear markets like we saw in 2008 to 2009 , there can be many big  up days that go nowhere.

Breadth thrust are very commonly used tools by traders to time market turns. Again if you skillfully use them then you can develop an edge. They give you early signal during turns.  

Using breadth to reduce drawdowns

Posted on 12/17/2014
One of the trick to using breadth for reducing drawdowns  is to use it as anticipation tool rather than a reactive tool.

The easiest way to do that is to use extreme breadth values. You have to know ahead of time likely turn that way you can close positions at profit and not react once 3 to 5 big distribution days have already happened. If you follow those kind of methods you will invariably be late on both bullish and bearish side.

That is where the skill in using breadth models is. Data on breadth is freely available and if you can use it skillfully to stay ahead of the game you will have less drawdowns and less psychological problem. Drawdowns waste mental and financial energy. It wastes time as you have to spend time recovering from loss.

The best use of breadth is to find extremely bullish or bearish breadth situations. Those tends to be unsustainable and give you early warning signal.

After 4 to 5 distribution days everyone knows market is in correction mode, but if you can anticipate that ahead of time you have an edge. It might be small edge but it is worth studying and acting on. 

How to use breadth to determine market conditions

Posted on 12/16/2014
Ample warning from breadth . November last week signalled breadth weakness and since then market has had trouble going up.

Market Breadth is study of number of stocks participating in up or down move. When you see breadth deteriorating and high volume selling it indicates likelihood of short setups working . When market turns breadth turns , if market were to start rallying , breadth trends will first quickly turn from negative to positive.

Positive and negative moves in market start with breadth thrust. If you study historical breadth thrusts you will notice that at turns in short time window lot of buying or selling happens.

There are many ways to monitor breadth and there are hundreds of breadth based indicators and some very well known breadth models. If you want to be on right side of the move and avoid large drawdowns incorporating breadth in your trading plan will help you.

As we are for last few weeks in down trend shorts have worked.

To become profitable trader think setups

Posted on 12/12/2014
If you develop the ability to think in terms of setups , you can shut out all noise.

Once you think setup your mind will work in terms of pre defined process flows and trade selection and management criteria.

Then you don't need to worry about what any Noah Sophia Liam Emma Jacob Olivia Mason Isabella William Ava Ethan Mia Michael Emily Alexander Abigail Jayden Madison Daniel Elizabeth Mark Peter Dan or James thinks about market or an ETF or stock.

The day you can do that you will have graduated to higher level in trading.

If you have a well defined setup trade show up in your method and you buy them or short sell them. You exit the trades at appropriate time as defined by your setups.

Both of these trades are part of Stockbee Momentum burst setups. They triggered and showed up on setup scans at right time. 

If you understand the Momentum Burst setup you can find these trades on your own. You know how to manage these trades , where to enter, where to put stop, where to exit and so on. If you understand the method and study in depth, you can do this on your own.

Start your new year with a setup thinking emphasis and develop setups .

If you want to be position trader study position trading setups and perfect them

If you want to be swing trader study position trading setups and perfect them

If you want to be day trader study position trading setups and perfect them

Atop following others trade and concentrate on setups, that will make you independent trader

How to scan for strong stocks

Posted on 12/10/2014
Strong stocks are stocks that make big move and hold on to their gains and do not correct much . These stocks once they establish a trend can have multiple up legs.

The corrections on these  kind of stocks tend to be shallow.

To find stocks with extraordinary strength in Telechart you can scan for them easily.

c/minl252>=1.8 and minv3.1>=100000 and c>=.75*maxh252

stock is up at least 80% from 52 week low

Stock is within 25% of 52 week high

volume for last 3 days is above 100000

If you run the scan currently you will get around 153 names. This reduces your focus universe to a very small number of stocks . Within that stocks that are in consolidation or pullback mode is what we are interested in .

A watchlist of the stocks in consolidation will allow you to enter them as they breakout or enter in anticipation.

ILMN is one such stock . It is setting up for possible breakout to upside from this level. A high volume breakout might lead to explosive move. 

Selling pressure increasing

Posted on 12/09/2014

After a V shaped recovery the market is witnessing breadth deterioration and sell pressure has increased.

In last 10 days we have had 3 big sell days as shown by 300 plus stocks down 4% plus. Many leaders from last few ears like PCLN, NFLX, TSLA, GOOG , and oil and gas stocks are under steady selling pressure. Healthcare related stocks have been holding up well.

T2108 the Worden indicator that looks at % of stocks above 40 day moving average is showing sharp decline after reaching 70% level.

Once again we are faced with divergence in breadth as indexes are near high. A pullback of few days to week looks likely. 

Hard part of trading

Posted on 12/05/2014
If you were a doctor and in  50% of the cases you got diagnosis and treatment wrong , you are unlikely to survive the profession. If you were a architect and 50% of your buildings fell down , you would be a total failure. If you were a software developer and 50% of your software was as disastrous as the Obamacare software launch , your software company would not survive. If you were fixing cars and 50% of them broke down immediately after your fixed them you will need to close shop.

Most profession have very low failure rate in their decision making . In trading chances of you proven wrong are very high. That makes the profession difficult for people being used to being always right. Trading is a humbling experience , you can be proven wrong inspite of all your analysis and backtests and years of experience.

Good traders have learned very important thing , you will be wrong often in this business. They learn to live with it . They learn to quickly cut losses when they realise they are wrong . As against that struggling traders often have not come to appreciate the fact that it is best to acknowledge quickly when you are wrong and move on.  They hold on to losing trades longer , they add to losing trades.

The harder part of trading is when you are wrong 8 times in a row and get stopped out and you still need to put in the 9th trade which might work and recover  the losses from those 8 trades. these are some of the unique challenges of trading and as you prosper and survive in this business you learn to manage your own emotions to face these challenges.

Trading makes you humble as you learn to accept limitations of your own decision making and learn to live with 50% or less of your trades working . That is big challenge for many who are used to be always right. they don't survive the game long. 

Do you want to be a full time trader

Posted on 12/04/2014

As a full time trader for 14 years , I often get questions from new traders about becoming full time trader. Here are some frequent questions :

Do you need a LLC for full time trading

My answer is no.

You need profitable setup, risk management , and sufficient capital to become full time trader.

LLC is just a pass through entity for trading .

You do not have unlike conventional business liability in your trading business.

So don't worry too much about setting up  LLC if you want to be full time trader.

To become full time trader you need sufficient capitalisation level , that is most important consideration. If you do not have sufficient capital LLC or no LLC you are not likely to survive very long . Under capitalised traders are under tremendous pressure to generate returns , which leads to they taking higher risk and that leads to demise of many traders. The more capital you have the better it is to become full time trader. 

Should I get trader status to trade full time

The taxes for traders are taxed as ordinary gains if you are doing short term trading.

Getting trader status is not much help unless you plan on having losses, which anyway should not be any traders objective.​

Unless you have very high volume of trading and has been doing it for many years and have substantial cost associated with your trading , I do not see trader status helping.

I am not tax consultant but that is my opinion. I have traded fulltime for 14 years and traded profitably every year, besides that my trading costs are very low so I do not see too many benefits to  going for trader status. Plus it is difficult , complicated , and costly process to get the status.

Do not worry too much about these things. These are least important things to become full time and profitable trader. See my answer above , most important thing is sound and profitable method and sufficient capitalisation to survive winters in trading .

How can I get money to trade

Many traders have small capital base and that creates pressure on them to actively trade and on small base even if you make good profit it still a struggle. So I often get question as to how to get more trading capital.

While there are no easy answers to this question. Some options are:

  1. prop trading firms . for a % of your profit prop firms give you access to their trading capital. For someone who is day trading and has good track record of few years this can be excellent option. Once you prove yourself you can get access to large sums of money with very little skin in the game. But this means being full time trader and in most cases trading in firm's office.
  2. Family and friends . If you have profitable track record your family and friend know about it. They can see it . They are your best source of capital.
  3. Selling assets like second home, or business
  4. home equity (which I am not recommending unless you have very good track record and can manage losses.
  5. Date or marry rich millionaire or find sugar daddy or sugar mother !!!!!
If you do not have enough capital think long and hard before attempting full time trading . I often get questions like I have 50k and I want to trade full time and make 10k per month, while it is possible the probability of you being able to do that are extremely low. There are too many trading gurus promising you that but it is unlikely to be true and you being able to replicate it is going to be extremely difficult so don't get carried away and become full time trader with 50k. 

Can I deduct cost of my trading tools

Best option is to ask a tax consultant.

But as a general rule as ordinary investor you can not deduct those costs unless you itemized your deductions.

Even if you itemized deductions there is a catch:

The IRS  considers investment expenses a miscellaneous expense and limits it to 2% of gross income.

So if your gross income is 100k then 2% of that is 2000. Let us say your trading expense is 200 dollars per month. (2400 per year) You can only deduct 2400-2000=400 dollar out of 2400.

So don't assume you can deduct all your expenses. As your profit grows your taxable income grows so the 2% limit also grows. So if you have say 400k taxable income 2% of that will be 8k. So if your expense of trading is less than 8k you can not deduct it.

That is why keep your trading expense very low. My trading expense is less than .25% of capital traded. It is miniscule expense in larger scheme of things for me because I trade a style that does not require expensive data sources and 5000 a year trading services.

Becoming full time trader is not for everyone. Either you need extremely high level of skills or you need sufficient capital base and extremely high self efficacy beliefs to make it work. If you have that then you can make millions.