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 â€œimbalancedâ€ 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.
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 â€œsweet spotsâ€ 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.
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 â€œscalpsâ€, 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.
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.
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.
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 â€˜gamesâ€™ of stops and holding individual stocks for a longer period of time than Iâ€™m used to.
This is sort of â€œlazyâ€ trading and I place probably place no more than 5% of the portfolio in these â€œtradesâ€ – they tend to be income producing and have a clear risk/rewardâ€¦ 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).
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.