The Mark of ChaosThis will be the weekend educational post. I decided to openly answer some recently submitted questions. Apologize for any grammatical errors in advance.
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1) "OpihiMan" wanted to know about my trading routine, post-trade analysis, record-keeping, my definition of trading success, if I pay attention to macro situations/news, the stylistic differences between day and swing trading, and whether I subscribed to any paid services.
a) Trading Routine - I create my watch list the night before. Then, I try to be ready 2 hrs before the market opens. I watch the futures market as well any gap ups or downs on any of the stocks on my watch. I plot them on "blank boxes" to see if they will fade or break higher. I also plot the approximate open of the market on the chart. I go through my scan one more time in case I missed anything (and I do miss things anyway).
b) Post-trade Analysis - I review the daily charts of my holdings and the market indices. I mark all holdings as either "hold" or "possible sell" for the next day. The ones with a "possible sell" are given higher priority the next morning.I also monitor the Asian and European markets and plot them on the daily as they progress.
c) Record-keeping - A simple spreadsheet for the trades. The blog is my trading journal.
d) Trading Success - My personal definition is measured on monthly percentage returns. My goal is 10%+ per month. If I don't hit double-digits in any given month, then I know I did something wrong. March 2009 was the first month in 15 months where I made less than 10% and I did make quite a few mistakes.
e) Macro Situation/News - I do pay attention, but I don't put much weight on them at all. I let the charts do the decision making. Sometimes, news can gap the markets beyond a consolidation range and form a breakaway, in which case it is technically significant.
f) Day/Swing Trading - same patterns, different time frames. Tolerance for risk and loss and the margin of safety is greater for swing trading than for day trading.
g) Subscriptions - I only have a monthly membership to Stockcharts.com, which I highly recommend for candlestick chartists.
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2) "Kush" wanted to know how trading the opposite of the media (CNBC, Cramer) makes you money, finding a trader that's a contrary indicator, best time to buy, and FAS/FAZ range trading.
a) Trading Opposite of Media - I use CNBC only for breaking news, economic data results, etc. I do not watch Cramer's show and ultimately, you shouldn't blindly trade a stock because someone mentioned it. You have to do your own homework. Sometimes the media is right, sometimes they're wrong. You should trust in your decisions based on fundamental and/or technical facts.
b) Contrary Indicator - Josh. He bet against me for 7 weeks, and look what happened to him.
c) Best Time to Buy - For anything, the best time to buy is when a high-probability setup emerges. Doesn't matter when. Same goes for short setups. High-probability setups ensure that the odds are in your favor in most cases.
d) FAS/FAZ Trading Range - First of all, when and if I trade FAS/FAZ, I use the SPY. It may not be as accurate, but it will help when the market gets to become too volatile and it can help you control your emotions. I personally do not recommend day trading within a tight range, such as the triangle we've been seeing for the entire month of May. The range is about to close, and the market will make a major imminent move.
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3) "GonzoTrader" wanted to know what intra-day scans I am running, the most reliable chart setup, pre-market homework, setting stops and limits on buy orders, finding stocks with the most market orders pre-market, and what sectors are in play for next week.
a) Intra-day Scans - I hardly run intra-day scans. Since I am a swing trader, I can get away with scanning after the market closes each day. My scan right now is all stocks between $1-3 with volume above 100K. Prior to the dollar stock circus, my "normal" scan was stocks above $5 with volume above 500K.
b) Most Reliable Setup - This one goes to the High-and-Tight Bull Flag. I drew it out below:
c) Pre-market Homework - refer to (1a).
d) Setting Limit and Stop Buys - In cases where I believe that a multiple number of stocks will breakout at or near the same time, I will set limit orders immediately above their breakout resistance levels. The vast majority of time, I use market orders and manually make entry.
e) Finding Stocks with most Pre-market Interest - You can use http://money.cnn.com/data/premarket/nyse (also contains NASDAQ stocks). You can also go to http://www.allstocks.com/markets/premarketactive.html or http://dynamic.nasdaq.com/dynamic/premarketma.stm.
f) Next Week's Sectors in Play - TBD, but I am long biotech/pharma, oil/gas, and commodities.
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4) "Cuervos Laugh" wanted to ask how I managed my information flow.
a) I actually do not read blogs on my blogroll unless something is brought up to my attention. As for the links on the sidebar, I primarily look at pre-market action and analyst upgrades/downgrades. The link library is for the readers, not me.
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5) "P" wanted to know about using different time frames.
a) Using Different time frames - Intra-day, daily, weekly, and monthly time frames should all support each other. Which time frames should you use? It all depends on your holding period. I use intra-day and daily charts since I am a swing trader. If you are a buy-and-hold investor, you should use the daily and weekly charts more frequently. Intra-day and one-day breakouts or breakdowns are your earliest signals for entry or exit.
When you mentioned the SPY, the weekly pattern is not a bear flag, it is a bull flag as noted below:
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6) "Juice" wanted to know how I spot s FEED, CAR, DDRX in it's early stages and how I can tell if it's going to go to sub-$1 to $5+, and if ATSG can get over $5.
a) Finding Next Multi-bagger - This is a difficult question because no one knows for certain whether a stock will go from sub-$1 to $5+. The only thing that I can tell you is to keep true to the technical pattern of the chart. If the chart remains intact, then hold the stock. It also depends on your time frame. In these cases, you'll most likely have to be a positions trader, holding positions for several weeks or longer. The important thing is to catch the first high-probability setup for the stock and ride it until one of the wheels fall off.
b) ATSG - I would be mindful of the May 2008 breakaway gap down as it will create some resistance. Like I mentioned above, ride the trend until it trends no more. See chart below:
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7) "Kel" wanted to know about target setting.
a) Targets - Usually, my targets are located at major moving averages and support resistance areas. I do not use MA crossovers, because they are lagging. Instead, I first determine which MA a stock is following (e.g. 15-day, 20,day, 50-day, etc.). When the stock reaches striking distance, it is automatically placed on my watch list. An intra-day setup and/or breakout will confirm the entry. As for exits, I usually sell at least a partial position at the first major resistance area (by major, I mean the 50,day, 100-day, MA's or 200-day or any large previous breakaway gap downs). It all depends on the individual stock.
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8) "Susannah" wanted to know about setting stops and exiting positions.
a) Stops - I rarely use them. The last time I used stops was when I was on vacation in Mexico. I use flexible and mental stops and the shorter-term MA's, such as 15 or 20-day MA's, dictate my decisions. If a stock closes below a short-term support area, I would most likely exit the position. If I am wrong, I can always re-enter the stock.
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9) "Yogi & Boo Boo" wanted to know how I keep myself from blowing up.
a) Anti-Blowup - Keep most of your positions small. With the exception of CTIC, all of my positions are between 5-10% per position. This way, ff a stock drops -20%, you don't freak out (you shouldn't). In addition, make sure your stocks have the best setups, thus ensuring a higher success rate. Sometimes I recommend stashing away your gains to protect them during times of extreme uncertainty.
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10) "Lindsay" wanted to know if I watched any bellweather stocks during the day, hedging long/short positions, the US Dollar, China, hyperinflation, and ETF use.
a) Bellweather Stocks - I do not, but that doesn't mean people shouldn't. I keep things very simple, so basically I simply keep an eye on the SPY, my existing positions, and my watch list stocks.
b) Hedging - Hedging is highly recommended during times of consolidation to avoid whipsaw and during times of uncertainty of market direction. Once it becomes apparent that one side has the greater odds of winning, release the hedges.
c) I do not particularly pay attention to the US Dollar, China, or hyperinflation for my trading. I refer to the other bloggers to answer these questions for you (feel free to chime in).
d) Using ETFs - The positives are less vs. individual stocks, diversification. The big negative associated with ETFs (I'll refer to the 2x & 3x ETFs) is time decay. Over time, price will decay as a result of the daily compounding of the NAV. This is especially true for the 3x ETFs (e.g. FAS, FAZ).
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11) "Fortune8" wanted to know about trading options the "right way".
a) Options - Not an expert. Comments are open for expert options traders who use them frequently since I do not use them often enough.
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12) "All About Health" asked what my process is for deciding to switch from long to short and vice versa during the day, as well as selecting the right industries/sectors to trade.
a) Switching Sides - Under extreme circumstances, I find myself having to entirely switch sides. This occurred at the March bottom when I was briefly caught short, a mistake that contributed to my worst month in 2009 (+2%). I am not a primary day trader, but the same patterns that apply for swing trading also apply to day trading. Use chart patterns, intra-day moving averages and trailing stops to guide you from one direction to another. It's all the same thing, just a different time frame.
b) Choosing the Best Industries/Sectors - First, I look at the SPRD sector ETFs for any clues (XLV, XLB, XLK, XLI, XLY, XLP, XLF, XLE, XLU). I then look closer into sub-sectors (e.g. for Health Care, I'd look into biotech, drug manufacturers, healthcare providers, etc.). Then I'd look into individual names. This is a variation of the top-down approach.
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13) "Nashville Cat" wanted to know about gap strategies at the open.
a) Morning Gaps - When a stock gaps within a range/consolidation/S&R, then it is not very meaningful to me and the gap has a higher chance of fading. However, when a stock gaps outside of the above, it has a higher chance of following through. This is not true for exhaustion gaps (which fade anyway), but they are true for breakaway gaps and continuation gaps.
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14) "Relaxsome" wanted to know if I used oscillators.
a) Oscillators - I don't use them. They are unnecessary. Focus on the basics.
4 comments:
John, guess I have the honor to first thank you for this post & your blog in general, you are on my daily reading list!
John, one more thing. Outside of trading hours, how much time do you spend doing your homework preparing for the following trading day?
Hi John-You continue to amaze me. Thanks for all the education and time you put into the blog. I will be getting a membership to Stockcharts.com next week. You have gotten a very intelligent group of traders following you who add a different perspective to your picks with their questions and comments. Keep up the good work.
double k - 1 hr-ish.
Thanks Mob/Mike.
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