How I Trade

Mar 31, 2007: 5:39 PM CST

lthough I predominantly act in the realm of intraday time frames, I use a top-down approach that funnels information down to individual trading decisions and am heavily steeped in technical analysis.My goal is to be a technical purist, yet I let fundamental and economic releases influence my overall bias.

Although I approach my investment decisions within the context of the overall trends of sector rotation, interest rate cycles, market cycles, and economic cycles, I will not discuss those here, but will instead focus on how I trade intraday and hold balanced swing-trading positions to supplement these.

I am heavily risk averse, and this part of my personality influences how I make decisions, how long I hold a trade, and how close to place my stops. I often err on the side of:

  • Stops placed too close to the entry
  • Trades not being held long enough to develop into great profits
  • Entry after confirmation of a move underway

Although I am working on these, it is important to note your personal weaknesses when assessing your strategy. As such, I seek strong stocks in strong sectors (based on sector rotation) and aim to balance these (if opportunity presents with weak stocks in declining or underperforming sectors. Overall market direction will be an indicator of how “imbalanced” to be (which is often to the long side).

No matter what your strategy is, it is crucial to know how you could improve, and this is done with analysis and journaling and studying your trades and whether or not you personally followed your system.

Swing Trading

After obtaining a watch list (study list) of selected stocks, I then use technical analysis on the daily time frame to establish my bias and read of the stock. Once I see a pattern or trade set-up I have tested and identified as profitable, I will determine simple factors from the weekly chart (support, resistance, momentum, trendlines) for possible profit targets OR obstacles my trade will have to overcome.

I further analyze the daily chart for profit targets, price projections (which I actually hand-draw on printed charts – I leave room on the right side of the chart to do this) and stop placement.

I rely heavily on trending stocks (on a particular time frame) and often use moving averages as entry zones, and thus my stop is placed slightly below the entry (moving average). If I am stopped out, I have adopted my own rule that I must repurchase the stock should it rise a set amount above the stop-loss point.

I heavily rely on price swings and swing charts that I create, and am looking to play for small targets based on the price and swing structure of the trend of the stock and the sector, and am always comparing momentum readings to new price highs or lows. I also look for “sweet spots” in various stocks that allow me to play for larger targets. Wealth is built by holding positions longer and taking on more risk when the need arises.

I am learning to enter my trades and walk away and not adjust profit or stop targets unless key information enters the system that compels me to do so. I typically do not hold trades over the weekend unless a strong trend is in force, and will re-buy Monday if no adverse news occurred during the weekend. I like to have my weekends clear of positions so that my analysis can be cleaner and without stress or biases.

Intraday Trading

While I consider myself a scalper, I am not one based on traditional definitions. I am also not your typical day trader, who sits glued to the screen and breathlessly watches news reports and has many watch lists up in anticipation of breaking momentum or increased volatility. I hate volatility and rapid price moves and avoid them if at all possible.

Rather than behave as most people view day traders do, I take my biases from my weekend analysis and try to play them out each day through classic chart patterns, momentum, support/resistance, and trend analysis. I do use margin and leverage on key “scalps”, which are nothing more than playing out the direction of the signal on the daily time frame as it occurs on a key buy signal on the 5 or 15 minute charts.

I seek to play price swings in the dominant direction of the daily trend and exit when a swing is complete. I will avoid the counter swing and will repurchase to play for the next swing, provided there are no warning signs from volume or momentum. I am technically using swing trading tactics on the intraday charts.

I display the 5 min, 15 min, 30 min and daily charts of the stock I am viewing. I use three monitors for my workspace and use TradeStation as my carting software and my broker.

During a typical day, I will have entered and exited 5 or more positions and held each for a maximum time of 20 to 30 minutes to an hour.

Indicators

Moving averages are absolutely essential to my analysis and trading decisions. I cannot live without them. On all time frames, I utilize the 20 period exponential, 50 period exponential, and 200 period simple.

I enjoy reading the stochastic and RSI indicators, but generally use them as confirmation/non confirmation rather than as trading signals.

I view price as king, and study price swings and how price traded around key zones. I use swing charts (color charts) based on an Average True Range function for the colors in my chart.

I also cannot live without the 3/10 Oscillator, which is both a momentum and trend indicator. Popularized by Linda Raschke, the indicator is simply a MACD oscillator with settings 3, 10, 16 and can be programmed into any charting platform. I seek new momentum highs or lows as trade ideas and confirmation of price swings, and I view divergences as trade ideas and confirmation of price.

Volume is crucial for any trader, and I look for volume as a confirmation/non-confirmation indicator. Exhaustion in price often signals the end of a trend, and so I am vigilantly looking for price exhaustion or capitulation.

I use the Breadth (Advance/Decline Issues) as a backdrop for market strength/weakness, and will (often) only take trades in the direction of the breadth unless there is a compelling reason not to do so. I also use the TRIN as confirmation and show the TICK, but make few if any decisions based on it (NYSE TICK).

I used to use a whole host of indicators, but they just mixed me up so greatly and increased my already existing anxiety, that I just wanted to run away from them all. Viewing too many time frames can do the same.

Favorite Set-Ups

I have described my two most frequently used setups in recent posts: The Impulse Buyand the Momentum Divergence play both setup tight risk-reward and allow you to play for high probability small targets.

I have also described The Four Types of Trades and most rely on the Trend Retracementtrades for the bulk of my trading.

Trading Vehicles

I often use major market ETFs (DIA, SPY, QQQQ) for swing plays and individual stocks for scalp plays. If I am feeling particularly bullish or bearish, I will trade the @YM futures (Dow Mini) for increased leverage.

I have also found minor success swing trading oil and gold futures, and probably will be expanding my knowledge and trading into futures more.

(“Optional” section on options)

I also do trade options, but sparsely and in unconventional ways. I will identify larger trends on higher time frames and if I feel like I could benefit from holding a position for a longer time, I will use either bull put (credit) spreads or bear call (credit) spreads. This allows me to collect premium from time decay, and allows me to rise above the ‘games’ of stops and holding individual stocks for a longer period of time than I’m used to.

This is sort of “lazy” trading and I place probably place no more than 5% of the portfolio in these “trades” – they tend to be income producing and have a clear risk/reward… although the risk is always higher than the reward, the probability of achieving the reward (through trend analysis and charting) can offset this risk. Nevertheless, without this edge, this has a negative expectancy (technically speaking).

Conclusion

There are so many more things I could discuss, but this is the most brief description I could provide. Nevertheless, I still advocate simplicity over complexity, and finding a strategy that works for you and you alone. Play around and see what works and above all, have fun and keep your spirits up and actively avoid getting overwhelmed.

I intend this to be a mini-work in progress, as I hear back from readers regarding questions and things I missed in this brief entry.

15 Comments

15 Responses to “How I Trade”

  1. Rahul Says:

    Corey,

    Your trading approach is eerily similar to how I trade. Of course there is a lot of difference in the details but overall approach is so similar. Check it out at http://tradernirvana.com/trading-rules/.

    Since, I am sticking to end-of-day swing trading, my trading activity is fairly low due to my market timing rules. So I am planning to port the trading method to hourly charts. Any suggestions from you would be welcome.

    Also, I am trying to research catching sector rotation as soon as I can. If you could share your methods on that it would be great.

    Rahul
    http://www.tradernirvana.com

  2. Corey Says:

    Hey Rahul,

    I like your site and will be visiting it more. Or approaches are similar, except that you are using the 10 and 30 EMA and using the Williams R% for entry/exit. You are also using higher time frames for confirmation/nonconfirmation which is very helpful.

    A first observation to note, that you already are aware of, is that oscillators fail during strong trends, and at momentum extremes, and can be overbought/sold for extended periods of time. Perhaps try to add a volatility filter to determine range/trend axis for increased validity of signals.

    Switching to hourly charts will provide more signals and (hopefully) better timing, but just make sure you can handle the transition without becoming overwhelmed (you’ll be looking at about six times the candles of the daily chart).

    Regarding sector rotation, probably the best book I read on the issue, which helped me determine my strategy, is Peter Navarro’s “If it’s Raining in Brazil, Buy Starbucks.” The title sounds funny, but the book introduces the concept of MacroPlays and contains the best logical description of Sector Rotation, Market Cycles, Economic Cycles/Reports and Interest Rate cycles. Toni Turner’s “Short Term Trading in the New Stock Market” adopts these ideas, but doesn’t do them justice (it’s just a brief overview taken from Navarro’s work). I also recommend Peter Navarro’s “When the Market Moves, Will You Be Ready?” which is just a shortened, easier to understand book like his “Raining in Brazil” book.

    I didn’t mention it, but I also view Intermarket Technical Analysis (how the S&P is related to the bond market, currency market, and commodity market) as setting up the big picture. This is more for the longer term investor, but it helps to know if there are divergences especially between bonds and stocks. John Murphy’s Intermarket Analysis is probably the best book to begin.

    There are three places I view sector rotation and intermarket analysis:

    Sector Rotation Charts: Stock Charts Sector SPDRs
    Intermarket Analysis: Stock Charts Intermarket Study
    Prophet.net: Industry Group Analysis (also click on “Historical Trends”)

    StockCharts also provides a “cheat sheet” chart. The site also recommends Sam Stovall’s S&P’s Guide to Sector Rotation, but I have not read this work.

  3. Makutaku Says:

    Thank you very much for taking your time to share your trade methods with us!

    Even though I am a beginner, I was able to understand most of your post. Except the following part:

    “I use swing charts (color charts) based on an Average True Range function for the colors in my chart.”

    I know what Average True Range is but I don’t understand what it has to do with colors and what you meant by “color charts”. Could you please elaborate more on that?

    Thanks again!

  4. Corey Says:

    Sure, Makutaku. Welcome to the trading community!

    I view candle charts and swing charts depending on my analysis. Swing charts are generally longer term and help me assess market structure and ‘swings’ (think waves) in price. They are exclusively price based and I am seeking to determine swing highs or lows.

    I have posted a few examples from my swing chart analysis (look at the chart construction, rather than the textual analysis): Momentum Precedes Price, Momentum Divergences, Anticipating a New Swing Low.

    Basically, the color comes from a specified average true range function from the lowest or highest price 16 bars ago. Say, 16 bars ago, the price was $20 and the ATR is $1 so if the price now is 2 times the ATR (or $2), then the price would change color.

    Actually, the mechanics of the color really aren’t that important – I don’t make decision on color, it just looks prettier and shows me data already there. I am analyzing bar charts to determine more data and look at longer time frames and identifying swing highs and lows in the structure of the price data.

    For my decisions, I will only use candle charts.

    If this doesn’t make much sense, or needs more clarity, please let me know.

    Thank you for the comment!

  5. Trading on the Edge » Market Musings and Stock Trading Plan for April 2, 2007 Says:

    […] links of note that I would like to share with you. Hopefully you will find them as useful as I did. How I trade: Corey has put up a nice post detailing his general methodology. I was pleasantly surprised to see […]

  6. Rahul Says:

    Corey,

    Thanks for the info on sector rotation. It will take me some time to get to the books but the links, specially the one from Prophet is immediately useful for me. It has provided me with another quick method of getting some stocks for my watchlist.

    Just wanted to point out that I use EMAs and Williams %R on index charts only to define long/short bias and market timing. I do not use any indicators on stock charts and use only price action. I do have keltenr and 20sma overlays but they are used only to kinda chart a map for the price and not to make any decisions for entries really.

    I am planning to ADD hourly charts based trading to my daily routine and not switch from daily. I will still stick to daily and take entries when charts say so. And, as to getting overwhelmed, I have done my stint with trading the opening gap on 1 min charts, tracking ~ 10-15 charts with crazy scanners spewing out data at the same time. Hourly should be fine. Probably won’t even end up being day trades.

    Can you also please explain the following from your comment: “Perhaps try to add a volatility filter to determine range/trend axis for increased validity of signals.”

    Thanks,
    Rahul
    http://www.tradernirvana.com

  7. Corey Says:

    Rahul,

    Be sure to filter down the industries and view the individual chart components in Prophet to get the best out of the site, along with the historical trends. You are looking for money to be flowing into an industry group.

    Thank you for the clarifications. I was only able to read the post you referenced and this is helpful to understand your method better.

    The closer you can get to price action, the better. Indicators are helpful, but as long as we all realize that they are derivatives of price or volume.

    I traded one minute charts for about a year solid before burning out doing that! I’m right there with ya! My rule now is never view a 1-minute chart again!

    Regarding the volatility filter, yah I shouldn’t have just thrown that out there without an explination. Refer to market principle #4: The Market Alternates between Range Expansion and Range Contraction. I have not posted regarding this on my blog (but intend to) but Brett Steenbarger at TraderFeed recently posted regarding this issue and its statistical foundation.

    A quick overview: When the market experiences price-bar overlap (swing high/low overlap), it is in a trading range. It is winding down to an equilibrium point. Oscillators will work best in this environment and moving averages (as support/resistance) will not. The market will (sometime) break to a trending period, where oscillators will no longer work, positive feedback will kick-in, and moving averages (for S/R) will work best.

    What I mean is that oscillators and indicators are often sensitive to the condition of the market – be it range or trend. Also, this is (likely) why there is no magic indicator, because the market alternates states and changes ‘character’.

    You can determine this condition by ‘eyeballing price’ or by using the DMI (Directional Moving Index) or the ADX (Average Directional Index). You are looking for a low ADX to identify range conditions and a high ADX to identify trend conditions.

    You can also view the distance (squeeze/tightness) of the bollinger bands for volatility contraction and expect the price to breakout when the bands “squeeze” price, especially when they squeeze through Keltner Channels (if you overlay them both). This setup can allow you to play for a large target when price expands out of the “squeeze-play”.

  8. Makutaku Says:

    Thanks a lot Coray! It makes perfect sense now!

  9. Makutaku Says:

    Corey, (sorry for misspelling your name earlier)

    One more question, if you don’t mind:

    What parameters do you normally use for the bollinger bands and Keltner Channels ?

  10. Corey Says:

    Hey Makutaku:

    For most indicators (except the MACD), I use the standard settings.

    For both Bollinger Bands and Keltner Channels, I use the 20 period lookback. It helps to keep the settings the same, but remember that shorter lookbacks lead to more signals (and more whipsaws) and longer periods lead to fewer signals, but more valid ones when they occur.

  11. air jordan 17 Says:

    It looks good,I have learn a recruit!
    Recently,I found an excellent online store, the
    sall4.net
    are completely various, good quality and cheap price,it’s worth buying!

  12. uggs outlet Says:

    The post of content is very interesting and exciting. I learned a lot from here.The content from simple to complex, so all of you can come in . No matter you want to see what can be found.By the way ,there are some websites is also very wonderful,you can go and see.such as ajf 8

  13. How To Trade: Blog Linkfest Volume One | Forex Hour to Hour - Forex Trading News, Forex System Reviews, Twitter Updates Says:

    […] Afraid to Trade site has a number of useful posts relevant to trading psychology, but also details the author’s trading approach. See also the Trader’s Narrative site, which posts trading methods as well as market […]

  14. ????? porter ???? ?? Says:

    ????? porter ???? ??…

    How I Trade | Afraid to Trade.com Blog…

  15. Hassan Says:

    Selling your broken auto for hard cash to a good
    and dependable damaged car dealership is likely to lower out a whole lot of problems.

    Junk Cars Cash is equipped with its own fleet of tow trucks offering services across the length and breadth of the city.
    The thought of trying to sort through our stuff is so
    daunting, we just try to cope with drawers
    that won’t close and closets you don’t dare open.