Keep Your Eye On The Ball:(updated - Recognizing Trade Potential)
Contents:
A - Attain The Proper Psychology
Components Of Intuitive Day Trading
Learning How To Win, Learning How To Lose
Don't Isolate Yourself
Further Reading On Trading Psychology
B - Begin With Goals
What Motivates The Successful Day Trader
C - Constructing A Trading Method
Recognizing Trade Potential
1) Momentum Trades
- Identifying Momentum Gap Trades
- Identifying Momentum News Trades
- Identifying Momentum Market Trades
- Identifying Momentum Sector Trades
- Timing Momentum Trades Using Tape Reading
- Previous Trades
- Bid/Ask
- Previous/Today's High/Low/Open
- Time
- Trade Size
- Level II Data(Market Depth)
2) Trend Trades
- Identifying Trend Trades
- Timing Trend Trades Using Technical analysis
Trading Day Procedures
- Before the Open
- During The Day
-After The Close
Further Reading On Trading Methods
D - Define Your Risk & Money Management Method
Diversification
Margin/Bet Size
Stop Losses
Averaging Down
Holding Winners Overnight
Know When Not To Trade
E - Evaluate Your Execution System
Broker
Data
Software
Real Time News Sources
Remote Execution System System Failure - Contingency Plan
More On Execution Systems
F - Further Help On Setting Up A Trading Plan
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A - Attain The Proper Psychology (Trader's state of mind)
Components Of Intuitive Day Trading:
1) Desire
2) Faith
3) Visualization
4) Specialized Knowledge
5) Organized Planning
6) Decision
7) Persistence
8) Network
9) Sixth Sense
Learning How To Win, Learning How To Lose:
How to win?.....DON'T GET EXCITED about a big win. Just take it as a normal part of trading. Always close a winning trade and move on.As a Day Trader you can lose as quickly as you win.
How to lose?..DON'T GET DEPRESSED about a big lose. Just take it as a normal part of trading. Always use stop loss orders. Always close a losing trade and move on. As a Day Trader you can win as quickly as you lose.
You must learn to take all your trades in stride and focus on you trading plan. Getting excited or depressed just clouds your judgement and prevents you from take the right action at the right time.
This is the biggest difference between successful traders and losers!
Don't Isolate Yourself:
One of the biggest risks of remote online trading is the isolation that can occur and lack of networking intraday. For the trader this can cause problems with keeping their mind on the task at hand, as well as losing their perspective on what is happening with the markets.
To alleviate this problem the Final Frontier Chatroom was created:
The Final Frontier Real Time Trading Room:
Message 4947279
Further Reading On Trading Psychology:
Trading For A Living - Alexander Elder
Market Wizards - Jack Schwager
New Market Wizards - Jack Schwager
Think And Grow Rich - Napoleon Hill
The Winning Edge - Adrienne Laris Toghraie
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B - Begin With Goals (short/mid/long term)
What Motivates The Successful Day Trader:
1) Money
2) Freedom
3) The desire to maintain control of his/her own mind towards external events, and observe/react correctly to the short term emotional actions of others in the market.
Once you have determined what motives you can draw up written goals to review and visualize daily. Visualization is they key to developing the proper mind set needed to react correctly throughout the trading day.
Your goals should be broken down into the short,medium and long term. A good idea is to create financial projections including revenues, expenses and profitability objectives - much like any business plan.
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C - Constructing A Trading Method
Recognizing Trade Potential:
I have found that there are basic types of Day Trades and by quickly recognizing what type you are trading you can adjust your trading to minimize losses. I have greater success Reading The Tape than Identifying Trends using Technical Analysis. For this reason I make Momentum Trades the focus of my trading .Each trader is different. The key is determining your strengths and capitalizing on the types of trades that suit you.
1)Momentum Trades
These are trades which you do not hold long (1 minute to 30 minutes)and therefore are willing to take what the market gives you(1/16 to a point) You may make several trades on the stocks but are unwilling to hold the position until a discernable chart pattern emerges.
- Momentum Gap Trades(trading off opening gaps)
- Momentum News Trades(trading off recent news)
- Momentum Market Trades(trading off volatile markets)
- Momentum Sector Trades(trading off moves in stocks within sectors)
Identifying Momentum Gap Trades:
This requires doing some analysis of pre market news, previous day Momentum News Trades and opening statistics.
Identifying Momentum News Trades:
I rely heavily on #DAYTRADERS chatroom to provide me with Intraday Momentum News Trades. You MUST read and evaluate the news AND the company BEFORE you take a position. Here are some tips for using #DAYTRADERS chatroom:
Message 4603899
In addition you may want to scan news yourself using one of the various news feeds(Reuters,Dow Jones,Bloomberg,Briefing.com,etc)
Identifying Momentum Market Trades:
This involves tracking the Dow 10 minute intraday chart and watching for reversals after large intraday selloffs or runups.
Identifying Momentum Sector Trades:
This involves tracking sectors or sub sectors of stocks for a news maker. The idea is to watch companies in the same sector and trade the laggards in the group on the assumption that the market will move the group as a whole not just the news maker.
Further Reading On Momentum Sector Day Trading:
exchange2000.com
Timing Momentum Trades Using Tape Reading :
I Use the following indicators to read the tape and time entry/exit points:
Previous Trades:
For me there is no better indicator for trading than previous trades. Trades literally define the leading edge of the trend.
By watching a scrolling summary of trades I am able to determine
whether demand is slowing down or picking up for the stock.
The volume of each trade helps me to determine if there are any serious buyers in the market and how badly they want to buy the stock.
You can get a real feel for the market of a stock by watching the velocity of the trades. As momentum gains the speed of trades intensifies. Whether or not the price can break through on this higher volume is a key in determining support or resistance points.
Knowing these support and resistance levels is a key to knowing when to enter or exit trades.
Often traders or market makers can fool you by jockying around on the bid/ask, but previous trades denote the true sentiment of the market.
Bid/Ask:
After Previous Trades watching the bid/ask is the next best thing.
There are several components of the bid/ask:
price - the price offered at the bid, and the price offered at the ask
spread - the difference in price between the bid and ask
size - the number of shares at the bid, and the number shares at the ask
For NASDAQ stocks it is possible to get a Level 2 screen of the bid and ask for individual stocks. This gives you additional information such as the size and price of bids and offers behind the current best
bid/ask.
For example if the best current bid for Intel was 1000 shares bid @ $100...Level 2 would show bids below this, such as 1000 shares bid @ 99 15/16.
Additionally Level 2 will give you what brokerage house is bidding/asking, how many shares each is bidding/asking for, at each price differential.
Bid/Ask is a good trading indicator of the strength of the demand/supply because you can see new orders for stock being added or deleted from the market. This information can help you to determine whether prices are likely to move. For example if the size of stock bid is much higher than the size of stock offered it is likely that prices will trend higher. This is not always the case though and that is why previous trades tend to be a better indicator of trends.
The spread is a reasonable trading indicator as well, but it is much better in non-liquid stocks. In liquid markets stocks tend to maintain tight spreads. In non-liquid markets a wide spread can mean that a price movement is eminent. The tendancy of traders to not tighten the
spread means that the market must change the bid/ask up or down to attract more traders to the market.
Once again previous trades tend to be a better indicator than the spread because of opportunity for traders to manipulate the spread, especially in non-liquid stocks. Unfortunately in non-liquid stocks there may not be enough previous trading to get a good feel for the trend...and that is one big reason why I rarely trade non-liquid stocks.
Previous/Today's High/Low/Open:
Keeping an eye on the daily price range of a stock gives me perspective of where the stock is trading with relation to it's longer term (such as hourly, daily of weekly) trends.
Knowing when a stock is approaching or breaking through a new day high/low is critical to helping me visualize that daily range.
Paying particular attention to trades as they happen as the stock is approaching a new daily high/low gives me a good insight as to the momentum of the market and it's willingness to establish new ground.
If a stock trades around new daily high/lows early in the day it helps me throughout the day in establishing Entry and Exit points for that stock.
Time:
The time between trades, as well as the time spent at a particular price level tends to indicate resistance/support levels.
For example - Often when I am watching a stock in an uptrend the pace of trading slows down at a particular level. If there is an increase in the size of trades during this time I will take this as an indicator that resistance has been met.
Often this will mean that a large order has been filled and is being
crossed to an institution before the market makers pullback off their bids.
I see the same thing happen on downtrends, but in this case the market makers are buying from the institution.
Trade Size:
As I referred to in my last post, the size of previous trades can indicate a lot about what is happening with behavior of a stock.
for example - While watching a stock trade in a tight range a series of trades of large size will indicate a struggle that the market makers are having is about to be won by one side, and that the beginning of a breakout is near.
Level 2 Data(Market Depth)
An additional tool for Momentum Trading is Level 2 Data or Market Depth. This replicates alot of the data from Level 1 Data but in addition it displays all the information on who is bidding and offerring and at what price.
Further Reading On Level 2:
Elite Trader
elitetrader.com
From The Trading Desk
Subject 15612
2)Trend Trades
These are trades which you hold longer( 30 minute to several hours)and therefore are looking to make 1/2 to several points.
- Trading plays based on a discernable stock chart patterns. Entry/exit points for these trades would be timed off 10 minute intraday stock chart
Identifying Trend Trades:
I have been experimenting with daily charts using Sequential Pattern Analysis, Mathematical Indicators and Classical Chart Patterns. Rather than explaining various Technical Analysis methods I would suggest reading a few good books on the topic and also the SI thread:
Technical Analysis - Beginners:
exchange2000.com
Further Reading On Technical Analysis:
exchange2000.com
Timing Trend Trades using Technical Analysis:
Entry/exit points should be timed by using Technical Anaysis and strict stop loss orders. Using tape reading techniques may kick you out of the trade early which might cause you to miss the long term trend.
Trading Day Procedures:
Before the Open:
1) Review your Trading Plan to get into the proper state of mind for trading.
2) Review overnight markets and news to get a feel for the overall market sentiment. Knowing the sentiment of the overall market will help you to determine how aggressive or defensive you will be with your trading.
During The Day:
Follow your Trading Method
After The Close:
1) Review your trades.What did you do right or wrong? what can you you learn from each trade?
2) Using specific criteria based on Technical Analysis and/or Fundamental Analysis screen news/charts/fundamental data for potential candidates for tomorrow's watchlist. Some traders will also pre-determine entry points at the same time based on Technical Analysis.
The Final Frontier Watchlist:
exchange2000.com
Further Reading On Trading Methods:
Day Trader's Manual - William Eng
Hit And Run Trading - Jeff Cooper
Street Smarts - Larry Connors & Linda Bradford Raschke
Summary Of Ken Wolff's Trading Method:
Message 4571285
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D - Define Your Risk & Money Management Method
Diversification:
My belief is that if you are Momentum trading you should not hold more than one or two positions at the same time. Trading more than or 1 or 2 positions will make it difficult to spot the small nuances in the tape that signal exit points.
If you are Trend Trading I believe you can trade multiple positions at the same time. Although too many positions can lead to excessive slippage and diluted returns.
Margin/Bet Size:
Be careful not to overextend yourself by betting too much on one trade, or using margin to increase your leverage more than you usually would. A good strategy is to determine the bet size you are comfortable with and NEVER increase it. If you feel less confident about a trade REDUCE the bet size until you feel more confident about your trades.
Stop Losses:
You MUST keep your stops! There is no faster way to go broke than to hold on to a trade after it has violated your stop loss target.
Keep stop targets to a maximum of 5% of the trade capital. Some prefer tighter stops of 1% or 2%
I will usually kick out any stock when it fails to do what I think it should( in other words - the reason I bought it)
Averaging Down:
You MUST NOT average down! This only increases the size of the loss you will take from not holding your stop target.
Holding Winners Overnight:
Often many Day Traders hold overnight if the trade is closing strongly in their favor. What if the market or sector the stock is trading in, gaps dramatically in the opposite direction of your trade the next day at the opening? Are you willing to assume the risk of a gap down on a concentrated position?
Know When Not To Trade:
Often times the market is flat, or you do not have the proper state of mind to trade. If this is the case take the day off and relax! The market will be there tomorrow.
Days to Trade, Beware and Avoid:
adtrading.com
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E - Evaluate Your Execution System (software/news/research/quotes/broker)
Ultimately there is no perfect execution system for everyone. Because each person has a different approach and trading method what is perfect for me, may be terrible for you. Generally speaking, here are some guidelines:
Broker:
Make sure know what you want from your broker. Fast executions, immediate confirmations, reliable data and software, great client service, competitive fees, good website, excellent reporting. Make sure the broker is reputable and has a good capital base behind it.
Software:
Make sure you know your needs before looking at software. Currently Real Tick III dominates the landscape and is very flexible. Also CyberTrader and Tradecast are as flexible yet not as widely used. A step down from this is a browser based systems offered by Castle Online(a.k.a Market Link). A step below this are the other browser based systems such as those offered by Datek, Etrade, Dreyfus, Discover, etc. Ask around the online trading rooms for opinions on what systems are good, bad and why.
Data:
Will most likely come packaged with the software. If not consider S&P Comstock or PC Quote or DBC.
Real Time News Sources:
Reuters, Dow Jones, Bridge, and Bloomberg set the standard for news sources. All are excellent.
Remote Execution System System Failure - Contingency Plan:
1)Know how to contact your broker in case of problems. Have several backup numbers in case the lines are busy.
2)Know what your broker's procedures are concerning phone in orders/questions.
3)Discuss your broker's liabilty with regards to missed trades/opportunites. What will he take responsibilty for and under what conditions.
4)Be sure to follow through on orders regardless of execution problems. Hesitation to follow through on trades could cause many headaches including missed opportunities and larger losses. You may not take a loss at the time but a change in your strategy may lead to larger losses down the road if you hold the trade longer because of execution problems.
5) Be sure you now how to reboot your system as quickly as possible. Always find out what the problem is before you waste valuable time trying to reboot. Sometimes the system may be down for lengthy periods of time.
More On Execution Systems:
From The Trading Desk
Subject 15612
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F - Further Help On Setting Up A Trading Plan
For background information on "Keep Your Eye On The Ball" including books, magazines, articles, software vendors, brokers, quote vendors, news sites, research sites, and various educational sources of information useful to Day Traders check out:
The Final Frontier Links
Subject 20613
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