KYEOTB - Trading/Risk/Money Management Methods(updated - Trading Day Procedures)
C - Constructing A Trading Method
Identifying Potential Day Trades:
-Identifying Gap Trades
-Identifying News Trades
-Identifying Anticipation Trades
-Identifying Market Trades
-Identifying Sector Trades
Using #Daytraders Chatroom To Identify Potential Day Trades
- Introduction
- One Good Play A Day
- Avoid The Open Madness
- Do Your Own Homework
- Holding Overnight - Don't Believe The Hype!
Approaching Day Trades Based On Time Frames:
- Technical Trading
- Momentum Day Trading
- Further Reading On Momentum Day Trading
Using Technical Analysis In Several Times Frames To Determine Whether to Technical Day Trade or Momentum Day Trade
Further Reading On Technical Analysis
Using Tape Reading To Time Exit/Entry Points
- Previous Trades
- Bid/Ask
- Previous/Today's High/Low/Open
- Time
- Trade Size
- Level 2 Data(Market Depth)
- Further Reading On Level 2 Data
Trading Day Procedures
- Before the Open
- During The Day
- After The Close
D - Define Your Risk & Money Management Method
Adequate Capitalization
Diversification
Margin/Bet Size
Stop Losses
Averaging Down
Holding Winners Overnight
Trade Liquid Markets Only
Know When Not To Trade
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C - Constructing A Trading Method
Identifying Potential Day Trades:
As a Daytrader you thrive on volatility. Volatile stocks,sectors, and markets are typically set off by a specific event such as news, potential news, or movement in related stocks/sectors/markets. Day Trades can be defined by this triggering event. The types of Day Trades are:
- Gap Trades(trading off opening gaps)
- News Trades(trading off recent news)
- Anticipation Trades(trading off anticipated events)
- Market Trades(trading off volatile markets)
- Sector Trades(trading off moves in stocks within sectors)
Often such triggering events can have impact over fairly long time periods and can lead to consistently volatile markets that a Day Trader can take advantage over weeks and even months.
Knowing how to identify and trade the different types of potential Day Trades will help you to focus on the task of trading effectively.
I post my thoughts on triggering events on the Final Frontier Watchlist:
exchange2000.com
Identifying Gap Trades:
This requires doing some analysis of pre market news, previous day News Trades and opening statistics. Keep an eye on the largest point movers for ideas at the open.
Identifying News Trades:
I rely heavily on #DAYTRADERS chatroom to provide me with News Trades. You MUST read and evaluate the news AND the company BEFORE you take a position.
Instead you may prefer to scan news yourself using one of the various news feeds(Reuters,Dow Jones,Bloomberg,Briefing.com,etc) and make calls independent of others.
Identifying Anticipation Trades:
This involves analyzing what stocks have upcoming earnings, news announcements, etc. coming in the near term. Generally stocks will pickup momentum has the timing of the anticipated event grows close.
Identifying Market Trades:
This involves tracking the Dow 10 minute intraday chart and watching for reversals after large intraday selloffs or runups. Generally I will play the largest point movers or News Trades in tandem with market reversals. Or the market directly thru the DIA, SPY, or potentially equivalent futures vehicle if you so wish.
Identifying 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 Sector Day Trading:
exchange2000.com
Using #Daytraders Chatroom To Identify Basic Day Trades:
Introduction:
For those not familiar with #daytraders it is simply an online chat which is open to anyone. #daytraders attracts all types of traders.
#daytraders is growing all the time and the influence it exerts becomes more evident everyday as you follow the ebb and flow of the room. Typically there are 600 people in the chatroom. The main thrust of the room centers around the identification of stocks which are poised to make large intraday moves (up or down)
Traders' posts revolve primarily around breaking news from Briefing.com's INPLAY section, Reuters, Dow Jones, CNBC, Yahoo, and other news services. Often the basic fundamentals of the company will be posted from Marketguide( Shares outstanding,float,revenues,etc.)
In addition there is a tremendous volume of post by traders commenting on these stocks once the room has began trading them. This is where the danger exists for the uninitiated. The pace of the room is very quick and many traders get caught up the energy surrounding a hot stock which has been identified and is being accumulated very quickly.
The way to use the room is to use your own tools to identify those plays which meet your own criteria for good trades and to take the appropriate action at the appropriate time.
One Good Play A Day:
Typically each day #daytraders will have one good News Trade. This is what makes #daytraders worthwhile. This phenomena seems to occur regularly . The potential News Trade can be anything from micro cap to large cap stock. The key is to recognize the News Trade as having:
1) good potential to move the stock.
2) see a lot of buying on the offer.
3) good follow up buying from traders in the room.
4) good follow up buying in the market.
Typically you should sit on your hands for awhile until you can see the breakout occurring. Many traders rush into false breakouts and end up dumping the stock at a loss. Take your time and really look for the momentum to build behind the stock. Even if you miss a 1/2 point it will be worth it too know that it is a REAL breakout.
Avoid The Open Madness:
Whatever you do don't listen to people talk up/down stocks pre-open!
Watching the manipulation of market makers on level 2 screens is bad enough without listening to a lot of people with they're own agenda try to sway the room in one direction or another.Make you own calls!
Do Your Own Homework:
Anyone who has spent time in #Daytraders will tell you the fastest way to go broke is to act on every trade that is hot in the room.
Every traders has his/her own agenda. Due your own due diligence before leaping into a trade. Here are some things to help you determine if a trade has good potential.
News
- Do you understand what the company does?
- Is the news significant enough to move the stock and attract sustained interest so that you can exit with your targeted profit?
- Is the news recent or is it several hours/days old?
- Is it a repeat of a previous news release?
- Is the news being picked up by major news wires?
( Briefing.com,Reuters,Dow Jones,CNBC )
Volume
- Is it real volume or just one or two large block trades?
- Is the volume increasing quickly?
- Is there enough volume to trade it?(minimum 100,000 shares intraday)
Price Action
- Are the market makers simply moving the stock up briefly so that they can distribute stock to you at a pumped price?
- Who is in control? retail or market makers?
- Are traders buying on the ask?
- What does the chart look like? is the daily trend down?
Other
- Are you late to the party? have traders in the room already loaded up before you? are they looking to unload for 1/4 or 1/2 to you?
- Is the overall market an active market for traders? or are there very few plays making big runs?
- What is the float? is it small enough that a significant run won't be diluted?
- What is the insider ownership? are there any outstanding warrants or options?
- Who are the major market makers?
There are many more factors to consider and you should be able to determine the majority of them as a matter habit - you better! because you know the OTHER traders will!
Holding Overnight - Don't Believe The Hype!
Okay you've identified a good story stock with good momentum and the room is as bullish as you've seen it. You trade it several times and now the stock is going into the close and you are long/short with no end to the momentum insight . Know What do you do?
1) Hold overnight for the gap up?
2) Blow it out at the close?
The thing to remember when Day Trading is that you believe in momentum - not hype!
If you answered number 2 you are probably on the right track. If you answered number one you better re-think why you are Day Trading. Holding overnight means that you feel confident in the hype and that you think that once traders view the news/fundamentals they will continue to buy the next day. Wrong!
Approaching Day Trades Based On Time Frames:
Technical Day Trading
These are trades which you tend to hold longer(30 minute to several hours)and therefore are looking to make 1/2 to several points.
Technical Day Trading is based on strict technical signals which confirm entry points along with tight stops that signal exit points.
Momentum Day Trading
Momentum Day Trading is based on reading the tape to determine the timing of entry/exit points.
You do not hold Momentum Trades long (1 minute to 30 minutes)and therefore you are only 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 unless the momentum continues.
Further Reading On Momentum Trading:
Summary Of Ken Wolff's Trading Method:
Message 4571285
Using Technical Analysis In Several Times Frames To Determine Whether to Technical Day Trade or Momentum Day Trade:
Once I have identified potential Day Trades candidates I use 10 and 60 minute intraday charts as well as daily charts to determine support and resistance zones. I visualize and draw trendlines, areas of congestion, and insert moving averages on charts to come to some conclusions as too where support and resistance zones exist. Once these zones are identifed I can determine the potential profit that exists and decide whether the trade would be worthwile. If the potential trade is confirmed by 2 or 3 time frames I will consider it a Technical Day Trade.
Technical Analysis can take many forms including classical chart patterns, mathematical indicators, and sequential patterns.
Further Reading On Techincal Analysis:
Technical Analysis - Beginners:
exchange2000.com
Recommended Books On technical Analysis
exchange2000.com
Day Trader's Manual - William Eng
Hit And Run Trading - Jeff Cooper
Street Smarts - Larry Connors & Linda Bradford Raschke
Linda Bradford Raschke - Swing Trading
mrci.com
Using Tape Reading To Time Exit/Entry Points :
Once a Day Trade has been Identified, support/resistance zones identified, and profit potential determined I will use Tape Reading to time entry and exit points.
I Use the following indicators to read the tape:
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 jockeying 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 tendantcy 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 a lot of the data from Level 1 Data but in addition it displays all the information on who is bidding and offering and at what price.
Further Reading On Level 2:
Elite Trader
elitetrader.com
From The Trading Desk
Subject 15612
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.
3) Review the DOW's mood and determine in what time frame the best trades should exist. Is the DOW trading in a range or trending? in what direction? Is the NASDAQ diverging or running with the DOW as a whole? How are the different sectors behaving with relation to the DOW and NASDAQ?
4) Update your watchlist to reflect any potential day trade candidates.
5) Review charts of potential day trade candidates.
I try to posts my watchlist on:
The Final Frontier Watchlist:
exchange2000.com
During The Day:
1)Follow your watchlist and watch the open for potential Gap Trades.
2)Follow your watchlist and add any potential News, Anticipation, Market, Sector Trades as you observe the intraday news and judge the mood of the market.
3)Use charts in several times frames to determine support/resistance zones to determine potential Momentum Day Trades or Technical Day Trades.
4)Use tape reading to time exit/entry points.
After The Close:
1) Review your trades.What did you do right or wrong? what can you you learn from each trade?
D - Define Your Risk & Money Management Method
Adequate Capitalization:
For the experienced trader an adequate level of starting capital is in the 75,000 - 150,000 dollar range. The inexperienced trader will most likely start with less which will limit his available opportunities within the market.
Diversification:
My belief is that if you are Momentum Day 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. Although this increases theoretical risk I feel that using other ways to reduce risk are more effective for the Day Trader. In addition trading concentrated positions can result in MUCH higher rates of returns.
Technical Trading offers you the ability to diversify because of it's rigid entry and exit signals and longer time frame.
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. The less margin you use the better. Trading on margin is a double edge sword which can cut deeply if a trade runs away from you.
Stop Losses:
You MUST have a stop loss strategy in place to mechanically get you out of trades. Not using mechanical stops is the fastest way to lossing everything!
There are two types of stop losses I use. The first is a manual stop loss which I trigger whenever the trade is not proven correct by the market.
The second is the "Act Of God Stop" which is used to protect against spikes in the market.This is a trailing stop set(where possible) @ 5% outside the market)
Stopping Acts Of God:
adtrading.com
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?
Trade Liquid Markets Only:
Consider trading only markets such as the NASDAQ or NYSE where you can find stocks that have volume of 100,000 to 25 million shares trading daily. Liquidity means you can get in and out easily. The more liquidity also means the less likely the security is being manipulated by insiders,brokers, or promoters.
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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