1926 to 2014 best and worst 10 years S&P

Best 10 years in returns term for S&P from 1926 to 2014

Worst 10 years in returns term for S&P from 1926 to 2114

2014 will be around 12% year based on how we close. You can see the database for 1926 to 2014 here. 

V shaped bounce continues

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

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

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

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

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

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

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

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

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

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. 

How to make money swing trading

Swing trading as a style of trading has been as old as the market. It is based on fundamental nature of the markets. When markets or stocks move they move in momentum bursts. These momentum bursts are short term 3 to 5 days moves of 8 to 40% .  Momentum burst is structural tendency of the market and it exists on all timeframe and in all markets around the world.

Find a point from which as soon as you enter a momentum burst will start. If you can define such setup then you have an anticipation setup. And you will get very good low risk entry if the trade works. Research this approach if you are uncomfortable buying breakouts. Build on work by others in this areas before reinventing the wheel. Make comprehensive study of anticipation swing trading methods and then add your own sauce to it. That will give you an edge.

If you are comfortable buying breakout , then wait for stock to show the first hint of momentum burst by having range expansion and then jump on it. As breakout buyer you will miss the first few % of the move compared to the anticipation buyers. Research this approach if you are comfortable buying breakouts. Build on work by others in this areas before reinventing the wheel. Make comprehensive study of breakout swing trading methods and then add your own sauce to it. That will give you an edge.

If you want to make money swing trading understand the momentum burst phenomenon in significant detail. It might make you millions. 

Swing trading high priced stocks

High priced stock offer good opportunities for short term swing trades of 3 to 5 days. When they move they move in 10 to 25 dollar momentum bursts. This offers you an opportunity to risk say 1 or 2 dollar and try and capture a swing of 5 to 20 dollars.

MHK is an example of  recent trade like that. The stock had setup an orderly consolidation of 13 days. During that 13 days the stock was in a very tight channel with series of narrow gain days. On 19th November it had a range expansion where that days move was greater than previous 5 to 7 days. That was the entry signal and that is the day I entered in the afternoon. In next 3 days the stock went up 10 dollars from its opening price . I closed the trade yesterday capturing part of the 10 dollar move.

In order to find swings in high priced stocks you need to scan differently from low priced stock. I use a simple range expansion scan to find these. The scan basically looks for stock with range greater than last 3 days range. The scan throws a wide net from which one can select good setup.

The essence of swing trading techniques is to find an explosive short term move and enter it with very tight stops and exit before the momentum exhausts itself. For active traders the market offers thousands of such moves once you setup your scans and methods to find such moves. 

Using momentum pause for anticipation

PAYX is one of the stocks I am watching for breakout anticipation currently. The stock has a momentum pause.

When stocks establish momentum, they do not keep going straight. They go up for few weeks or days and then there is momentum pause as buying pressure decreases. When this happens the stock spends time consolidating.

These kind of setups are trend continuation or momentum continuation setups. The momentum reasserts itself and you often get next up leg.

It is easy to identify these kind of setups and anticipate a breakout on them. Once you setup a process flow to identify them, you can daily find 5 to 10 candidates like these. to find them you just need to focus on stocks with established momentum. 

What I look for in a short setup

NFLX is a short I initiated yesterday. I was watching it for couple of weeks for possible short entry.

NFLX was a market leader for last few years. Recently it missed earnings. That lead to a big volume drop . Which was followed by dead cat bounce on low volume. Yesterday that bounce attempt failed with range expansion on high volume.

Once a stock misses earnings after a big rally and a history of good earnings surprise previously, stocks tend to move in direction of the initial earnings reaction. On short side this effect gets delayed as bargain hunters buy on weakness.

It is too early to say whether the trade will work but these kind of failure setup after long rally have good risk reward potential.

In order to find them I look for stocks that had long periods in uptrend and that have recently dropped in momentum. (The momentum is calculated using 65 days Trend Intensity). Once the momentum shifts you have to find good shorting point.

A similar setup I am watching currently is SKX. After a multi month rally it recently had big volume drops followed by dead cat bounce. I have it on my short watchlist.

What I look for in a good IPO setup

Market action is dominated by 8 to 20% moves on 3 to 5 days timeframe. These are momentum burst or impulse kind moves where in a very short period of time stocks make a explosive move of few days. This same phenomenon also works on IPO.

To find opportunities like BOOT , I look for an IPO having a range expansion. The range expansion scan gives stocks that had bigger move than last few days of move. Along with range expansion I like to see a volume surge.

In ideal situation stock should close near high on breakout day. A stock that breaks out and say makes 1 dollar move on breakout day but intraday gave 50 cents of that move, is not something that I like to enter. If it pulls back say 25 cents after making high it is acceptable.

As you can see in BOOT prior to breakout day it was a negative day with stock down -.17%. I like to select stocks that had negative day prior to breakout day or a stock that is up less than 1%. I also avoid stocks that are up 3 days in a row prior to breakout. This ensures that the entry is at start of a swing move.

These kind of trades are typically of 8 to 40% magnitude and that move happens in 3 to 5 days time. To exit them I look for a price target of around 8 to 12%. If it is low priced stock then it can make even 20 to 40% move in 3 to 5 days as they tend to be more explosive. As far as possible I exit in t0 strength.

As we are entering the start of a momentum burst a tight stop can be used on these trades . If the trade violates the breakout day low the momentum is over and it is not worth holding it . So stop goes in at low of the entry day.

The market offers hundreds of such trading opportunities. Not every trade works like a charm like BOOT, but as long as half of them work and we keep losses small on one that do not work, it is ok. H

To find such trade daily on IPO you need to track IPO with less than one year trading history. Once you have that watchlist you can use a range expansion scan to find opportunities. If you set this up you can regularly generate your own trade candidates on your own. 

Loss of momentum

The market was over heated and in recent days there is some loss of momentum.

The sectors that were first to breakout out like biotech  and REITS are taking a pause or pulling back. But new sectors are breaking out so usual rotation kind action is happening.

One of the key thing to watch is small caps losing momentum. as a momentum trader small caps offer you best opportunities. when they move they can quickly make 10 to 20% move in days. However in last few days they have been losing momentum. If this trend accelerate then it will be cause for worry.

However based on daily  stocks in uptrend study on stocks using trend intensity,  I see ton of orderly pullbacks and consolidation. many stocks have started to pause after first up leg. These kind of continuation patterns have high probability of resolving to upside. Besides that the Trend Intensity universe is not showing signs of breakdown as of now. That means likely next up leg  for many of these stocks after a pause.

Stocks up 50% plus in a month above 20 tends to lead to correction

Stocks up 50% plus in a month above 20 tends to lead to correction /pullback in next small time frame. You can see it for yourself in the data. There can be delay of few days or 2 weeks but extremely positive readings on this indicators are short term bearish.

So far we have not seen a pullback or consolidation  but it is just a matter of time. When everyone is convinced this time is different, it tends to happen.

A pullback or consolidation will not likely be end of rally as the underlying setups are good. Lot of sideways action after first burst on many stocks. Plus dip buyers will ensure that it is shallow pullback.

To find big winner look at stocks that have doubled recently

There are around 7000 stocks in the market . If you are looking for a stock likely to double look for a stock that has already doubled recently from its 52 week low.

When a stock doubles from its low , in many cases  (but not all) there is a significant catalyst for such powerful move. That catalyst can remain valid for many months or at times years. If the move has such identifiable catalyst then those are the stock you can focus on for next part of the big move. Every stock that makes a 1000% move first has to  double.

If you use this kind of approach you narrow down the universe of stock to focus on to a small number of around 200 stocks in the market. That makes task of researching them easier. Within the 200 stocks many will have already made there big moves so they get eliminated. The one that recently doubled for the first time are the one worth focusing on.

You can set this up pretty easily in Telchart by using the scan:

 c/minl252>=2 and minv3.1>=100000

Once you get scan candidate you need to further research them to find the 5 to 6 good candidates with big catalyst.

Find setups that give you many opportunities

"One of the best things I've learned from this site is how many opportunities exist in the market. It takes away the temptation to go for the big trade. As long as I keep losses low and I keep throwing lines out I've done very well."

A Stockbee Member.


If you have a setup that gives you multiple opportunities for trade or if you trade a bunch of setup that together give you lots of opportunities to trade, then you can reduce your risk.


More opportunities allow you to make money without risking too much on single trade. You can risk little of your bankroll and take more shots at market. Psychologically it is easier on your mind as you are not overly dependent on one or 2 large trade for returns.


Methods that involve risking big per trade can produce big returns if trade works out but can also lead to big drawdowns . You can spend months trying to recover from that . As against that you can increase your number of trades if your trading setup produces many opportunities.


This is a choice you can make as a trader.

Find basic tendencies of market

If you want to trade the market find the basic and structural tendencies of the market.

A structural tendency of market is some kind of observed behavior of stocks that repeats . For example stocks with surprisingly good or bad earnings tend to go up or down for several days post announcing such earnings . It is called PEAD (post earnings announcement drift). If you research this and find this actually happens , then you can then design a process to identify such stocks daily and exploit the phenomenon to try and make money.

Similarly if you study stocks that go up a lot in short period of time like say 25% plus in less than a month and you find that these stocks had range expansion at start of such move then you have a structural basis to go with . Then you can build a process to identify such stocks.

Or if your study shows that when stocks go down a lot in short period of time of say 5 to 10 days, then they tend to bounce back hard for couple of days from such deeply oversold level and this phenomenon repeats. Then your task is cut out to try and build process flow around it.

Or if you find that stocks that have gone down 50% plus in less than a year tend to perform better in next one year then you can systematically isolate these kind of stocks and then build a process flow to exploit that.

The structural tendencies of stocks give you a process oriented solution to finding opportunities. If you select the right kind of market structure to focus on you increase probability of success in the long run (there still will be periods when your structural phenomenon may not work due to some change in market structure or your own failure as a trader to exploit that , but in both cases it is a fixable issue.

Sooner you find an exploitable phenomenon in your trading career better it is as it will save you time , frustration and money. Sooner you find an exploitable phenomenon in your trading career better it is as it will allow you to intensify your focus on getting process right.

A period of pullback/consolidation will be natural action

A period of pullback/consolidation will be natural action after a torrid V shaped recovery. That creates the momentum burst kind of setups where stock has first leg and then consolidates and breaks out.

Unless breadth significantly deteriorates the benefit of doubt is on bullish side.

Because so many stocks are over extended in short term a shakeout will be very much normal reaction . A series of breakout failure near high might signal lack of buyers but orderly pullbacks will signal continuation.

Patience will be required to wait for good continuation setup to form. healthcare, biotech, airlines, utilities, restaurants, reits are where they are likely to happen.

Some of the recent earnings winners are also likely to setup with orderly pullbacks as many of them had big gaps due to overall market momentum.

Markets continue to build on recovery

After a 9% kind of correction , markets have had a sharp V shaped recovery. The breadth has started to improve and new leadership has started to emerge.

A V shaped recovery is sign of strong buying on any correction. Which has been the hallmark of this market in last 18 to 20  months.

As long as breadth trends continue to improve the rally has probability of continuing . Any breadth deterioration is what I would watch for sign of pullback or reversal.

Stocks with momentum and momentum burst setups have started to show up and are having follow through.

What do these stocks have common

OMER
KERX
JNS
IQNT
ATHL
ATHM
CFN
CNAT
CEMP
EVC
LAKE
PTRY
MOVE
MRCY
HSTM
EXAS
UIHC
ANGO
HNI
QLGC
HA
CRAY
IVC
RT
AERI
HCI
SCSS
INCY
SCMP
PACB
XNPT
RGEN
MMSI
TTPH
ARC
ZOES
RDNT
KITE
NVAX
AMAG
TUBE
RNA
MDXG
SHLD
CVTI
CLVS
VDSI
LCI
RENT
GIMO
BBW
FMI
XLRN
FNHC
OVAS
USNA
OSTK
ESPR
INFN
DRTX
NLNK
AGIO
ESI
RCPT
DRIV
RGLS
VTAE

they are all up 25% plus in last one month.

What kind of setups do they show.

Central tendency of stock moves do not change. 

Define your setup

Define your setup thoroughly before trading it.

Think a lot at setup selection stage. I you think through your setup then trading it will be easier. If you do not have good setup stop trading and search for good setups first. Once you have good setup your trading will improve.

Think about what market structure this setup exploits when selecting setups. If there is no structural phenomenon it exploits then , it will not work.

Setups that people have used for centuries are:

• momentum burst also called impulse moves
• Trend failure
• Anti Trend swing
• pullbacks also called mean reversion trades
• range
• Trend transition setups
• trends
• pairs

There is lot of information about these setups in public domain. 

Biotech lead the action

Biotechnology stocks are in best position to lead the V shaped recovery. Many of the biotech had shallow sell off and were near their pre correction high.

As the market is attempting to recover the biotechs were first to breakout. Closely followed is drug stocks. That is where best setups are currently.

Airlines is another sector doing well as low oil prices are leading to increased profitability or hope for it.

The downside is being led by oil and gas.

Where should beginner start

I often get emails from beginners asking where should they start. The markets and choice of setups and trading approaches can be challenging for a beginner. 

In the beginning due to lack of understanding of how markets work and how real traders make money ,  you can end up believing in anything. Which can lead to loss of time , money and opportunity.

First thing a beginner trader should do is to try and master a simple setup. Focusing on only one simple setup will help you gain confidence and help you develop skills faster. 

Trading a setup in existing established trends is one of the good starting point for beginner trader. Once a stock established a trend it offers you a choice of breakout or pullback setups. There are many variation of these setups but they essentially look for either a momentum burst in existing trend after a period of consolidation or buy during low volatility consolidation/pullback in trends. Typically buying first pullback or consolidation after a trend is established is a simple trade setup. That also ensures you are not buying extended setup. 

Simplicity is very important in the beginning phases. That means avoiding piling on too many indicators on your chart or making too many rules for your scans. Simplicity will also allow you to understand each of the indicator you use.

Beginner trader need to put themselves in situation where they have time to consider every detail of the setup they are trading and trade they are making . Simple setup will allow you to plan all elements of the trade. Consistently trading one setup using consistent process for few months will help you perfect it. That is how a small edge becomes unique edge.

Grit is important

Grit is most important criteria if you want to be successful trader. 

If you have grit then you will overcome many psychological obstacles. If you study most successful traders it took them 10 years or so to become consistent. Most people do not persist that long and give up because they blow up or do not have grit. early failure leads to fast exit. 

After trading 14 years profitably and talking to many other traders the consistent theme is ability to persist in initial years after many setbacks. Some blow up multiple times before finding their unique edge. The edge they find may not be big but the process of trial and error and persistence leads to their unique personality that can not be easily replicated.

Grit and self efficacy beliefs are biggest determinant of success in this field.

Most edges are small but how you play around with them is what matters. Take a small edge and marry it with well thought out process flow and good risk management and you will develop a larger edge.

but if you have grit it will work , absent that this is difficult game for many. 

Momentum burst setups showing up

When you have set method and you follow them daily, you don't need to be rattled by market moves. With the market improving in last couple of days post Fed panicked and assured they will postpone QE if needed, that has resulted in another V shaped recovery in index.

The momentum burst scans I run have started to show up candidates. When market was in correction the scans were not showing many bullish candidates as momentum was on downside. During bull moves stock move in sharp momentum bursts of 3 to 5 days after that they rest or revert.

If this rally has legs same thing will happen. Stocks have started gaining momentum. They will in few days go sideways as buying cools on those individual names and then they setup for another move higher.

Sharp V shaped recoveries has been the hallmark of this market especially in last 18 months as Fed panics every time market goes in to correction mode of even 5%. They come out with new interventions or delay end of QE , and sometime just do verbal intervention like some Fed members dd this time once market starts correcting around 10%. That signals the market no matter what Fed will not allow market to go down. So happy days are back again.

During a bull move hundreds of momentum burst setups will show up if market continues its advance. So task for speculator is clear , scan for stocks with established momentum and look for those that are setting up for possible momentum burst and also run daily momentum burst scans and look for good setups.

If you did not lose money during this correction, you are in good shape to profit from this move as long as it lasts. If it fails then bearish setups will proliferate. 

Signs of stabilisation

After few weeks of correction the market is attempting to put a bottom.  During correction market had around 9 % correction. Typical corrections are 8 to 10% in bull market.

So far the reflex bounce has held up well , but it is still not all clear . Many reflex bounces can fail after few weeks. The individual stock action is dominated by some V shaped bounces . The V shaped bounces have become the defining character of this market in last few years.

But some sector action in last ten days points to probably emergence of new leadership. Healthcare and residential construction shows best setups as of now.  REITS and defensive sectors also dominate the action.

From momentum burst kind of swing trading as of now not many A quality setups are showing up, but if this becomes a bottom that situation can fast change. When situation changes tons of good setup will show up suddenly. 

Reflex bounce in most oversold names

Bearish moves are often punctuated by sharp snap back rallies. We are due for one as market in short term is oversold.

These sharp bounces are led by most beaten down stocks and not the stocks holding up well. You will see signs of that in last 2 days.

Big drop attract bargain hunters and also the short sellers cover. This leads to these reflex rallies. Most reflex rallies eventually fail but for mean reversion kind traders are good opportunities. But one need to have well defined setup for that.

When stock or ETF go down often the earlier reference point become anchor for many trader. They think the stock will bounce back to its high.But that is not at all necessary and also does not happen. Once a stock breaks down , it might have number of counter trend rallies but it may never come back to previous levels.

 Once the reflex rally plays out some of the same stock become shorts again. If market puts in bottom then , some of the reflex rallies stick and after a period of back and forth establish new trends, that is when stocks with momentum start breaking out.

Watch stocks with momentum carefully here, if they start breaking out it will be good sign. The top 200 ranked stocks by 6 month momentum is what I am watching currently. 

Keep drawdowns low to profit from next bull move

A market which is way oversold that refuses to bounce indicates weak market.

Probably a capitulation kind selling with huge breadth will be needed for a tradable bottom. we have not seen any high volume selling so far. If you go back and see Market Monitor down moves often have huge 1000 plus stocks down 4% before a bottom is established. That kind of selling leads to forced liquidation, margin calls and seller exhaustion. From that kind of selling a sustained rally can start. We are not at that level yet as breadth has not been very negative by historical standards. 

Currently we are down only 9% from high.  Which is a correction but may not be sufficient correction for a 5 year bull move. In last 3 years we have not had 10% plus correction . So if we get one it will not be out of character.

And some sort of action by Fed to induce confidence will at some stage may be required but with markets down just 9% it is unlikely to worry them.

Remember every rally since 2009 started with launch of some Fed program like TARP, QE1, QE2 , operation twist and so on. At some stage if market goes down a lot then Fed's hand will be forced. And that could be a signal for bottom.

Bottom is a process and might require time and level. Either way how you handle bear markets depends on how much is your risk tolerance. Barish market tend to be very volatile and most trader who survive the market for decades after experiencing few big ones tend to focus on capital protection during such time. If you do a good job of that and don't have much drawdowns or maintain your capital emotionally it is easier to trade when new bull move starts. Which invariably starts once traders capitulate. 

This is the time to upgrade your trading skills , improve on things you want to improve. Develop setup ideas. Work on market timing . Bear markets give you an ideal opportunity to do that. If you do that you can profit handsomely in next bull move. 

Corrections are good

We are getting good broad based correction after many many months. By historical standard this is hardly big correction. It is just normal action after many months of rally.

Bull markets create situations where at some stage they run out of gas. just few weeks ago you had IPO going up 60 to 100% on first day, that kind of wild action does not last long.

Corrections like this are good as it creates conditions for better returns in future as new leadership and new companies emerge post corrections.

Corrections are also good as it thins the rank of amateurs and wipes out some overconfident traders. That is healthy process. It ensures only speculators with good risk management skills and trading skills survive to profit from next big bull move.

this is good time to learn how to manages risk and trade profitably. 

Breadth readings approaching extremes

T2108 is at 13.45 indicating only 13.45% of stocks are above their 40 day moving average. Readings below 20 on this indicate extreme bearishness from which bounces tend to happen. The readings can go in to single digit in bear markets.

$BPNYA is another breadth indicator that tells you % of stocks in confirmed bullish mode by point and figure charts. At this stage it is approaching extremely bearish zones. A turn in breadth is easier to spot in this indicator.

In the Stockbee Market Monitor the Primary indicator turned bearish on September 18, 2014 and since then you will see steady selling. The Primary indicator is approaching extremely bearish zone but is not yet below 200. Intraday basis it was below 200 yesterday.

Going by all the breadth indicators I monitor market is approaching extreme bearish zones, but these are not extremes by historical standards. A bounce is very much a possibility but in bear market you can have many bounces that look like bottom before actual bottom is in place. The market has not yet seen capitulation kind of selling , so bounce might give temporary respite.

If you want to maintain your profits made during bull moves and maintain your sanity and not get rattled by bearish market , study breadth. Breadth will help you reduce drwadowns and anticipate turns. 

Night Time is Right Time

Activities to do after market close to find trading opportunities.

Episodic Pivots

Research all the stocks that show up in Stockbee EP scan to find stock with game changing catalyst with at least 50% potential. 

4% and $ breakout and breakdown

Go through all stocks showing up in Stockbee b/o and b/d scans to find setups for swing trading.

If you have time then you can also go through Range breakout  and breakdown scan to look for swing candidates.

Anticipation Candidates

Run anticipation scans and look for good setups. Create price alert on them either in Telechart or Interactive Brokers. Quickly see if there is any news on them. The one with news can be high priority.

Earnings After the close today

Look for stocks with big earnings surprise that are u 2% plus on 50000 volume after close.

http://goo.gl/1BMpcp

After hours movers

Study these like EP to see if there is any game changing catalyst stock.

http://goo.gl/G3h2il

Other news plays

Fresh news leads to rallies next day. If you want to day trade those news then look at stocks with news after close.

http://seekingalpha.com/news/all

Playing great defense is key to profitable trading

Traders who survive and prosper over lifetime learn the value of playing great defense. If you do not have great defense sooner or later you will be out of the game. One big bearish move and you will get wiped out.

Many people spend lot of time taking their account up and then in few weeks end up giving up all the profit and go in to drawdowns. They become aggressive at exactly the wrong time. Once they hit loss, they become more aggressive hoping to recover loss in few large trades.

There are also some traders who do not have any concept of risk and play with margin. Typically they will be using full margin all the time. When market hits bearish phase like this , they quickly land in soup and lose lot of money in short time period. many of them get margin calls. When hit with margin calls instead of closing the position , they add more money and then it leads to more losses. People who have businesses and other sources of cash flow make bad traders because of this problem. They are great source of income for brokers.

If you want to survive as a trader learn great defense. Most of good traders avoid certain market periods and are aggressive when market conditions are right. Great defense involves learning to get out of loss making trade at first small loss. Great defense means first thinking how much can I lose on this trade. Great defense also comes from having well thought out methods to find trades and not relying on rumors and CNBC to make trades.

Every year thousands of traders blow up because they lack great defense. 

How to use the morning activity list to find profitable trades

The hunt for both big Episodic Pivots kind trade and swing trade should start in the morning , preferably a hour before market open. In order to do that you need to be organised and focus on few things. 

Anticipation List Bullish and Bearish

Based on your bullish and bearish anticipation scans get your anticipation candidates ready. Create price alert on them either in Telechart or Interactive Brokers. Quickly see if there is any news on them. The one with news can be high priority.

After Hours and Before open movers

These stocks will have some fresh news , that fresh news can lead to fresh start to a swing or a new trend or end of trend. Go through both the list and focus on stocks up 2% plus on 50000 plus volume.
Earnings Stock

Stock with earnings after close or before open are your prime candidates for EP. If earnings was game changer they will show up in your after market and before open scans as they will likely be up 2% plus on volume. Many earnings stocks are best bought in pre market as many times they can make part of the move in pre market itself.

IBD Front Page / New America/ Sector Leader

Because IBD has large circulation and following , it can sometime move a stock. The front page stocks on EP day can be good source of ideas for busy people. Often IBd will mention a stock near buy point and it breaks out next day.

Upgrades and downgrades

Stocks with multiple upgrades or downgrades can often go up or down , if the upgrade or downgrade happens near good setup buy or sell point they can give you good entry in to swing trades.

Unusual Option Volume

When a stock has above average option volume it sometime is indicative of coming rally or drop. Monitoring stocks with unusual volume will give you early indicator of likely big moves.

Bounce got aggressively sold

The Wednesday bounce failed very next day. That puts market back in extremely bearish territory by breadth. However extreme can become even more extreme.

I did not have any bullish position open coming in to yesterday so no damage to account. A failure to rally from a 4 to 5% correction as has been the case in last 24 months may indicate change of character.

We will see it is still one day and one setup at a time kind of approach market. 

Market can quickly surprise you if you are not ready

Familiar pattern of Fed induced bounce in play. Every Time people become too negative and predicting big drop, the pattern repeats. Fed makes dovish statement or changes policy and we are back to rally mode.

The backdrop to the bounce was extremely weak breadth, so chances of further follow through for at least few days or weeks are good. The only problems with many of these recent bounces is extremely narrow number of stocks leading the action.

From swing trading point of view both pullbacks and momentum burst kind of setups are likely to work if more buying comes in. Which should give swing traders lot more to work with. 

As we have seen again and again in these V shaped bounces, many of the beaten down stocks make bigger moves than those that held up well. There is more pronounced mean reversion effect in play during such bounces.

The quick bounce also is cautionary tale for those who take the eyes of the ball during such corrections. Market can quickly surprise you if you are not ready. 

Earnings season has started so I will be looking for earnings Episodic Pivots. They offer the best bang for buck during the season. One or two big earnings trade can potentially make your year. 

Typical corrections are 8 to 10%

At some stage market was bound to correct. It had spent more than 600 days above 200MA.

How far correction will go we do not know. But typical corrections are 8 to 10% and this correction is yet to reach that level, barring small caps which have corrected more than that.

Down moves are characterised by frequent counter trend bounce so one is again due in next couple of days.

Mot corrections since 2009 bottom have been few weeks affair, we will see if this one is different.

All corrections since 2009 has ended with some sort of Fed intervention . Sometime intervention has been just verbal intention. So watch for signs of that.

Market turns offer opportunity

When market undergo corrections lot of time traders and investors start losing focus or get discouraged , but if you are serious about making money , then you can not take the eyes of the ball.

Some of the best trading opportunities happen as soon as correction starts to end. Many stocks start moving even before a turn is visible in indexes. You have to constantly watch market for signs of that.

Another good thing to focus on during correction is new setups and methods and improving your skills. Market down turn allow you time to upgrade your skills and get ready for new upturn.

8 to 10% corrections are common every few year in market, they offer you best opportunity to profit from next bull phase. 

Market bounces back from extreme oversold level

The Worden T2108 is Worden's market breadth indicator. It shows you % of stocks above their 40 day moving average. At levels below 20 it indicates extreme oversold level. Levels above 80 show extreme over bought areas. 

Last week T2108 reached 16.7 level. From that level market has bounced back. At this stage it is a oversold bounce. It might retest the same level again. If lot more buying comes in at this stage then it might be yet another shallow correction.

Under the hood lot of stocks are setting up for breakout . So market still favors bulls till this rally convincingly fails. 

Better ideas make you better trader

Good traders are innovator. They find better ways to do things. They are creative. They look at same setup or market situation in different manner and design strategies to extract profit.

Creativity is required to reduce drawdowns or to judiciously use margin to enhance returns. Creativity is also involved in designing entry or exit strategies. If you study successful traders they have innovated in these areas. They do not follow  most commonly talked about techniques or indicators.

There is too much talk in trading communities about discipline and psychology , but not enough focus on creativity in trading. If you are not creative and innovative as a trader it is unlikely you will last much longer even if you focus a lot on discipline or psychology.

Good traders look for good ideas. They are constantly innovating around setups or entry, exit, risk or any other parameter. They always have new and fresh ideas. They hunt for new ideas and try and incorporate them in their trading.

If you want to improve your trading start generating and collecting new ideas. Fresh ideas will give you fresh perspective and fresh ways to make money. 

How to train Procedural Memory for trading

Working memory involves the ability to maintain and manipulate information in one’s mind while ignoring irrelevant distractions and intruding thoughts.

That is how traders make money. By trading a method or setups without distraction and making decision based on constantly changing dynamics.

This requires a well trained and developed procedural memory for a setup or trading style.

The simplest trick to training procedural memory is repetition and repetition in high volume and more importantly repetition in high volume at a very compressed time frame.

Intense short duration voluminous practice is best way to train procedural memory. It is more effective if done at a rapid fire rate. The reason that works is when you do things under pressure the brain trains itself to be super efficient.

More than that intense effort done at rapid rate also enhances your confidence as it leads to improvement in your skill rapidly.

This is the principle used to train in US army. US army is one of the largest user of psychological research. If you see books on expertise development many of the studies are sponsored by the US Army.

Basic Combat Training and Advanced Individual Training are the core starting point for all recruits. Both those courses are designed to be highly intense and challenging

The principle applies to anything which involves expertise in life. Train, Overtrain,. Constantly Train. Train under pressure. Bootcamps are the preferred methods in US Army for that reason.

In practical terms if you want to be better trader instead of getting in to endless debates and flirting from method to method or setups you should train and train intensely, and train intensely under severe pressure to master a set of setups.

The Stockbee trading Bootcamps work on that principle. They are intense 2 day sessions where Stockbee members go through thousands of past setups in intensely structured and fast paced environment with constant feedback to build a procedural memory for trading 2 or 3 setups.

Once you do that then you can build on that over the years. most people think trading is something they can do as some part time project with minimum training. It does not work that way. Sooner or later they blow up.

If you want to be successful trader and make millions:

Train

Train intensely

Train intensely under pressure

Train intensely under pressure with feedback loop

Train repeatedly

Train regularly.

Do that if you want to be a successful trader....

Why study breadth

If you want lower drawdowns

If you want to maintain sanity

If you want to anticipate turns

If you don't want to panic at wrong time

If you don't want to ride roller coaster of profit and blowups

If you want to make money in retirement account and keep the gains.

Few weeks spent understanding breadth will pay you lifetime dividend.


Good thing about breadth is:

You don't need to be Market Wizard to understand it.

Once you understand the concept you can just using simple scans or using existing resources look at breadth trends daily and take decision.

It does not take more than few minutes to do it.

Start tracking breadth daily and it will start making sense as you would start questioning why is this number going up or down.

Why is this number so big or small...

and so on.

It will put you on path to profitability.

Stocks down 25% plus and V recoveries

The market is in correction mode for last few weeks. It has been a slow breadth deterioration kind of situation.

A select few stocks have still are rallying but it is really selective rally. Some large cap stocks are still holding up well and large caps indexes have hardly corrected.

The T2108 indicator is approaching 20 levels. In bull markets most of the time such low levels lead to a bounce. The bounce may not sustain itself . If we see dramatic improvement in breadth on bounce then that will be good sign.

It is not an ideal environment for momentum burst kind of setups. But things can improve

Stocks down 25% plus in a month
-----

GOMO
LEJU
CLV
LPCN
NM
PIR
CTCM
CIG
CLF
PGN
AUY
SFXE
AU
VLCCF
VNET
SDRL
HYGS
RPRX
MXL
BIOF
OMN
NADL
SSRI
VHC
SALT
TNXP
WPRT
HGSH
GTN
SWHC
AKS
CVGI
BGC
CONN
FRM
WG
GTAT
KNDI
VNOM
TRS
EOX
MOV
EOPN
CMCM
BCRX
ADHD
CRK
EXXI
RTRX
JMEI
PEIX
XONE
USLV
CVEO
BBSI
JRJC
CRR
QIHU

These stocks are down 25% plus in last one month. Keep an eye on them.

If you study the last few years bounces, you will see that beaten down stocks made the biggest moves coming out of such market corrections. V shaped recovering in stocks are common in this market.

NFLX and CMG kind V shaped vigorous rallies have been common character seen in recent times. Something to keep an eye on if we start getting another V shaped bounce. 

Is it the beginning or end of selling

If you look at T2108 we are reaching levels around 20 which have been levels from which rallies have started in last few years.

If you look at MM, this is just the beginning phase of sell off with significant and growing divergence.

If you look at QE indicator, every time QE ended it has lead to 10% plus correction. QE3 ends next month.

Bottomline treacherous conditions for momentum burst kind swing trading.

Wait for conditions to improve before committing big money.

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Understanding momentum to find explosive stocks Part 2

In the first part of this post I explained what is momentum and how to scan for momentum. The post focused on relative momentum. There is another kind of momentum, absolute momentum which is also widely used by traders to find explosive moves. 

What is absolute momentum. Even those who claim they do not use momentum in their trading use absolute momentum unknowingly. Absolute momentum is when you find momentum for a particular stock.

Let us say we are talking about momentum on 6 month timeframe

6 month = 126 trading days

Using Telechart we can find momentum in various ways

c/c126 (relative)

now if we decide we only want to trade stock up say 30% plus in last six month

c/c126>=1.3 

it will give us stock with absolute momentum of 30% plus in 6 month.

c/avgc126

will give you six month momentum compared to average price of 126 days

if we decide to convert this in absolute momentum we can say

c>avgc126
All those who insist on stocks to be above say 200, 100, 50, 20 or any other Moving average are basically using absolute momentum

If you say I trade stocks that are within 15% of 52 week high it is also an example of using absolute momentum

Once you understand the two types of momentum, relative and absolute, you can use them to find stocks or develop stock trading scans or setups

Every Friday IBD publishes list of stocks in its weekend edition . it is an example of combining relative and absolute momentum.

Stocks have EPS rating 85 plus

Stocks have RS rating 85 plus (relative momentum)

Stocks are within 15% of 52 week high (absolute momentum)

Most of IBD methodology combines relative and absolute momentum

Nicolas Darvas method was based on absolute momentum. 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.
both are absolute momentum criteria

Doubled from 52 week low (absolute momentum)

At all time high (absolute momentum)

Richard Love in Superfperformance Stock says :

look for stocks that have doubled from 52 week low (absolute momentum)

and that are within 25% of that 100% move . In other word stock should not correct more than 25% from high (absolute momentum)

These are just few examples of using absolute momentum or relative momentum. You can use them very creatively to find right kind of stocks and pinpointed buy or sell points if you further explore this topic. If you study many methods I have highlighted, they use a combination on relative and absolute momentum to find stocks to trade.

If you are motivated trader serious about making lot of money trading go in to depth of this momentum concept and you will find many profitable trading methods. 

Understanding momentum to find explosive stocks

Understanding Momentum helps you find explosive stocks and exploit them as swing trader or position trader. As a trader you want to be in stocks that for a given holding period are the fastest moving stocks.

At simples level momentum is rate of change (ROC) with which stock is going up or down. It measures speed of a move. Knowing ROC of stocks allows us to rank them and focus on those with top speed.

Let us say if you want to focus on say only 50 strongest stocks in the market. You can find them if you understand momentum. If you want to narrow your focus and only focus on best stocks in the market , focusing on 200 stocks with most momentum is sufficient to find big moves both for swing and position traders.

Momentum is time specific. In order to find stocks with momentum you must first decide your time frame. A time frame of 3 to 6 month is good for finding momentum stocks.






This stock VIMC currently ranked top by 6 month momentum.It is still holding its momentum gain. Momentum looks for stocks like these. As a trader you  want to find them right at start of momentum move. As swing trader you want to trade swings in them.

A stock can have positive momentum on longer time frame say 6 month but same stock can have negative momentum on month time frame. DGLY is current example of that.



This stock had momentum month ago. Now it has negative momentum on monthly time frame. It is down 45% from it momentum high

How can you scan for momentum?

There are many ways to rank stocks by momentum and every method has some advantages and disadvantages. Once you understand momentum you can use it creatively to find many kinds of stocks

Let us say we are talking about momentum on 6 month time frame to rank stocks

6 month = 126 trading days

Using Telechart we can find momentum in various ways

c/c126

will give you six month momentum compared to price 126 days ago

c/avgc126

will give you six month momentum compared to average price of 126 days

c/minl126

will give you six month anchored momentum compared to lowest price in 126 days

(c/c63+c63/c126)/2

will give you six month momentum calculated as equal weighted 2 period for 3 months

There are many many ways to slice and dice momentum. But all the above momentum scans are used to rank stocks . They help you find relative momentum for a universe of stock.

Most well known and popular  trading methods are based on momentum. A deep understanding of momentum can help you in your trading if you want to be profitable trader. 

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Develop basic understanding of momentum

Many beginner traders email me asking where should they start. I always tell them to try and develop understanding of what is momentum , how it works and how to use it.

Momentum is a very powerful friend of short term as well as long term traders. If you understand momentum you will be trading fast moves in the market. For investors also stocks with momentum offer various position trading opportunities

If you are serious about your trading develop basic idea about:

What is momentum.

How can you scan for momentum

What is relative momentum

What is absolute momentum

How can you use momentum

How can you use momentum in  swing trading

How can you use momentum in  position trading

How can you use momentum as a growth investor.

How can you use momentum as a value investor.

How can you use momentum as a ETF investor.

There are many ways to slice and dice momentum. Having working knowledge about momentum will help you 

No aggressive selling so far

A mild selling pressure is hitting the market so far.

In lst 14 trading sessions there have been 8 negative breadth days. but none really big 300 plus on 4% . which indicates mild selling pressure. A series of 300 plus days on number of stocks up $4 plus can accelerate selling . Absent that this looks like buyers strike. Not many buyers willing to chase at this level.

A mild selling like this can possible indicate a mild pullback. As we have seen since beginning of QE3 , there are not major corrections in the market. Most pullbacks have been less than 5% and lasting less than a month.

On a practical swing trading level, the last ten to fifteen days have had very selective rallies in handful of  stocks. But at the same time number of breakouts have failed. Few shorts are working .

As  the market has shown tendency o bounce back from minor correction traders have been conditioned to dismiss any breadth divergence or pullbacks. Which creates condition for some of the traders getting caught on wrong side at some stage. Personally I still like to be cautious at some juncture still things are clear. My objective always remain to make money but not lose money and especially not lose money due to returns so far. Low drawdowns is my primary concern.

What happens next will depend on breadth trends. If breadth keeps deteriorating then it will indicate further weakness.

Understanding market breadth can help you lower drawdowns

Stock markets are composite markets.

The overall move in market is an aggregate of moves of several hundred or several thousand stocks. So the level of participation in a move is important. How many stocks are participating up or down move tells you about extent of money flow in the market. Market breadth measures the number of stocks participating in a move.

Many Of the most reliable market timing models are based on Market Breadth. Understanding  Market Breadth will help you if you want to do market timing. Study every single Market Timing model most rely on market breadth. They use different kinds of market breadth measures but ultimately the core concept is market breadth.

If you can understand this you will be able to develop your own home brewed workable market timing model. For more than 100 years people have attempted to build market timing models and they have ultimately come to same conclusion, that market breadth is one of the best way to do it.

Market Breadth tells you how many stocks are participating in a move. And it is just simple common sense that if you have more stocks participating in a move to upside it is a bullish market, and if more are participating in a move on downside it is bear market and at either end (bullish or bearish) there is breadth extreme or breadth divergence.

There can be periods when divergence can last long but ultimately either more buyers come on or more selling comes in to resolve divergence.

Ultimately most breadth based models are based on same concept of exhaustion of trends. Extremely bearish breadth is considered bullish as it signals seller exhaustion. (the 90% plus day indicator is based on that). Extremely bullish breadth is considered bearish as it becomes unsustainable and leads to trend exhaustion.

In a bearish market breadth keeps going down till it reaches extremely bearish levels. At that stage no one is left to sell. Buyers step in and you get a breadth thrust to upside. Breadth can flip from negative to positive in matter of hours near bottom. Market breadth is extremely good at spotting bottoms .

Near top there can be significant time lag between extremely bullish breath and top formation. Market breadth is not very reliable for top signal. Breadth divergences are more common in uptrends.

If you want to use breadth in your trading , there are many ways to measure breadth.

% of stocks above 200 MA

% of stocks above 50 MA

% of stocks above 40 MA (Worden T2108)

% of stocks above 10 MA

% of stocks above 5 MA

% of stocks making new high

% of stocks above upper bollinger band

% of stocks in bullish mode as per P&F chart ($bpnya)

and many more methods primarily look at finding out how many stocks are participating in a move.

In Worden telechart there are number of breadth indicators.

T2 Market Indicators

T2106 T2105 T2118 T2115 T2116 T2114 T2113 T2126 T2127 T2129 T2104 T2102 T2100 T2123 T2125 T2128 T2101 T2103 T2107 T2108 T2110 T2111 T2117 T2109 T2120 T2122 T2121 T2112

you can find this under "Main"

http://stockcharts.com/freecharts/candleglance.html?[BREADTH]

http://stockcharts.com/freecharts/candleglance.html?[BREADTHSECT]

These are also breadth indicators published daily on Stockcharts site.

The Complete Guide to Market Breadth Indicators: How to Analyze and Evaluate market Direction and Strength Hardcover –by Gregory L. Morris, is the most comprehensive book on breadth but is out of print and sold for ridiculous price on Amazon

McClellan summation index is one of the oldest breadth indicator. The McClellan paper on breadth has won The market technician award some year back. It is worth reading.

Breadth statistics are valuable because they give some of the best indications about the health of the liquidity that is available to the stock market. A small amount of money can be employed to make a handful of stocks go up or down, and if they are the right stocks then even the major market indices can be moved. But to affect the breadth numbers, which measure all of the stocks on the exchange, requires major changes in the liquidity picture. The available money has to be so plentiful that it can be spread far and wide in order to make the majority of stocks close higher, and especially so in order for the market to show positive breadth for several days.
From the McClellan paper
http://www.mcoscillator.com/download/special/McClellan_MTAaward.pdf

Growing divergence

Mountain sized breadth divergence has developed while S&P and DJ 30 make new high.

Small caps are getting sold daily and they never participated much in this bounce.

Number of high flyers are showing signs of running in to selling on new high or in pullback mode.

Breakouts are failing same day or next day.

It has become extremely selective move with very narrow bunch of stock leading the action.

Prudent course for short term swing traders is to lower exposure on long side to minimum, keep tight stops, protect open profit , be extremely selective on long side and see how the divergence resolves before making aggressive bets.

Always think process flow

Everytime you see someone twitting a stock idea, ignore the idea, try and find out what process this person uses to find that stock.

Every Time you visit a blog of someone you think is good trader find out what process this person uses to find that stock.

Every time you read a book on trading find out what process this person uses to find that stock.

Every time you attend a trading seminar or workshop ind out what process this person uses to find that stock.

The process understanding is very important. If we do that we should be able to find same stock and trade it in same way.

Don't get fascinated by picks ask the person

"Brother or sister can you tell me what step by step process you use to find these things. What scans did you use. where did you enter why, where did you exit or plan to exit, how much did you buy"

and if he or she can not tell you that it is difficult to make money from those ideas.

Eliminate Processes and methods

There is a diner next to my house, it has menu which runs in to 10 pages with around 10 items on each page. That is like 100 items.

Think about it . 100 items require 100*5= 500 ingredients or more. Plus you need people to know 100 processes.

As against that if you see food trucks , they have 2 to 5 or in some cases just 1 item on menu.

Be like food truck and not a diner.

Trade as few methods as possible.

Just because you know 100 methods do not trade 100 methods.

Learn from them and incorporate some learning in your method. but do not start trading too many methods.

Less processes you run easier it is

Less is more when it comes to trading.

Just trade 1 to 3 methods.

Do not clutter your mind

Start with process flow if want to improve your trading

Start with process flow if want to improve your trading

However imperfect it is start first by setting up a process flow for trading any setup you like.

If you like momentum bursts setup process flow

If you like anticipation setup process flow

If you like trading news set up process flow

If you like CANSLIM setup process flow to find and buy IBd kind stocks

If you like beaten down stock setup process flow to identify and buy them

If you like EP setup process flow to trade them

If you like to buy near 52 week high setup process flow to

If you like to trade earnings setup process flow

If you like to trade stocks that go up 300% in a year setup process flow to find and buy them

If you like Lemonade strategy set up process flow to trade it

If you like to trade others picks setup a process flow to find and trade them

If you like to trade IPO setup process flow to find and trade them

If you want to trade options setup process flow to find and trade them.

If you like to trade stocks that start with A setup process flow to find them

If you like to trade stocks that start with Z setup a process flow to find them

Unless you have a process no miracle can make you good trader or investor.

Once you have process you can start to improve it

Once you have process you can do things in less time

However imperfect your process , it is the first starting point to becoming profitable trader.

In the beginning run only one or two processes. Your brain will not be able to handle many processes simultaneously. So be less ambitious .

First question you should always ask is what is the process to do this. You read a trading book , fine but unless you have a process to convert that books trading idea nothing will happen.

Stop dreaming about the money you will make trading. Unless you have a process nothing happens. Once you have process you start finding trades. Once you have a process you follow it to enter those stock. Once you have process you know when to exit them or put stop.

As you trade more a process you will find simpler ways to do same thing. Once you have one good process for swing trading going well then you can add more processes.

When developing processes think simple. Simpler a process and less the steps involved in it easier it is to perform. If your process involves 10 steps something is wrong with it.

If you see this site it is all about processes flows. And most likely first question you will encounter from Stockbee members is what is your process flow to find these stocks or options. You will see members have done process innovation around simple setups.

Learn to be process focused and money will come. the person who made 96 million trading Episodic Pivot has simple process flow. when he started to explain it , members were like there must be something more to it. But all he does day in day out is follow simple few steps process flow. Good trading is like that.

Once I found process flow I became profitable. Before that I used to go crazy working till 2AM in morning to find stocks. Now same task takes less than half an hour.

Once I became process oriented things began to happen. I found process flow to find big earnings surprises and tripled my account in few months.

Become process oriented if you want to make money trading . Start today.

And there is no other better place than the Stockbee Member site to learn to do it. everything is about process orientation here.

You will find process to find momentum burst.

You will find process to find Episodic Pivots 

You will find process to find stocks that Doubled (Double trouble) 

You will find process to find stocks that have been cut in half (Half trouble) 

You will find process to use news to find day trades (Night time is right Time) 

You will find process to use to use Investors Business Daily to find good growth stocks 

You will find process to determine entry , exit , stops, position size. 

You will find the process flow of the trader who made 96 million trading Episodic Pivots 

You will find process flow to fully automate trading 

You will find process flow to take 100k to 160k in month in the ongoing Options Quest being traded real time by @cammotrader 

You will find process flow to find big winners and play golf courtesy @ckergin 

You will find process flow shared by hundreds of members 

You will find processes to fit working people

Even if you are not a member , you will find simple processes shared on this site daily.  Read the posts highlighted in sidebar they have many of my process flows.



Methods (processes ) trump markets is the motto of this site and that is the key to success in trading and beating the market.

Become process oriented today.....

That is if you want to make serious money trading .....