photo credit: ilamont.com

This trading tip can make a huge difference to your trading account.  It’s simple to implement, but it does take a few minutes of research.

Invest in the best performing sectors and short, or avoid, the worst performing sectors.

There have been countless investigations that prove this strategy beats most other options.  In fact, an Standard and Poors study from earlier this year revealed the validity of this claim after a 40 year investigation.  In essence, their findings showed that buying the prior year’s top performing sectors beat the S&P 500 index by a nifty 70%.  Compare that to only a 40% win rate for purchasing the bottom sectors.

Here’s how to implement this trading tip on a shorter time frame: scan a list of sectors on a monthly basis and rank them against the return of the S&P for the same period.

From the top 3 sectors that outperformed the S&P find those stocks that beat their sector.  Make a list of those strong stocks.  Wait for a pullback and then evaluate an entry point.  Calculate where to place a stop and then wait for the entry price to trigger.

By concentrating trades in the stocks from outperforming sectors there is a good chance it will become a profitable trade.

This is one trading tip that has some impressive, supporting statistics.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Both levels are barriers.  Knowing where those barriers reside can save lots of frustration.  For example, it wouldn’t be wise to buy near strong resistance and sell near solid support.

It’s not that difficult to find support and resistance zones.  Study a weekly chart and draw in lines that corresponds to levels where price made little forward or backward progress.

This weekly chart has horizontal lines at areas of resistance.  Price touched these areas and then retreated.

Here’s a technique that helps develop a robust support/resistance trading system.  Find support and resistance zones on multiple time frames.

Here’s a daily look at the above chart.

The next task is to draw the support and resistance levels on the daily chart.  Draw them in a different color.

This is a daily chart with resistance lines drawn in pink.

The benefit of a chart like this is that it represents a multi-time frame look at areas of strong resistance.  As price approaches the long-term weekly lines it is approaching a very strong resistance area.  It may not be wise to initiate  a long trade near this area.  Conversely, if price falls back to a white line it may be a solid area of support and a great zone in which to place a trade.

If this method resonates with your trading style, don’t forget to draw support lines on both time frames.

This technique is valuable for intraday trading, too.  The rule of thumb is this — move up one level and draw the support and resistance lines.  For example, if trading from a 30 minute chart first draw the lines on an hourly chart.

There’s a complete trading system devoted to this strategy, HERE. I recommend it because I wrote it ; )

Another method to quickly find zones of support and resistance is to look at a Heikin Ashi chart.  Heikin Ashi graphs are special candlestick charts.  The candlesticks are clustered in the same color until the trend changes.

Here’s a weekly look at the Heikin Ashi chart for ILMN, the same chart as above –

And the corresponding daily chart –

Finding support and resistance is one of the oldest techniques of technical analysis.  This deceptively simple technique is still widely practiced by those traders that realize the value of interpreting price action and incorporating it into their trading system.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

So that we’re all on the same wavelength I’m talking about the kind of volatility that measures the deviation from an average price.  It’s sometimes called statistical volatility.

I’ve never heard anyone say they hoped to buy a stock or ETF and have it flat line at the purchase price.

Volatility can help you find stocks that move.

One measure of volatility that uncovers stocks with some get up and go is historical volatility(HV).  There are two popular calculations: HV 50 and 6/100 HV.  HV 50 is the volatility reading of a particular security over the past 50 days.  6/100 HV is a ratio of the 6 period and 100 period HV.

My basic stock screen incorporates the HV 50.  I build a watch list based on price, volume, and those stocks trading at or above a HV of 40.

The 6/100 HV is best used as a filter in a trading system.  Track stocks with a low 6/100 HV , ideally below 50.  Those stocks should be closely watched for potential trades because a sharp move could come at any time.

One of the best trading systems of recent times uses volatility.  I posted about it HERE.

These are a few screen shots of stocks that exhibited low volatility prior to their breakout.  Watch for the green arrow on the charts that mark the buy signal — go long above that bar’s high.

Volatility will not tell the direction of the move, only that a sharp move may be imminent.

Once you incorporate volatility, either the HV 50, 6/100 HV, or both, I think you’ll find that your watch list contains more “active” stocks!

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

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There are generally two types of investment styles: strategic and tactical.

Strategic allocation is usually a buy-and-hold strategy.

The initial asset mix is developed after establishing the investor’s goals for growth, capital preservation, income, etc.  Once in place, the portfolio’s values will “drift” within the initially established mix.  That means the growth portion may be making great gains while the income assets are declining in value.

Re balancing is part of a strategically allocated portfolio.  There are a couple ways to re-balance.  For example, one technique is to purchase more of the declining asset class.  In the example from above that would mean adding more to the income positions.

A second way is to reconfigure the portfolio is to liquidate a portion of the assets.  This normally occurs when an investment class moves a certain percentage above its original value.  For example, if the growth portion of the portfolio was 8% above its original value a portion of the growth assets would be sold.  There is no “carved-in-stone” rule on the percentage, but it is usually predetermined at the portfolio’s inception.

Tactical allocation is less rigid and has no fixed time period as the buy-and-hold strategic investing model.  The tactical model is more for opportunists looking for a chance to capitalize on an unusual occurrence.  For example, if the semiconductor space was making fresh highs a tactical investor would want to invest in that space.

The tactical approach is more active and has a market-timing component.  It also requires restraint and discipline.  The strategy requires monitoring the market for opportunities.  Once those investment opportunities are showing signs that they’ve “run their course”, the investor must have the discipline to move on to the next promising area.

My style of investing is tactical.  I don’t want to buy and hold, hope and wish, or watch my capital decline for the sake of a balanced asset mix.  I want to buy the leading stocks in the best performing sectors.

One of the tools that lets me recognize opportunities is TeleChart.  Here’s how I do it –

Under the WatchList tab is the Custom Date Sort.  I click on Custom Date Sort and draw a beginning an ending date on one of the major averages.

Once “Ok” is clicked on the Custom Date Sort window, TeleChart automatically recalculates the data for my time period.

To see which areas of the market have outperformed the S&P all that is left to do click the drop down arrow next to the name of the current scan view.  The current view is called Charts With Notes — the small down arrow opens a bigger window and it’s easy to find the Morningstar groups.  Click on the Morningstar groups link and TeleChart will sort those industry groups by performance for the same time period as the S&P.

This window shows the Industry groups sorted for the selected time period.  I sort from high to low, or low to high.  My objective is to find the best performing sectors because I want to invest in the strongest areas with the strongest stocks from those areas.

Now that I know the top-performing sectors I can find the best performing stocks in each sector.

TeleChart makes tactical investing an easy, quick, and effective investment strategy.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: Paul Keller

Making money in the market means using a sound trading system and having the nerve to stick with it.  Here are a few suggestions:

Know what you want before trying to find a trading system.  Write down your requirements.  Narrow your focus.

For example, how much time can you devote to trading?  Can you handle nightly research of the market and stocks to find new trades?

Find one trading system you understand and become an expert at using it.

A frequent mistake is trying too many systems and not mastering any of them.  Find a system you understand.  Give it at least 6 months.  Paper trade it to build your confidence.

Become an expert.

Consistently fine-tune the knowledge of your trading system.  For example, focus on finding the best stocks to trade.   Or maybe concentrate on making the best entries.  You’ll learn to trust your system or spot the weaknesses that need fixing.

Walk before you run.

Become a master instead of a “pretty good” trader.  Maybe this means you only trade long.  It’s easier to trade long.  I don’t think we’re programmed to wanting a stock to decline in price.  That’s an extra step to learn and accept.

Practice your technique every day and you’ll get better faster.

Before you begin, know that practice will make you better.  Know how much practice time you will have every day to perfect your skills.

You can do it!

I think the biggest decision is knowing what you want from trading.  Maybe you just want to track the overall market, keep track of your current investments,or double-check the validity of a financial adviser’s recommendation.

Knowledge is a good thing.  A little effort devoted to understanding a trading system can bring you peace of mind, confidence, and financial rewards.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Trend lines will keep you on the right side of the market.  That can be the difference between making money or losing it.

NASDAQ

DJ-30

Russell 2000

S&P 500

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

To become a successful trader one needs to be a bit of a market analyst.  It’s important to know where the market has been and where it may be headed.

Support and resistance will give you clues as to where the market is, relative to where it has been.  I’ve devoted an entire website to that topic.

What this has to do with position sizing is this — never, ever, buy size at or near a top.  Sounds pretty obvious, right?  You’d be surprised at the number of traders that get sucked into the enthusiasm, buy a big bunch of whatever only to see it decline when the market rolls.

Turn off the noise and chatter from pundits and TV personalities.  Think logically and react calmly.

Learn to read the market.

Buy size when no one else wants to buy.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Issac Newton discovered a truth that can help you improve your trading.

The First Law of Motion states : a body at rest tends to stay at rest, and a body in motion tends to stay in motion,unless the body is compelled to change its state.

The market confirms that truth.  There is a great deal of market research that confirms stocks that perform the best/worst over a 90 day to 1 year period tend to continue that performance over the next 90 days to 1 year.

Momentum trading has been a successful stock trading strategy for many years, year after year.

A successful momentum trader knows how to find those stocks and exploit them for gains.  It’s called having an edge.  Once you find your edge (you’ll probably have more than one) it will never again be a problem to profit from the market.

Why don’t more traders employ such a strategy?  I think it’s because of the promise of technical indicators that have been sold to the unsuspecting.

To become a successful trader it takes a work, patience, and persistence.

Also, I think too many traders use too short a time frame.  That has likely developed due to the over-hyped mystique of day trading.

And lastly, to be successful, work on finding an edge or two and then stick with it.  Refine and perfect it — give it a good run for at least six months, not six days.

If you’d like more profits from the market, start 2011 looking for consistently winning stocks.  My suggestion would be to find a half dozen consistently strong stocks.  Study them for anomalies and learn how to exploit those quirks to your advantage.  See if what you learn by study the initial six can be used with other momentum stocks.

It’s possible that you will find your edge!

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: Sean Rogers1

Yesterday’s big jump in price should have been no surprise.  It’s not a guarantee that post-holiday trading will deliver the big gains seen on Monday, but there were clues that it could happen.

When price starts to consolidate and move sideways in an uptrend, watch the volume bars.  A series of decreasing low volume days may be setting up a jump higher.

These are examples from a couple of index charts, the S&P and NASDAQ, but it can occur on stocks charts or ETFs, too.

Don’t make the mistake and try to short these basing patterns in an uptrend.  Instead, watch price and volume as described, and profit from the pop!

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

I’m often asked what trading tools I use to build and maintain my trading systems.  You’ll be surprised to know that I use very few.

My core piece of software is TeleChart(TC).  I could do a commercial for TC, but I won’t.

I’ve been a user for many years and I depend on this reliable service.  It allows me to do some very unusual sorts and screens that have made a huge difference in my trading.

If you refresh this page an ad for TC is in the upper right corner.

Yes, I’m a reseller of TC.  If you purchase it they pay me.

The other piece of software I use is AmiBroker (AB).  Unlike TC, this charting package doesn’t have its own data feed, but it reads the TC data and is very easy to configure.

AB lets me write complex formulas with ease.  The scans revealed in my Scanning Manual were created in AB.  The charting capabilities are very flexible, too.  There is a tab system that lets you configure and save different chart set ups that is a real time-saver.  AB also has back-testing capability that is very good, too.

If I could resell AB, I would.

Both TeleChart and AmiBroker have a trial period.  Take them for a test drive if you’re looking for some new software.

I use two different trading platforms: TradeStation and Schwab’s Street Smart Pro.

TradeStation has every sort of operation you’d ever need to place a trade.  Street Smart Pro is not nearly as complex.

That’s it.  That’s all I use.  I prefer to keep costs low and my techniques simple.  Simple has made me money for years — no reason to complicate the process, now!

I made a video a while ago about TC — if you missed it here’s a link:

Related articles

• Trading Tip – One Of The Ways I Use TeleChart (tradingsystemssite.com)

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

They say, history repeats itself.  In trading, that is very true.  Each stock has a personality of it’s own.  Learn the quirks and it’s possible to trade a single stock for a long time, year after year.

And yes, I’m speaking from experience.  I traded AAPL (Apple) for many years.  My confidence was so great that I even owned AAPL LEAPS.

This technique is very logical, simple, and effective.

Find a stock that is in a stable uptrend.  I’ve chosen APKT (Acme Packet).

This is a daily chart of APKT.  The stock has risen from $10 to nearly $60 in less than a year.  The move was a very steady rise.

When I find a stock that has started to trend my first thought is finding the best entry and exit.

To do this I want to look at some history.

The question I want answered is, “how did this stock trend in the past?”

• Find a prior trend and make some notes about price action.

There are three up trends on this compressed daily chart.  That should give plenty of study material to make some good observations about how to trade APKT.

Notice the boxed area on the chart.  I don’t consider this a valid area to study.  Price made an enormous gap up and then leveled off before declining.  That is not a trend.

A closer look at the first arrow in mid-2007  follows.  The chart has the following indicators: a 20 simple moving average (blue) and a 50 period exponential moving average (red).  Both MA’s are on the price bars.  There is a 20 simple moving average on the volume bars.

The area within the circle is the trend.  Since my preference is trend trading, my concentration is the overall move, not so much the swings.

The price chart shows bars that move continuously upward once price moves above the 20 MA (dashed blue line).  That’s clue #1.

Once the trend started, price seldom closed below the 20 MA.  Notice how the volume was higher than the 20 MA of volume.  That’s a good sign this move has support.

The bright blue bar marks the first close below the 20 MA in mid-September (#1).  Not only did price close below that average, it opened below it.

The next bar (#2) was a huge, wide-range bar that opened below the 20 MA, probed below the 50 EMA and then closed at the top of the bar’s range just barely below the 20 MA.

Bar’s #3 and #4 show price opening below the 20 MA again.  Price did move above the line, but never recaptured the prior high.  Then it fell below the 20 MA and eventually, the 50 EMA.  Once price broke the 50 EMA  a serious move to the downside was underway.

Lots of good information from that trend:  price tends to stay above the 20 MA.  When it breaks below the 20 MA it is a warning that price may trade to the 50 EMA.  If price drops below the 50 EMA then it is likely the beginning of a correction.

This is the second up trend and it’s not very smooth.  Volume was above average at the inception of the move.  Again, price closing above the 20 MA looks like a good signal for an entry (dashed blue line).

Point #1 shows a move below the 20 MA, but a quick recovery and then the upward climb begins.

#2 is a price bar that crashes below both of the MA’s.  The next bar recovers the lost ground and really adds to the price.  (Just an aside — those enormous up and down bars can signal exhaustion.  You can see from the follow price bars that price was exhausted and could not exceed the huge bar’s high).

Bars #3 and 4 are the breaks below the 20 MA and then the 50 EMA.  Once the 50 EMA gives way, price corrects dramatically.

New information from this second trend is this:  the stops should not be set too close to the 20 MA.  The evidence is this:  when there is good volume to support the move up, a stop too close to the 20 MA may create a whipsaw.  Price is likely to recover and move up even if it does close below the 20 MA.

So far the clues are:

• a close above the 20 MA may make a good entry signal
• heavier than average volume should confirm the price move
• price breaking below the 20 MA is a warning
• below the 50 EMA starts a severe downturn

This is the third and last up trend before the long move that began in early 2010.  Again, the signals are very similar: a close below the 20 MA is a warning.  Price  closing below the 50 EMA means “get out of Dodge”

With a better understanding of how APKT trends, my trading rules for trading it would be these:

• look for heavier than average volume on the signal bar — the price bar that closes above the 20 MA
• go long above the bar that first closes above the 20 MA
• sell 1/2 of the position if price closes a few cents, maybe a dime or so, below the 20 MA
• sell the remainder of the position when price closes below the 50 EMA

This last chart is the current move of APKT from early 2010 to the present.  Now’s the time to see if studying the prior up trends have helped to create trading rules for this stock.

You don’t need a lot of stocks to make money.  Find a few, learn their behaviors, and develop a trading system specifically for them and you can stash a lot of cash!

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: asvensson

When you understand how the market really works you realize the necessity for a good stock trading system.  This came to mind as I perused an article about the market blow up in 2008.  A lot of the big players didn’t believe it and either didn’t have a system or didn’t follow their system.

These were guys who were hailed as the new wizards of smart.

One quote stuck in my mind.  It was how the market is a lot like a poker game.  Here’s an excerpt from the article:

Let’s talk about some of the guys you met and your impressions – Ed Thorp is seen as the father of the quantitative approach, he started out with ‘Beat the Dealer.’ This is a consistent theme, we see these guys playing blackjack, going to Vegas, playing poker. What was your takeaway with Ed Thorp, did you get to meet him?

A: Yeah, I met Thorp many times. He’s totally fascinating, he’s also probably…I don’t know if I respect anybody I’ve ever met on Wall Street more than this guy, just because of his demeanor. When you meet him, you know this is a guy who is completely straight-up, he’s going to tell you what he thinks, he’s a gentleman, he’s also just incredibly brilliant. He’s definitely old-school, he goes back to the days of the Great Depression when everybody had to pinch their pennies, so he’s not a gambler. The thing is, he learned how to beat these games in Las Vegas in a way that he didn’t have to gamble, that was his whole point, that I’m not gambling with my money. For him, it wasn’t about the money. So he was totally fascinating.

And here’s the take away from this article for me:

– Not about the money, but rather just demonstrating that a rule-driven, systemic approach to uncertain probabilistic systems can generate alpha. As long as we’re making the right bets, you’re not going to win every deal, but over the course of time, the high probabilistic bets are significantly going to out-perform random bets.

You can read the full interview here.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

The scan produces some of the best “young” stocks.

This is the front page of Investors.com.  On the Stock Research Tool window click the drop down box (red arrow) and click Screen Center — Basic.

That opens a second window.  The screen is called Young Guns.  The most important sort, I think,  is the Fundamentals view.  That sorts the list by IBD’s composite rating.

Clicking on the View All button expands the list to the top 20 stocks.  It’s worth a look every once in awhile especially if the stocks in the list are new to you.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: jelene

I’ve been listening.

Just finished what you’ve asked for. . .

Check it out here – From My Trading Stash

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

A great deal of ink has been spilled trying to decipher the trading signals derived from the price/volume association.  In reality, volume is most appreciated as a filter.

Volume can validate a move up or a move down.  For example, if price is moving higher on below average volume it’s likely the move is fragile.  When price climbs a good sign is to have plenty of volume behind it.  Volume will push prices higher.

Conversely, when prices start to retreat,  a low volume pattern demonstrates lack of conviction in the downward movement of price.

Two of the most important times to watch volume is when a top or bottom are forming.  There may be a day or two prior to the last high when volume is extraordinarily high.  At that point, it is almost assured that everyone that wanted into the issue now has a position.  Often times volume will start to diminish as price tries to push to higher levels.  That is a sign that the buyers are “all in”.

One reliable sign of a price bottom is unusually high volume.  That action goes by the name of capitulation.  Traders that bought at higher levels have become so sick of their losing position that they dump the stock en masse.  That accounts for the huge volume and the term, capitulation.

One good study to keep on your charts is a running average of volume levels.  That offers a benchmark from which you can decide if volume is above or below its average.  By watching the moving average of volume you may be alerted to an early hint of the strength or weakness of the current price move.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

• Find a stock trading below its 200 day moving average.  A stock in this predicament is already weak.
• When it stops declining and starts rising in price, place an order to go short beneath the low of the first up bar.
• Continue to try and enter short at each bar’s low.
• Stop trying to enter a short order if the stock breaks to a new high.

Here’s the sequence:

Imagine the blue line as that of a stock that has moved well, but slowed and was eventually stopped at the 200 day moving average.  When price hit the 200 day moving average price fell, as seen in the orange circle.  Now price has picked up steam and is starting to move upward, again — the red line.

The inset shows the bars of the up move.  At the first green bar up, enter an order to short a few cents below that bar’s low.  Continue to place short orders until success, or the top is taken out and price moves beyond the 200 day moving average.

The rationale behind this trade set up is this — you’re looking for the stock to hit the wall again at the 200 day moving average.  If that happens your logical stop would be the first low after the first decline.

I’d sell 1/2 of my position there and hope more weakness would follow!

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

An outside day is a price bar that occurs frequently on a daily chart.  To be a true outside bar it must have a high higher than the previous bar and a low lower than the prior bar.

This is what an outside bar looks like –

There are dozens of outside bars in this Dow Jones Industrial chart.

The common wisdom theory is that an outside bar should have a trader on the look out for an impending trend change. In an uptrend, an outside bar is supposed to signal a down trend is near.  The opposite results would be expected for an outside day occurring during a downtrend.

Really?  I’ve let my system scan the above chart and mark all of the outside bars.  Here’s a look –

It appears that  there were lots of times the uptrend should have been sold if you’re relying on the validity of an outside bar.

I’ve also heard some say that as soon as an outside bar appears look and see if it closes opposite of the overall trend.  If so, price will follow the direction of the bar.  In other words, in and uptrend if an outside bar is made and it closes lower (a red bar), it means that price will trade lower.

The blue arrows show where the market should have been sold given the red outside bar.

The only reliable signal looks like the one marked by the blue arrow in the yellow circle.

Outside and inside bars (price is entirely encapsulated by the prior bar) are fun to spot, but I’ve never found them very useful by themselves.

I much prefer to find trend changes with a trend line and moving average break.

My system would find a possible trend change at least three bars earlier than the last red arrow/outside day on this chart.

I would be concerned about a trend change at the bar marked by the curvaceous blue arrow.  Not only did price fall below the trend line, but it broke and closed below the 20 moving average.

Outside bars, in my opinion, may reference a day of  indecision.  Sometimes there will be an outside bar and then a couple days of sideways trading.

Price patterns are interesting, but a one day price bar does not persuade me.  It pays to be somewhat skeptical when so many see the same thing on a chart.  Often the obvious is obviously wrong.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

“Buy when there’s blood in the streets.” –  Baron Rothschild

Did your system flash buy signals here?

I was trading full-time during those lows.  Doubt and skepticism was rampant when the market started to rise.

Watch for pull backs.  They’re all over the charts.  On this daily chart there were  plenty of pull backs to trade.  Here’s a bunch over three years.

You could knock the time frame down from daily to hourly, hourly to a 30 minute chart, etc.

Trading the pullbacks can create some wicked profits!

If you don’t have a pullback strategy, I’d encourage you to add one.   Start by adding a pullback system for long trades and keep it simple.

As you build more systems there will be more opportunity for confusion to sneak in to your trading decisions.  Here’s a piece of advice — make a “play sheet” and keep it on your desk.  I’m speaking of the same kind of laminated sheet the NFL coaches have on the side lines.

Create one that has the rules of your systems on it.  It can save your time and keep your from making bad decisions that cost money.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

The current market conditions are difficult for many trading systems.  Up one day, down the next, is not an ideal environment unless you’re a day trader.

If my emails are any judge, even the short-term day traders are having a tough time, too.

Trading is simple, but not easy.  One of the more challenging aspects of trading is psychological.  This is an occupation that require mental toughness to succeed.

Here are a few coping suggestions:

• Take a break.  There’s nothing wrong with standing aside for a few days.  Wait for the market conditions to reappear that you’re good at  trading.
• Evaluate each trade.  This is something that really helps me.  Sometimes a pattern will appear to which I can make adjustments.
• Annotate your charts.  Write down why you want to take the trade.  See if the reasons would have led to a good or bad trade.
• Stick with one or two methods.  One of the biggest problems, especially with new traders, is jumping from one strategy to the next.  If your trading systems has worked in the past, it will work again.  Stay with it.
• Keep it simple and keep the faith.  Try not to over think the problem.  Not all market conditions are worth trading.
• Do research.  It never hurts to investigate a new trading skill or improve an old one.  Practice drawing trend lines on a lot of charts.  Don’t just draw them on stock charts.  Draw trend lines on sector charts and the major indexes, too.  Trace those lines on an uptrend and a downtrend.  You may be surprised how much a simple line can reveal about the movement of price.

We can’t force the market to do what we want.  It will do what it wants, when it wants.

Price will eventually break free from this sideways movement.

Until then, be patient, protect your trading capital, and watch for the next tradeable move.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Here’s a stock that would catch my attention.  It has had some nice $4 moves between grid lines.

Starting in mid-July this stock wanted to move higher.  Volume tells me so.  Notice how low volume was and then BOOM, a nice volume spike accompanied by a  price gap higher.

Just by analyzing price, its obvious that buying above every high was profitable.

This simple exercise shows how to catch the beginning of an up move.  It also is a re-entry method when price pulls back.

Knowing where price has been, in relation to its current position, is important for me.  It’s my way of using a benchmark.  So a couple of moving averages are usually on my charts.

This chart has a simple 20 moving average (ma), the yellow line, and a 50 period exponential moving average (ema) in red.

Once price started to move upward it walked along that 20 ma.

Even when price fell below the 20 ma it didn’t stay too long.  Price never came close to touching the 50 ema.  Notice how the 20 ma was always above the 50 ema.  That confirms the uptrend.

Something else to watch is the width between the moving averages.  The wider the distance between the two, the stronger the trend.

I think an exit strategy could develop from this information.  How about placing a stop beneath a price low that occurs beneath the 20 ma?

The strategy so far is:

• Trade long when the shorter ma is above the longer ma.
• Enter above the highest high above the 20 ma.
• Place a sell stop at the lowest low beneath the 20 ma.

The green box contains the strategy in action — blue lines mark the highs and blue arrows are the buys.  The pink lines mark the lowest low beneath the 20 ma with pink arrows showing the exit bar.

Notice the big red volume bars at the far right.  That is some serious profit-taking.

This chart shows the cross of the shorter ma below the longer.  Our system doesn’t allow us to trade long when this happens.  And with good reason, notice the chop and sideways price action.

On the far right, the 20 ma crosses above the 50 ema.

Now we’re back in business and ready to go long above the highest high.  It’s just a matter of “rinse and repeat” using the trading system’s rules.

Hope these ideas will help you start building your trading system!

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: valdeklaur

You’ve seen the thumping the dear old US Dollar has taken recently.  And everyday the news is filled with this country devaluing its currency and that country trying to counter the effects by doing something else.

There must be a way to make money from all of these shenanigans, right?

I wish I could be of help. Shucks, I wish I could help myself, but this isn’t my area of expertise.

That’s why I associate myself with someone that I know has an expert’s understanding of Forex, Bill Poulos.

For you that like to trade Forex, here’s a “by invitation only” look at a live trading demo from Bill, himself.  Yeah, he’s got a new software system and it really moves fast — saw him slam dunk pips in 60 seconds!

I know a lot of you like to trade the coin.  Here’s a link to a video.  See what you think — HERE

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

I was rummaging around my trading library the other day.  It’s full of books written by famous traders like Martin Pring, Joe DiNapoli, Larry Connors, and even J. Welles Wilder  I will often pick up some of these volumes and thumb through them looking for a little gem that I may have missed or not understood on my first or second reading.

There are some books that are always at my fingertips.  Usually because I’m looking for a reference or validation of some trading idea.  One of those books was written by Steven Achelis.

Does the name Steven Achelis ring a bell?  He was one of the founders of Equis International, makers of the charting program, MetaStock.  Once in a great while Mr Achelis used to do an interview on CNBC.  Haven’t seen him in years.  Nonetheless, he is a very gifted trader and analyst.  And a few years ago he wrote a book called, Technical Analysis From A To Z.

Now this book isn’t for everyone.  In fact, if you’re the least bit interested try and get a copy and thumb through it.

The author uses the same format for each indicator he describes.  First he gives an overview.   The next brief section is how to interpret the indicator and then an example of the indicator plotted on a chart.  The section ends with a discussion of the math.

This book really helped me understand technical analysis indicators.  It’s very clear and straightforward.    But it can be quite complex, especially in the math section.

The greatest benefit from this book was its ability to spark my interest in creating my own measurements and indicators.

My trading doesn’t involve the use of many technical analysis indicators.  But it can be useful to plot and view what price is saying.  It’s also helpful to measure today’s price behavior against earlier price action.

When I get stuck for a solution or need a bit of clarification, Steven Aechlis’ book is the first one I grab.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Lets first look at a key reversal bar up.  This is going to be a little counter intuitive, so bear with me.

A key reversal bar up occurs during a down trend. You can identify it by looking for these three conditions:

• The open is less than the last close.
• The low is less than the last low.
• the close is greater than the last high.

This is a key reversal bar on a daily chart of the S&P 500 in late July of this year.  Notice it has all three points from above.

A key reversal bar down appears after an uptrend.

• The open is above yesterday’s close.
• Price makes a new high.
• The close is below yesterday’s low.

Here’s the same chart with two key reversal bars down:

It’s best not to trade on one indication by itself.  Try pairing it with another condition and see if the two agree.

Using key reversal bars with channels, stochastics, or the relative strength index will improve the odds of success.

Key reversal bars are also useful to re-enter or add to a position.

I’ve rarely seen the opportunity to add to a short position on a reversal bar.  But they will occur during an uptrend –my method is to add above the high of the reversal bar, like this –

And one final point, the most reliable key reversal signals usually appear during or after a strong trend.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Get it wrong and you can lose a lot of money.

My suggestion for exiting trades is to use trailing stops.  My method for setting trailing stops uses the ATR (Average True Range).

ATR is a volatility indicator.  It doesn’t forecast the direction of price, it only measures volatility.

It’s crucial to know when price strays from its normal path of volatility.  Especially if you have money at risk on a trade.

One of the biggest problems when using stops is having your stops hit too early.   Whipsaws are characteristic of stops that are too tight.  If you find your trades constantly ending prematurely, only to witness the stock move higher, then your stops are too tight.

I’m going to show you how I use ATR for trailing stops.  I encourage you to experiment with this indicator and see if you can find how to incorporate it into your trading system’s exit strategy.

Here’s the easy math for finding the stop level:

1. Find the stocks “balance point” for the day — (High + Low+Close)/3
2. Note the value of the 20 period ATR and multiply it by 2 — ATR(20) *2
3. Subtract from the average price, the value of the 20 period ATR x 2 — Average Price – (ATR(20)*2)

That value is your stop level.

Here’s a real example using the SPY on Februrary 11th, 2010.

1. The balance point was 107.54 — (108.25+106.25+108.13)/3
2. The value of the ATR(20) was 1.67  — 1.67 * 2 = 3.34
3. The average price,      (107.54),      minus the ATR(20)*2,     (3.34) is    104.20

$104.20 is the stop price.

You could keep the stop values in a spreadsheet or on a chart, it wouldn’t make any difference.

It’s easy to plot this trailing stop method on a price chart.  Here it is, plotted as a yellow line, on a SPY chart.  The yellow line in the bottom pane is the 20 period ATR.

When trading from the long side of the market, stops only move up.  My method for noting stop levels on charts is by drawing a line at the trailing stop’s high points.  Like this:

Did you see where price fell below the pink line violating the trailing stop?  That was where the trade was exited.

When trading short, my stops are tighter.  That’s because a short trade can turn on a dime and wipe out all of the profits.

To trail stops in a short trade the method is the same, but the ATR period is shortened from 20 to 5 periods.  And I don’t use the multiplier (*2) for a short trade.

To find trailing stops for a short trade — add the value of a 5 period ATR to the average daily price.

For example, the average daily price of XYZ is 25.05.  The value of the 5 period ATR is 1.5.  The trailing stop value is 25.05 + 1.50 = 26.55

Here’s how the plot looks on the same SPY chart.  The white horizontal lines mark the low points of the ATR(5).  Stops are at those low points — exit any time price crosses above the white line.

Depending on how aggressively you short there were several opportunities for trades on this chart.

The first white horizontal line would have been a loser if trying to short up in that area.

The second horizontal line marked the bar which has been called the “flash crash.”

Taking a trade after the “flash crash” while obeying the stops of the ATR (5) made for a nice profit.

I hope you will see that if you like to tinker with trading ideas, or need to build a better stop system, the ATR is a good place to start.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

The best possible entry will not make money.  It’s the exit that puts cash in the bank.

Think of your trading system as a cooking project.  The goal is to prepare something tasty, i.e. profits.

It wouldn’t be wise to put a pan on the stove and let it go unattended while the flame  provides constant heat.  Yet that is what often happens.  Portfolios are built with thought and care and then the cook walks out of the room.

Back in the day, when the market was not so volatile, most people were encouraged to “buy and hold.”  They were told, that over the long run, ” the market will take care of you,” or “the market will come back.”

Yet there were probably many investors or traders that wished they had been more proactive.

How many times have you looked at a chart of a stock in your portfolio and said, “I wish I would have sold it up there, instead of down here!”

Record volatility levels have shown the fatal flaw of buying and holding.

Here are a few suggestions to avoid the misfortune of buy and hold.

No matter what you trade — a volatile group of stocks, or sector ETFs  — know your exit point.

As you plan to purchase, plan to sell.  Know where the exit is before the equity ever starts to decline.  This makes executing the exit easier and removes the emotion and second-guessing.

It will help quantify the risk, too.

My experience shows the best method is to give the initial exit plenty of room to move.  The wider initial exit will likely improve the number of winning trades.  But this means more risk.

Reduce the risk with fewer shares.

A tight initial stop may hurt overall performance and increase trading costs (commissions).  It’s frustrating to have a tight stop hit, only to see the stock go on and make good gains.  Whipsaws are a hallmark of stops that are too tight.

Average true range is a volatility measurement and a useful instrument to gauge stop levels ( visit stockcharts.com for a very complete discussion of ATR).

ATR tends to filter out the “noise” or randomness of price movement.  It also can help avoid multiple whipsaws as it adapts to volatility swings.

In the next post, I’ll suggest a simple trailing stop strategy that uses the  ATR.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: guiguis

Here’s a quick point to ponder as you construct your stock trading system:  do you want to be right, or do you want to make money?

The two questions are not necessarily opposed to each other.  But if you’ve traded for any length of time you know it’s not possible to be right all of the time.

It seems that our brains aren’t programed for anything other than triumph.  Yet those that trade the market know this feat is unobtainable, but can also be destructive.

I’ll use myself as an example.  By nature, I’m very competitive.   So for me, the idea of taking a trading loss was hard to swallow.  Yet everything I read talked about –  keeping losses small,  losses are a part of trading,  you can still be profitable if you have more losers than winners.

It wasn’t until I actually studied the charts and crunched the numbers that I found each of those three qualities were true.  I guess I’m a bit of a ” doubting Thomas,” too!

So what does all this mean if you’re trying to build a robust trading system?  A couple of things — focus on your bottom line and never sacrifice your trading capital for the sake of being right.  It’s okay to be wrong, just don’t let your mistake eat the bulk of your money.

There will always be trades to take, but for most of us, our trading capital is limited.

In Part 2, I’ll show you what I think is the most important part of a trading system, the exit.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: makdune

Have you wondered how some traders know when to get in just before the market takes off and then get out before it tumbles?  They’ve likely found something in the charts that gives them an edge.

It takes many hours of chart study to find those little twitches and burps that may precede a trend change.  Here’s an idea for you — watch the number of stocks above the 200 day moving average.  The more stocks that are above, the more top-heavy the market.

Here’s a weekly chart showing the percentage of stocks above their 200 MA.

Conceivably, the values could range from 0 – 100%.   Knowing the percentage of stocks above the moving average will tip you off to a market that’s ahead of itself or one that is overly pessimistic.

This is a weekly performance chart of the percentage of stocks above the 200 MA indicator ( yellow),  compared to the SPY(blue).  Notice a couple things about the indicator — there was a head and shoulders starting to form in late October 2007.

The indicator started trailing off in May/June  before the slide in the SPY began later in 2007.

It’s possible to track this data even if you don’t want to watch the charts.  Try keeping a running log of the % of stocks above the 200 day moving average.  Barcharts.com has a daily value for this indicator on the lower right portion of their home page.

Currently this indicator is at 71.  That means that 71% of stocks are above the 200 day moving average.  When the market topped in April of this year the readings were close to 90%.  At the lows in July the value was running at 35%.  When the market bottomed in March of 2009 this barometer was reading 3.5%!

When you’re suspicious that the market may be “overbought” or “oversold”, check this indicator.  Compare its reading with another breadth indicator or by really looking closely at the price action.  You just may discover your advantage to beating the crowd.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

This is my Channel Blaster method and it goes like this:

Plot what ever kind of band or channel you prefer around price.  My choice are Donchian channels.  They’re nothing fancy, just a moving average band of the highest highs and the lowest lows over n periods.  My setting is 20 periods.

Here’s how they look plotted on a chart of SPY — the white line is the average between the upper and lower channel.

To operate this strategy watch for price to poke its head either above or below the channel line.

Here’s a short trade set-up.  Watch for price to pierce the upper channel.

• Go short a dime or so below that bar’s low.

• On the 3rd day, if price is above the mid-line, sell the entire position.

• If price is below the mid-line on the 3rd day sell 1/2 of the position
  • Set a stop a few cents above the high
  • Sell the remainder of the position when the stop is hit, or
  • Sell the remainder of the position when price pierces the lower channel

Here’s how the trade looks on the same SPY chart:

For a long trade watch for price to make a visit below the lower channel.

• Go long a dime or so above that bar’s high

• On the 3rd day, if price is below the mid-line sell the entire position

• If price is above the mid-line sell 1/2 of the position
  • Place a stop a few cents below the low
  • Sell the remainder of the position when the stop is hit, or
  • Sell the remainder of the position when price pierces the upper channel

The same SPY chart with a long trade –

This strategy finds a weakness and then exploits it for profits.  Here’s why . . .  If price breaks above the upper channel it is exhibiting unusual strength not seen in the last n ( in my case, 20) periods.  Usually, price will revert to the mean or where it is more comfortable, for a short period of time.  This strategy notes the price anomaly and then exploits it.

The mid-line is the mean or average.  If price won’t fall below it (for short trades) or rise above it (for long trades) price is saying it still has some strength/weakness.  That’s why the sell occurs at that level.

The call to action on the third day of the trade developed from observing many trades.  On an average, price will usually not move in one direction for longer than three days.

A last tip — watch volume.  Low volume on an up-move accompanied by price piercing the upper channel may signal a weakening stock ripe for a short trade.  The same occurs at the other end of the channel.  Increased volume on a down move culminating in price piercing the lower channel may signal that all of the sellers are out of the way.  Price will likely move higher, if only briefly.

Look at your charts and let me know what you think about my Channel Blaster Strategy.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: ganesha.isis

If you can answer that question then you have the foundation from which to build your trading system.  The obvious answer is, ” to make money”, but there is much more to ponder.

What kind of trader are you?  Can you sit in front of the screen all day, or do you have a job that takes you away from 9 to 5.

How much time can you devote to analyzing and researching potential trades?  How much time do you want to spend analyzing data?

Maybe some ideas will develop for you  if I use myself as the “guinea pig.”

I want to make as much money as possible, in the shortest amount of time, with the least expense.  Let me break down that statement.

• “Make as much money as possible”

My goal is not to trade for fractions, but for points.  So my system will have to spot stocks that have the potential to move.

• “in the shortest amount of time”

Geopolitical problems, economic shocks, company concerns like earnings disappointments or upper management changes can send a good stock lower.  It’s not possible to completely avoid these pitfalls, but it’s important to know they exist.  So my system must get me in and out, hopefully after making a good profit.

The longer a stock is held the more opportunity for trouble.  Stocks are used to make money, not to build relationships.  Never fall in love with your stock — just date it!

• “with the least expense”

Trading expenses are SEC fees and commissions.  Commissions are the greater of the two, so my choice is to use a discount broker.

The second way to reduce expense is to not over trade and generate a lot of commissions.  Keeping trading as simple as possible works best for me, so there isn’t a lot of sell, then buy it back, then sell it again.  I follow what my trading system dictates.

From the three bullet points you probably have guessed that my preferred trading method is trend trading.  It offers the potential for the most return, in the least amount of time, with the least expense.

Using a volatility measurement  helps find a stock that is capable of “making as much money as possible.”  A volatile stock is one that moves instead of sitting at the same level for days.

The term, volatility has gotten a bad reputation in recent years, probably because of the term’s misuse by the media.  It doesn’t mean wild, unpredictable swings in price.  Traders understand volatility as the degree of price movement.  One of the best ways to compare one security’s volatility to another is by looking at the ATR (Average True Range) value.

By using a 20 period ATR it’s obvious to me that trading ADS is preferable to trading ORCL.  The 20ATR of ADS is 1.86.  In simple terms, the 1.86 is the range (high – low) of price movement over 20 days.  ORCL has a 20 ATR of 0.56.

Trend trading suits me because it has the potential to give me the greatest amount of profit in the shortest period of time.

Because I’m not trading in and out, but riding the trend, my commission costs are lower.

In the absence of a trend, as with the current market, swing trading is a more accurate description of my current trading style.  I’m still able to make money by trading the “mini trends” that exist in this sideways market.

Concentrating on the charts, finding the trades, and managing the best set ups is my nightly ritual.  My routine is very automated at this point in my trading career.  That will happen for you, too, when you can answer, “What Do You Want From Your Trading System?”

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This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

The Labor Day holiday provided the opportunity to mix and mingle with many people.  During the course of conversation the often asked, “what do you do” presented itself.  There is usually a little surprise at my full-time trader occupation.

Visiting about trading reveals many things about how people perceive the occupation.  What I learned this weekend is many people are a little scared and unsure about making their own trading decisions.

Low confidence comes from lack of knowledge, or trust, and being fearful.

Not everyone is meant to trade or invest their own money, but more should take an interest in the endeavor.  It’s not necessary to be an expert, but a little knowledge can prevent a lot of trouble.

For those of us that trade our own systems, one of the best ways to overcome fear and distrust is to thoroughly study our method.  All trading systems start with an idea.  That idea is then codified.  Backtesting is crucial and will quickly determine the viability of that initial idea.

Take your good idea and practice, practice, and practice some more.  Apply it to all types of stocks both large and small.  Try it with index and sector ETFs.  Use different time frames: weekly, daily, and intraday.  And most importantly, test your trading system during trading, trending, and flat markets.  Test the idea as far back as your data will take you.  Look at hundreds, maybe thousands of charts.

By using the power of observation, and with persistence, you may be able to find an edge that lets you trade profitably and confidently.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: Natural Light Seeker

See you after Labor Day — stay safe and enjoy!

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

For those that haven’t heard about divergences here’s a quick explanation.  A divergence in its simplest form is a non-conformation of current information — that there is a disagreement between two data sets.

Divergences can be very powerful trading indicators.  Let’s start drilling down into this information.

This chart has the custom ROC plotted below price.   The area in the box shows an agreement between price and the ROC.  This is not a divergence.  Price moved up in late November in a series of higher highs.  The ROC does the same and agrees with, or confirms price (click the chart for a closer look).

This is an example of a bearish divergence: price moves higher, but the oscillator doesn’t confirm it.   When this appears be on the lookout for a price decline.

A bullish divergence is the opposite: price moves lower, but the oscillator doesn’t confirm it by moving lower, too.  Price is likely to move higher when you see this pattern.

In early 2009 there was a very obvious bullish divergence that appeared on all of the major averages.  This is that time frame on the NASDAQ Composite.  You surely could have profited if you’d seen this pattern!

Now you  have a couple of ways to use the custom ROC — finding tops and bottoms, and spotting divergences.  In the next post, I’ll show you how adding a “second opinion” will enhance your confidence in this stock trading system.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

An oscillator moves in waves.  Many traders watch an oscillator at pre-defined levels calling those readings either overbought or oversold.

Price Rate Of Change (ROC) is a technical indicator that measures the amount that price has changed over a fixed period of time.  For a customized and effective oscillator try this:  combine three different rate of change readings into one indicator.  For example, my oscillator will be a combination of three ROC lengths.  K = ROC ( Close, 5) + ROC (Close, 13) + ROC (Close, 21).

The combo ROC from above is very  erratic when plotted on a chart.  It’s the blue line in the lower pane.  There is also a zero line plotted for a reference point.

The customized ROC catches many of the peaks and valleys on this price chart of Arch Coal.  My preference is to plot an exponential moving average of the customized ROC.  That smooths the indicator without losing its effectiveness.

Here’s the same chart, but with only the exponential moving average of the ROC — EMA(K, 5).  That formula will plot a 5 period exponential moving average of K (K was my customized ROC indicator).

If you like to build indicators, try this one.  It does a pretty good jobs of catching tops and bottoms on a herky jerky stock like ACI.

Oscillators don’t work well with trending stocks or in trending markets.  Notice how the trend from March 2009 until April 2010 has moved smoothly upward on this chart of AAPL.  But look at our indicator during the same time period — all over the chart, both up and down.

It’s possible to still use an oscillator in a trending market, but it should be paired with a trend following indicator like a moving average.  The yellow line on price is a 50 period exponential moving average.  During an up trend, it supports price as it moves upward.

A trading system for this indicator may be that long trades will begin when price moves above the 50 EMA and the MAROC is greater than zero.  A simple sell signal could be when price closes below the 50 EMA and the MAROC is less than zero and declining.

I’m sure you can think of many more ways to use a composite oscillator like the MAROC.  If you like to tinker with indicators I hope you’ve acquired a few ideas for your stock trading system.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

It’s really quite simple, but often so hard to implement.

If you want success trading the market, become the expert of one stock trading system.  After several years working with traders one trait stands out among those that struggle and fail.  They study countless techniques, but master none.  Unfortunately, they learn to speak the market lingo, but never learn to trade profitably.

Find a set up that is clear and is the easiest to understand.  Don’t get forced into learning a stock trading system that is complex, or one that supposedly creates trading miracles.  Then spend time at the computer looking at charts.  This  will help you master your chosen trading method.

We are all different in the way we learn and the speed with which we incorporate new information.  Don’t be too hard on yourself, but be consistent with your efforts.   A little screen time every day will move you farther and faster than trying to cram years of information into a few hours.

If you’ve been trading and struggling, now may be the time for a new beginning.  Narrow your focus.  Make a commitment to master a set up.

Once you find success, your own trading style will start to emerge.  After years of trading, most of us realize we trade with a blend of methods and trading techniques.  Yet we all embraced the same formula — pick one trading strategy, own it by becoming an expert, and then look for consistent profits.

It only takes one trading strategy to become a consistently profitable trader.  Why not start, today?

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: {Guerrilla Futures | Jason Tester}

There are several stock trading systems that trade news announcements.  Trading news is difficult.  There is a pitfall and a temptation — trying to judge the implication of the news versus the reaction of the stock price.

Have you noticed that what should be good news is considered bad, and bad news is interpreted as favorable?  There are a variety of interpretations and as traders we’re not smart enough to know the market’s reaction.

Some news releases are more important than others.  But the piece of news most often traded is the earnings number.

Here’s how you may want to trade earnings news.  Obtain a calendar of upcoming earnings announcements.  Yahoo has a calendar, here.  Screen some stocks that meet your price and volume requirements and start following the ones due to report.  Watch for a period of consolidation prior to the release.  Once the earnings are public information trade in the direction of the breakout.

Be very careful.  Momentum may not sustain the move so being prepared to exit is crucial.  Ideally, a stock will quickly trade up on good news and stabilize at the higher level.  The next move should be an extension to the upside as more traders realize the opportunity and decide to buy.

There are abundant opportunities for breakout traders  that want to trade earnings announcements.  Try and avoid having an opinion about the news release.  Price will tell you how to trade the information.

Both of these stocks had favorable earnings.  The initial reaction was good, but . . .

ECPG had good earnings, as well.

OSK had earnings that were spectacular –

In summary, trade the charts, not the news.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Here’s a guideline for trading — sell the second high and buy the second low.

Sell or go short the second high in a down trend.  Here’s an example of selling the second high for traders using a longer time frame.  This is on a daily chart –

Same symbol, QQQQ, but now an hourly chart shows the second high for short-term traders.

Staying with the same QQQQ chart, here are the second low buy points  in an uptrend for the longer time frame.

And lastly, an hourly chart with the second low buy signals for someone that may day trade.

Being first in trading is not always the best idea.  By watching the highs and lows, and with a little patience you can be like the second mouse — he always gets the cheese!

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

It happens like this –

Transitioning from a down trend to an up trend, not like this –

But like this –

Here’s a trading tip that you can prove to yourself regarding trend reversals.  After a long up trend the first sharp decline will always find traders willing to buy.  Conversely, after a protracted down trend the first snap up will find traders that will sell.

Take another lo0k at the two stock charts above and think about the contents of the last paragraph.

If you can accurately detect trend reversals there is money to be made trading them.

Here’s another trading tip that you may want to add to your trading method.  After an uptrend don’t short the first decline — short the second high.   After a long down trend, don’t buy the first move up, but buy the second.

Reversals take time and sometimes build at an excruciatingly slow pace.  The process can lull traders into a mental haze.  Take your time, keep your data current with fresh trend lines every night and you’ll spot and profit from trend reversals.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: TheTruthAbout…

The market is populated with amateur and professional traders.  The first hour is dominated by the amateurs.  When creating your stock trading system think about this –as a rule of thumb, avoid placing trades within the first hour of trading, here’s why.

Market makers are waiting to eat amateurs for breakfast.  A market maker is a company that has an inventory of stock for sale. They declare the bid and offer price for a security in their inventory and will buy or sell at those prices.  They are “making the market”.   The market maker profits by keeping the spread.  The spread is the difference between the purchase price and the sales price.

Market makers have a distinct advantage because they can see both sides of the market, both the buy and sell side.

Overnight there will be an influx of orders lined-up for the opening bell.  If there are a lot of buy orders for XYZ the market maker could force the price up and get the trader to overpay.  The opposite is true for the sell side — a lower price for the trader means a bigger spread for the market maker.

Don’t misunderstand, market makers are vital to keeping the market liquid and for the efficient exchange of stock from seller to buyer. Yet a retail trader can not play in the same arena — we don’t have access to the same information.

What we can do is be a little clever.  The market maker will leave clues — learn how to watch for them.

Here’s an exercise.  Watch the range (high – low) of opening prices for the first 20 to 30 minutes of a new trading day.  See if after the first hour prices don’t settle down and drift for the bulk of the day.

The last hour is when the professional trader goes to work, especially those last 30 minutes.  This is when the stock is apt to be bid up or down.  Remember the opening range?  See if there is buying or selling at those levels.  It can tell a lot about the interest in a stock and where the professional trader is willing to buy or sell.

Here’s an example.  Trader Smarty Jones has watched ABC stock decline for two days.  Last night, his system triggered a buy signal on ABC.  Trader S. Jones watches the first hour of trading and sees ABC open at 15 and fall to 13.75.  It has drifted between 13.60 and 13.99 all day.

The last hour finds ABC drifting up toward 13.99 and then falling back to 13.80.  Trader Smarty believes that this price action shows some stability.

The last 30 minute countdown begins.  Trader Smarty Jones knows the morning low hasn’t been seen since the first hour.  The range low at the open was too low and may be an area of support, he thinks.

He places an order to buy at 13.83, a few pennies above the most recent low.  The rationale is that he hopes to catch a few shares and have price move in the desired direction — up.

At the same time a sell order is placed a few pennies below the opening low range of 13.75.  Trader Smarty knows that market makers will sometime “gun the stops”.  That means taking price through an obvious support level to see if stops can be hit and cheap shares acquired.  $13.75 is too obvious, so Trader S. places his stop below the obvious 13.75 level at 13.63.

As the clock ticks toward the close Trader Smarty picks up a few shares at 13.83.  Yet before the bell closes the price dips to 13.70.  The closing price is 13.89.

Our fictional trader has a few shares and escaped having his stop hit.  Now he has to manage his trade and not let it turn into a loser.

For the most part, avoiding the open is best.  But learn to capture the information contained in those opening 60 minutes to fine tune an entry for that day’s close, or for a trade the next day.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

I’m going to reveal to you an entire set of rules that you don’t even realize exist.  They may be little thought clouds in the back of your mind.  Maybe something caught your attention during a trade.  You wondered about it, but never gave it much thought after the initial suspicion.   The answer may be found in this series of posts.

Rule #1: Excessive Volume Will End A Move

Prove this to yourself by pulling up any chart: stock, index, or ETF.  Here’s a chart of AKAM.  The excessive volume bars are readily visible.  Click the chart for more comments about the areas of excessive volume.

Pull up a chart of your choice and draw a few horizontal lines across the volume spikes.  You’ll soon find the levels that are significant.  Watch for those levels in the future and you may have a hint that the move is nearing an end.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Some of the best trading systems I’ve ever back tested are based on a very few indicators.  Too many indicators not only clutter stock charts, but they can create confusion and indecision.

Here are a couple of ideas that may help.  Start with a simple price analysis technique.  Define your buy, sell, short, and cover techniques on paper.  Generating ideas can be as simple as flipping through charts and thinking about what is displayed.

For example,  you may detect a pattern occurring after three consecutive lows.  Take a look at the volume bars and see if anything unusual occurs before lows, at highs, etc.  Is it a recurring pattern?

Back test your ideas before adding indicators into the equation.  You may find that a simple price analysis technique is all that is needed.

When adding an indicator to your new system do it in layers.  Add an indicator and back test.  Don’t throw the entire index of indicators into your system — do it in layers.  Try and use no more than two indicators in any system.  In this case, less really is more.

Test your fledgling trading system on a variety of stocks and ETFs.  Try it on the big blue chip stocks like MSFT, WMT, or GE.  Then try it on some of the smaller stocks, like those found in the Russell 2000 index.  Segregate the index ETFs like the SPY, IWM, QQQQ, etc. and test your idea there, too.

Building  a better trading system takes work.  If you have the patience and the inclination toward coding formulas it can be a profitable enterprise and a good learning experience.  The more charts you see the more you will learn whether you realize it or not.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Using trading indicators by themselves is not wise.  Indicators only indicate, they don’t predict or help to make good decisions in a vacuum.  This simple and quick addition is one of my favorite indicators and should help improve the effectiveness of the MACD.

Plot the standard 12, 26, 9 MACD  on a chart and mark all of the buy and sell crossovers.  On that same chart, in the price window, plot a trend line — lets start with an up trend line.   Compare the buy arrows of the MACD crossovers  to the price action at the rising trend line.

The following is the same SPY chart used in Part I.  But now,  I’ve added a trend line from the lowest low to the highest high.  Notice the white up trend line and the corresponding buy/sell arrows in the MACD pane.

A better MACD trading system might be this –

• Buy when the MACD crosses the signal line and the MACD crosses above 0.  Start drawing a trend line and keep it updated as more price bars populate the chart.

• Stay in the long trade as long as the trend line is not penetrated by price.

• When ever the MACD crossover gives a buy signal, add to the position — just make sure that price is above the trend line.

To trade the short side wait for an MACD cross of the signal line to the downside and the MACD is less than 0.   Plot a down trend line from the highest high and keep it current.

• Add to a short position anytime a MACD sell signal occurs and price is still below the trend line.

You’ll notice in this example that the MACD sell signals weren’t quite as accurate and lagged the bear move.

Test different MACD lengths instead of the standard 12, 26, 9.  Experiment with different stocks and ETFs and see if this MACD trading idea is something that you can build upon to find your trading edge.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Most profitable traders I know have found an edge and exploit it to their advantage.  You would probably be astonished to discover the simplicity of many trading “edges”.

This two part article will reveal the plain and honest truth about a popular indicator, the MACD.  Today, I want to describe the MACD and show how it is most ofter used.  In Part II, I will offer a different application for your consideration.

You’ve probably heard that Gerald Appel invented the MACD or moving average convergence divergence.  Commonly called the “Mack -D”, it is an exponential moving average (EMA) that uses the difference in values between two EMAs.

The default or standard MACD is a 12 day EMA minus a 26 EMA.  A 9 period EMA  of the MACD is plotted as a signal line.  The histogram (the white bars on the following chart) is the difference between the MACD and the signal line.  It measures the degree of momentum.

The common way to use the MACD is to make buy and sell decisions based on the fast line crossing above (bullish) or below(bearish) the signal line.  At first glance these signals look very interesting.

This chart is the same chart as above — the data is a little more compressed showing March 2009 to the current July 2010.  I’ve run a simple script asking for buys and sells of the MACD/signal line crosses.  The green arrows are buys, the red arrows are sells.  Here are the results:

This is the back test results covering the period visible on the chart — April 2009 through June 2010.  The actual trade dates, price, etc. are on the grid on the right.

I ran the same test on a list of stocks considered to be bellwether stocks.  For the same time period, these are the results:

I don’t need to run this back test over more time frames to know that this strategy is not up to my minimum standards.

In Part II I’ll suggest a better way to use the MACD.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: bulliver

The biggest difference between stock trading and forex trading is fundamental data.  The most successful forex traders not only use technical indicators to enter, place stops, and exit trades, but they know the fundamental data extremely well.

Successful currency traders understand the monetary ebb and flow.  They understand the relationship between GDP (gross domestic product) and the flow of money, the effect of interest rates, and the pressures caused by inflation.  In reality, the best currency traders are pretty good economists.

A commonality between successful stock and forex traders is this — they both maintain a narrow focus.  The best stock and forex traders don’t trade any thing and everything, but they learn a few stocks or currency pairs and become expert at trading these entities.  They learn and understand the trading signals of a currency pair or a particular stock.

The attraction to Forex is understandable — with greater leverage a forex trader can control bigger positions with a smaller capital commitment.  The cost of doing business is less as there is no middleman to charge broker or exchange fees.

There is no “secret”, nor robot, or new “discovery” that will creates a successful stock or forex trader.  In other words, there is no short cut.

Trading is hard work.  It takes time to gain proficiency.  Yet success is attainable — don’t give up, keep learning and practicing and success will be yours.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: Ivan Walsh

A stock screener can save lots of time.  A basic stock screen will produce a list of those equities that meet basic criteria such as price and volume.  Try keeping a watchlist of such stocks and refresh it every couple of weeks to keep the stock list current.

Use your basic watch list and refine it with additional filters depending on market conditions.  For example, in a trading market it may be helpful to filter for overbought or oversold stocks.  Unusually high volume can be an insightful filter.

This is a list of available stock screens.  Some have fundamental data, others technical indicators, and some have both.

• http://screen.yahoo.com/stocks.html

• http://moneycentral.msn.com/investor/finder/customstocksdl.asp  (This is MSN’s — pre-set screens can help generate ideas for a custom screen).

• http://www.marketwatch.com/tools/stockresearch/screener/ (Both technical and fundamental filters, here).

• http://www.zacks.com/screening_2/custom/ (Zacks research has a proprietary screener — exclusively fundamental data and based on their research).

• http://www.nasdaq.com/reference/StockScreener.stm (This NASDAQ screener is very complete if you’re comfortable adding your own fundamental and technical data.  It also allows you to screen any market including bulletin board and pink sheet companies).

• http://stockcharts.com/def/servlet/SC.scan ( This is a very unique and powerful page of scans — one of my favorites).

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: Symic

When you have a market that trades like this one it’s time to dust off the stock trading systems cabinet,  pull out the oscillators, and forget moving averages and other trend following indicators.

I like the Stochastics %K to trade a choppy market.  Try reducing the time periods from the standard 14 to 8.  Find a security that is pinging back and forth — I like the index ETFs.

Here’s the system:  take only the most oversold %K readings and go long a few pennies above the corresponding price bar’s high. The traditional overbought oversold levels are the 80/20 for the Stochastics.   Here’s an example using the IWM (Russel 2000 ETF)  –

Keep trying to enter a few pennies above each bar –

Finally, after four tries the buy order is filled.  Trail the stop at the low of the previous bar.

Rinse and repeat — works great on a lesser time frame, just make sure there is enough profit to make it worth your time.

Keep trading this system until the market starts to trend, either up or down, and then it’s time to use a trending system.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

It’s difficult to describe the appearance of a price fractal.  Think of a bearish fractal as a triangle.  A bullish fractal is somewhat like an upside down triangle.

What’s so special about fractals?  In essence, they form a reversal pattern.  In other words, price changes direction at a fractal.

No indicator should be traded in isolation and that goes for fractals, too.

Here is a chart of the NASDAQ Composite.  It has almost a year’s worth of fractals marked on the price chart — red for a bearish fractal, green for a bullish fractal.  Notice the triangle shape for the bearish, and upside down triangle for bullish fractals.

I hope you can see the value of this price pattern.  In the near future I hope to share some information on using fractals in a trading system.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

MarketClub is offering a free two week look into their system.  No credit card required and the offer cancels at the end of two weeks.

They will be hosting a live webinar so you can ask questions and interact with other MarketClub users.  If you have  questions during the trial period the support team will be available to help by phone or email.

If you have the time, this might be a good way to get your questions answered or pick up a few ideas.  Click on this link if you want to get in — Free Two Week Offer

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: Photos8.com

Charting software comes pre-loaded with a tremendous amount of technical analysis indicators.  It’s fun to sift through the indicator tab and plot the various indicators looking for the one that best finds tops and bottoms or new trends.

For my style of trading staying as close to price is the best strategy.  Price is the essence of supply and demand.  Every calculation made on price tends to alter the information revealed by price.  For example, moving averages “average” data,  the stochastic oscillator attempts to define the current price in relation to price action over a certain period of time.  Attempting to define, quantify, or average price can create lag.

There is a place for a few indicators in a trading system.   Indicators can detect subtle changes that aren’t readily visible on a price chart.  Yet some traders have a tendency to become overly confident in this information and miss trades, stay in trades too long, or delude themselves that the losing trade is about to turn around and become profitable.

Perfecting a few indicators on a price chart can create a path to profitable trades.  Trend lines, and support, and resistance are my favorites.  Keep these simple indicators current and you can prove to yourself their value.

It doesn’t take a fancy system with complex algorithms to make money.  It takes discipline, repetition, and patience.  I think it was Jesse Livermore who is often quoted as saying, and I paraphrase — It’s not the “doing” that makes money, it’s the “sitting”.

I have had the privilege of coaching traders who wished to improve their skills.  One of the most common exclamations after our sessions is, ” I didn’t know trading could be simple AND profitable!”

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Looking for a trend in a sideways market can be a challenge.  Here are a couple of tips –

• Reduce your time frame.  If you normally trade from a daily chart take a look at a 30 minute or 15 minute chart.

• Find a stock with plenty of volume and one that moves.  The minimum daily range (high – low) to look for is $1 price movement over “x” number of days

• Look for a stock that moves somewhat smoothly in either direction.  Reduce the time frame until you can clearly see a trend.

Here’s are some examples:

Here’s one that looks the best — CF.

An hourly chart isn’t much improvement over the daily –

The 15 minute looks the best because there are some definite trending movements –

When you find a stock that shows definite trends on a smaller time frame make sure there is enough profit potential to make trading it worth your time.  I’ve marked the potential profit, best case scenario, from several possible trades with CF.

If you have a sound trend trading strategy you may want to experiment using this alternate time-frame method and see if you can find some profitable trades.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Shortening your time frame will give you the edge to finding the early entries and exits before the “herd”.  Let’s say the short-term bias is to the upside.  We want to catch the up move early and get out when it fails.

Akamai has been in an uptrend and recently hit the skids with the rest of the market.  Yet it doesn’t look like a broken stock, but is one that may be just bent!  Here’s how to trade it –

Use my method for drawing trend lines — this chart shows the up trend lines in white and the down trend lines in blue.  Go long the next bar after a close above the white trend line.  Stay long until a close below the trend line.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: Msylvest

You may have heard the saying, “Fail to plan, then plan to fail.”  Trading online requires a plan, or a road map.  It should be a set of rules that governs how to allocate your trading funds and time.

Creating a plan will help to eliminate emotion from your decisions.  Here are some points your trading plan should cover:

• Determine the amount of capital to risk per trade.  In other words, how much are you willing to lose per trade?
• What kind of trader are you — day trader?, position trader? swing trader?  If you have a full-time job then day trading may not be the best choice.
• Trading is a business.  Can you endure repetition and discipline or are you looking for the excitement of a “home-run” trade?
• Know which markets you’ll trade — stocks, currency, commodities.  Try to specialize in one area before moving to trading in multiple markets.
• Think about your pre-market an post-market ritual.  How much time are you able to devote to analysis, research, and monitoring of existing trades?

This isn’t a complete list of items to consider, but it should help jump start your thinking.  If you can construct a decent trading plan, obey its rules, and then add a sound trading method you will be on your way to becoming a successful trader!

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: Bluesoft Brasil

Quick, cheap, and easy.  Those are the most common advantages associated with online stock trading.  Let’s  look a little closer at these attributes.

Instant gratification is possible if you trade online.  There is nothing quicker than writing an order, placing the trade, and then seeing the fill.  In the old days, the process was call the broker, give them the trade, they write the ticket, get it approved by their manager, give it to the trading desk, and then wait for a fill.  It was normally a return call from the broker that communicated the details of your trade.

Commissions can be less costly if you trade online.  They can be further reduced if you trade with substantial volume, or buy in quantity.  It is possible to save a lot of money if you’re a frequent trader.

It’s quite easy to write an order to buy or sell stock electronically.  It’s just a matter of filling out the symbol, quantity, and price.

If you trade online you’re in control.  No more phoning the broker.  No more asking when to buy or sell.  You’re now making the decisions of what to buy, how much to buy, and what to buy.  You’re in control and master of your money’s destiny.  How great is that?

Well, here’s a reality check — it’s not that easy.  If it were, there wouldn’t be so many stories of trading accounts that went “poof” and disappeared.  Don’t put yourself in this category.  There are some very simple things that will keep you from blowing-up your trading account.

Don’t be like most online traders who have no trading plan or trading system.  A trading plan is your written description of how to allocate the funds in your trading account.  A trading system is the method that finds trade set-ups and defines entries, stops, and exits.

Most traders don’t use these tactics.  They allocate too much money to too few trades and have no clue about what or when to buy.

Building a trading method is not so easy, especially if you’re starting out or have had some bad luck with a current method.  Find a profitable trader and mimic his successful trading method until you regain your confidence.

Yes, online trading can be very profitable.  Treat it like a business: study, and practice, practice, practice.  As I was once told — “Prior preparation prevents a pitiful, poor product.”

Part II — Building A Sound Trading Plan

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

If you’ve ever looked at much charting software you know it’s loaded with a gazillion trading indicators.  Indicators can be fun, but most of them don’t work very well, or don’t work consistently.

Like the name suggests, indicators indicate, they don’t predict.  The best way I’ve found to use them is as a confirming tool.  Most price indicators react to price, therefore they are likely to lag price action.  The most notable example is the widely used moving average.

The Relative Strength Index (RSI) is a good oscillator.  It moves from overbought ( above 70) to oversold ( below 30).  Yet it is worthless in a trending market.

Here’s a way to use RSI that is a little different, but works quite well.  Try combining from two to no more than five different RSI lengths and watch for oversold and overbought levels.

Using a multiple RSI is  an effective way to enter a stock that has steadily been moving up in price.  Wait for your double or triple RSI to signal that it is oversold — both RSI lengths are below 30.  When you see these values know your buy signal, for example, a close greater than the prior close.

For a sliding stock, wait for your multiple RSI to become overbought — both values greater than 70.  This technique can help fine-tune a short entry for a stock that has been declining.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

• Put a 20 period simple moving average (MA) on price.

• Plot a 7 period rate of change

• Plot a 3 period simple moving average of the 7 period rate of change (ROC)

• Plot a zero line in the rate of change window

The moving average of the rate of change is the indicator to watch.  When it crosses the zero line, note the price bar on which the cross occurred.  Go long a few ticks above that price bar’s high.

Once price pulls away from the 20 MA my stop becomes a close below the prior bar’s low.

Do the opposite to play the short side of the market.  When the MA of  ROC crosses below zero note the low of the price bar on which the cross occurred.  Go short a few pennies below the prior bar’s low.  My stop, once price drops from the 20 MA,  is a close above the prior bar’s high.

I will sell the entire position, if after entering long/ short, price moves below(for longs) or above (for shorts) the 20 MA.

Here’s how it looks on a minute chart of the DIA –

Test this on some of your favorite stocks to trade and let me know how it works for you!

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

My experience has provided a mental checklist for evaluating trading signals.  Here are some of its points:

• What is the overall trend of the market?

• What is the overall trend of the stock that signaled?

• If a buy signal, is the stock in an up trend?

• Would this trade be a breakout trade or a continuation of the trend?

• Did the signal occur near support, or resistance?

Configuring charts with a few simple indicators is helpful, too.  Using a trend line, on any chart that is under consideration as a trade, is a wise idea.

Moving averages, though not as reactive as price, will help point the trend’s direction.

It’s important to know the where the various layers of support and resistance reside.

Once resistance is vanquished a buy trading signal is apt to be more reliable –

Resistance now becomes support — a sell signal and a concurrent violation of support would make a strong case to liquidate a long position.

With a new bullish up leg apparently underway a new trend line can be drawn.   Let the moving average act as a filter to any sell signals.   Trading signals that fall near the violation of the trend line should be taken seriously.

I hope this example has demonstrated the value of filtering buy signals rather than blindly accepting their validity.  Also, this demonstration may show how the process of trading is a process of simple repetition of sound and tested,trading principles.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Traders have a couple of choices when it comes to technical analysis software:  either use what the brokerage offers, or purchase a software package.  One way to decide which choice may be best is to think about the features necessary to implement your trading system.  Here are a few ideas –

Charting is the primary feature in all technical analysis packages and is a very basic function.  The software allows the user to plot charts in a variety of ways: candlesticks, bars, and lines.  It should also allow you to draw trend lines and horizontal lines for support and resistance.  It’s a nice bonus if you can write on your charts — it helps to keep a few notes about reasons for the entry, stop, etc.

Back testing is very useful to test the viability of your trading system.  You’ll need to understand the formula language the system uses in order to write the code to test your trading system.  Some formula language can be quite difficult.  See if it’s possible to download a manual from the vendor and read through the section on writing formula code.  It’s even a good idea to ask the sales person if technical support can help with this function.

Optimization isn’t so important, but is usually included if the software offers back testing.  Optimization is fine-tuning your trading strategy to find the best settings for the strategy’s rules.  This could be an entire discussion by itself.

It seems to me that traders trade and formula writers code software.  In other words, you don’t need to worry about optimization.  If you thoroughly back test your strategy it will be apparent if your strategy is sound, or not.  Test over many years, during up and down years, and during sideways markets.  If you can be honest with yourself you’ll know if you have a good system.  Optimization can lead to curve-fitting that can lead to unrealistic expectations.

A scanner is a great feature to have.  It should allow the creation of a multitude of scans that can be saved, retrieved and executed with ease.

Alerts are useful.  A simple alert could be a buy or sell arrow on the chart.  More elaborate alerts are configured to go to an email account or a hand-held device.  It just depends on the level of  “contact” you need or want if away from your computer for the day.

Indicators are something with which you don’t need to concern yourself.  Most software comes loaded with bunches of indicators — many more than you need or likely want.  What is nice is the ability to customize indicators.  For example, a custom indicator could be a weighted Relative Strength Index (RSI), or coloring rising price in one color and declining price, another.

Another feature, that is now more common, is the ability to overlay multiple indicators in the same pane.  This is very useful especially if you have a system dependent on multiple indicator criteria.  For instance, it’s nice to display a 7 period, 14 period, and 40 period RSI in one pane.  Displaying the moving average of the RSI is another example of a multiple indicator overlay.

A good, clean, timely, data feed is critical.  You get what you pay for with data.  Free data is often error-ridden, late, or unreliable.  Purchasing data separate from the software program can be expensive.  Try and find a bundle of software and data.  If it meets your needs it will save some serious coin.

Much of the software for sale, but not all, has a broker interface.  This allows order entry directly from the program.  It’s not a necessity, but more of a personal preference.

As you see, there are lots of options to discover as you shop for software to handle your trading needs.  It’s nice to be able to “kick the tires” before purchasing.  When you find a package that you like,  see if a fully functioning trial is an option.  If not, a money back guarantee will let you take the software through its paces before you commit your cash.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: pasukaru76

Automated trading systems are also known as block-box or robot systems.  In essence, it’s the use of computer power to enter trade orders with the use of an algorithm.  An algorithm is really nothing more than a problem solver with a definite set of answers, or ways to solve the problem.

The groups of investors that use automated trading systems have big money — no, they have huge amounts of money to invest (pension funds, hedge and mutual funds).

A popular, automated technique used by institutional traders is breaking an enormous buy or sell into smaller pieces.

For example,  if fund ABC wants  a multi-million dollar position in XYZ company they can use an automated trading system to accomplish their objective.   An algorithm will solve the problem because it could be programmed to buy  chunks as certain conditions of  price, volume, etc.,  present themselves.

ABC fund can  avoid showing its hand, yet accumulate a substantial position in company XYZ.

Individual investors can automate their trading, too.  That means creating a rule-based system covering buys and sells.  Many existing trading platforms accommodate rule based trading, Trade Station being the most well-known.

Using trading rules removes human emotion from the decision-making process.  Fear, greed, and pride are just a few of the destructive feelings that can derail a good trade.

One of the pitfalls of automatic trading is coding.  If not properly coded large draw downs may quickly occur.  A second danger is lack of testing (back-testing was discussed here).

My trading has always involved using a set of rules.  Those rules are never violated, but do require some discretion.  As an example, the current market is moving sideways in the short-term, but moving down in the intermediate term.  A couple of trend-following strategies have given “buy” signals that I haven’t taken given the direction of the overall market.

As individual traders we’ll never be able to compete with the money spent by the institutions to create algorithms for automated trading.  Yet we have a distinct advantage –we are not big and cumbersome like the hedge funds, etc.

We can watch the clues of institutional activity and follow in their tracks — they have the money to move the market, but we have the agility to respond quickly and tag along for the ride!

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Creating better trades is a function of knowing the direction of the overall market and exploiting it with good stock picks.  Currently the market is weak.  As traders we should exploit that weakness by selecting the same kind of stocks.

Shorting isn’t for everyone, but here’s one of my methods for selecting stocks to short.  Weakness is a stock trading below the 200 day moving average — make a list of all stocks that are trading beneath that level.

For me, trading stocks with volume greater than 500,000 shares over the past 20 days  (MA(Volume, 20) >= 500000) is my minimum volume requirement — weed-out those that fail that minimum.

You don’t need to short the higher priced stocks, but I do and here’s why — they slide faster than they glide.  That old Wall Street saying means that declining stocks fall faster in price than rising stocks.

Realizing that my short trade may be quick I want the greatest return in the shortest amount of time.  My preference is to short stocks greater than $50 per share.  Here’s why– if shorting an $8.00 stock and it falls 10% than my profit before commisions,  is .80 per share.  But if I short and $80 stock and it falls 10% my profit is $8.00 before commissions.

Individual tolerance for risk is a good barometer for selecting what share price to short.

Try applying your shorting strategy to these already weak stocks and see if you don’t capture some profits.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: crazyoctopus

The popularity of exchange traded funds (ETF’s) grows each year.   There are nearly 1,000 ETFs available to trade covering almost any asset class imaginable.  Some of the bigger ETFs are offered by ProShares, IShares, and the SPDRs.

There are many reasons for their increased popularity, especially with the individual investor.  The primary attraction  may be that ETFs are considered less risky than individual stocks.  Because ETFs are a basket of underlying securities the business risk of single stock exposure is eliminated.  There’s no chance of corporate wrongdoing affecting an ETF like it would an individual stock.

Other benefits of ETF trading are:

• The market can be traded on both the long and short side.  This increases the opportunity for profits because an investor can gain from a rising and a declining market.

• Some ETF’s are leveraged.  More aggressive traders like the concept of increased leverage.  There are now ETF’s with not just double the added leverage, but also triple.

• The ability to trade multiple markets is possible.  Oil, gold, silver are a few of the possible commodity ETFs.  World markets are accessible – country specific investments like: Brazil, China, Japan, etc.

• The currency market is available with many ETFs — there is likely an ETF for all major world currencies.

• Option trading — just as with stocks, the same option strategies can be applied to ETFs.

• Portfolio diversification is easy given the number of asset classes, sectors, countries, and currencies represented by exchange traded funds.

• ETFs are popular with the investing public, but also with hedge fund managers and day traders.  One of the reasons, in addition to the ease with which they are traded, is using them to hedge.  Hedging with ETFs can protect the profits in a portfolio and it can be accomplished inexpensively.

As with single stocks, technical analysis techniques are suitable to ETFs.  It’s possible to successfully apply trend following indicators and oscillators.  Charting the price movement is no different than graphing a stock.  The big index ETFs move very smoothly and are great to trade.  An active market participant could make a good living trading only index ETFs.

One caveat – note the volume on each individual exchange traded fund.  Many like the SPY, QQQQ, DUG, and DIG have plenty of volume.  Some of the more obscure and often times, sector ETFs are thinly traded and should be avoided.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: Sh4rp_i

There are many ways to correctly execute stock research.  My bias should be no secret if you’ve visited this site before –my focus is  technical trading, not fundamental analysis.

When first trading,  my evenings were devoted to crunching numbers and analyzing data in the search for a worthy company to buy.  It wasn’t until learning and applying technical analysis techniques that my trading moved to a higher level of profitability.

It seems that stock research is best accomplished when the noise level is very low — after the market’s close and away from the chatter of financial TV channels.  It’s thinking time and it’s time to concentrate.

Once a pattern or system develops  it shouldn’t take more than 30 minutes an evening to find potential trades.

Here’s my nightly stock research system:

• Scan my Universe for trade set-ups (my Universe is composed of stocks with specific price, volume, and volatility requirements).

• Put “set-ups” in a second watch list

• Take a closer look at the potential trades to see if they meet all my trading method’s requirements (there are several trading methods, but usually just a few fit the market’s current disposition).

• Discovering several candidates means finding the most “textbook” set-up — no “almost” or “nearly there” set-ups

• Deciding the number of trades to place and the amount of trading capital to risk

Actually writing the order the night before helps — fuzzy morning thinking can be a hindrance, but not if the order is clearly written the night before.

Learning to do stock research is a critical component to trading success.  It’s all part of having a method of trading and a system to implement those trades.  Once those components are in place stock research is quick and easy.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

• Draw a line on a major average, like the S&P, following the movement of price for the last 3 months, 6 months , and the last year.

Do all three time periods agree to the market’s direction?  The dominant trend is the longest, or yearly trend — what direction is the market going?  Does the short-term trend (3 months) agree with the long-term trend?

Move up one time-frame and locate areas of obvious support and resistance.  The following chart is the same S&P , but it is a weekly chart.  The yellow arrows mark obvious areas of support and resistance.

• Move back to the original time-frame (mine was a daily look) and see how the chart appears with the support and resistance levels drawn from the higher time-frame.

Once the basic directional and support/resistance arrows are on the chart a quick look every night can aid your trading decisions.  For example, it may not be wise to take a long trade when the average approaches an area of resistance.  Conversely, if the index falls back to support and holds the level it may be a good low-risk entry for a buy.

These simple techniques can be quite powerful, especially the higher time-frame support and resistance zones.  The next S&P chart has support and resistance levels drawn on a 30 minute chart.

Here is the same data on a 15 minute chart:

5 minute:

A successful stock trading system doesn’t need to be complicated — in fact, some of the best, most profitable systems are deceptively simple.

If you choose to incorporate these easy and quick stock market technical analysis techniques it could be the basis for a successful stock trading system.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

A confluence of Fibonacci levels is usually an important area to watch.  One way to spot these congestion levels is by measuring from various points in the direction of the major trend.

Here’s how to do it using the NASDAQ daily chart from the May 2010 high down to the low in late May.  I’ll not put anymore bars on the chart until this move is thoroughly analyzed.

What the index graph shows is a Fibonacci analysis of the entire move down.  It looks safe to say the move has completed because the last bar had a higher low than the previous bar.  We won’t know for sure until more bars are on the chart.

Look closely at the chart and you’ll see there is another pivot or swing high –

Here are the second set of Fib levels drawn from the second pivot high down to the same low.  Notice the area of tight congestion in the 2283-2289 level — it should be considered an area of potential resistance.

Here is the same chart with more daily bars.  The area was a resistance level — four daily bars and the level was never penetrated.  The fifth bar penetrated the line, but price came in the next day.  Notice where price fell — back to the first low from which we’ve been drawing the Fib lines.

It looks like there is another pivot/swing high from which to draw a Fib line — the bar marked “5th bar” on the chart.  It appears that the “5th bar” level is fairly strong resistance — once again, there are four bars that haven’t closed above it.  The congestion zone is between 2307 and 2317.

Will the 5th bar scenario repeat and prices fall or will the market move upward to another Fib level sequence?

Stay tuned!

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Think about the psychology of a breakout.  If the security has been in a protracted down trend there will be lots of doubt about the sustainability of an up move.  One little blip of negativity can drive the market back down — it could be low volume, a close near the open,  a prior resistance area, the scenarios are almost endless.  The psychology is signaling the reluctance to believe in the trend’s reversal.

Look closely at almost any bottom that forms and you’ll see a couple attempts to rise that failed.  Here’s a chart of the S&P just before the March 2009 low.  Three times the S&P tried to move up and three times it came back in and made a lower low.

There was money made on these moves, but there must have been a lot of frustration as each break out from the lows came back in to start over at a lower level.

One technique that may prove useful is a series of moving averages.  Many times each moving average will act as an area of resistance.  There will be one average that seems to contain the breakout — keep your eye on that one.  Here’s the same chart as above with four moving averages.  Notice how that blue moving average kept a lid on prices during the down move?  Once price crossed above that line it seemed to stay above it.

I’m sure some of you are asking, “but how do we know the trend has reversed and prices will rise?”  We won’t know for sure, but the moving average that acted as resistance (the blue line) should now cup prices and support them.

Here’s another way to tell if maybe Mother Market has tipped her hand and wants to go from up to down, or vice versa– put a couple of trend lines on the last push up/down.

This is the same chart as above, but now with a couple of trend lines –  I drew the lines on the last two swings down.  Hindsight being 20/20 it’s obvious either one would have marked a safe entry for longs.  But trading experience and a dose of skeptisicm makes me trust the trend line that closely aligns to the blue moving average.

I’ll advance the chart and we’ll see how my theory developed, or didn’t.

For the most part, price walked up the blue moving average.

As traders, we can’t predict, but we can be sensitive to clues.  One thing that helps is to keep a trend line current on each swing.  That will help you stay on the right side of the move.  It will also telegraph a signal that the breakout is likely to fail.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Here’s the link to get your seat — Reserve A Seat

If you’re wondering what in the world I’m talking about, here’s a quick synopsis:

–  Bill Poulos is going to be hosting a step-by-step online training session this Tuesday, June 15th

– He reveals the actual daily trading plan he and his most advanced students use to spot the 4 low-risk, high-potential profit pockets” that can occur on almost any stock chart.

Discover how to:

* “fast filter” stocks

* How Bill automatically gets “spoon fed” the highest-potential tradeable stocks every night via his special “Profit Feeder” report…

* How to trade his 4 “Market Mastery” methods against the “hard right edge” (when you don’t know what the next day looks like).

* How to “add on” his “F_R_E_E Trade Strategy” to any trading method you’re currently using – it’s his favorite way of taking as much profit potential as possible.

* His time-tested risk management strategy inspired by Albert Einstein, yet so simple to execute that an 8th grader could do it

After you register, there’s a special link waiting for you that will show you how you can get a full scholarship to Bill’s most advanced stock trading program he’s ever taught – his Market Mastery Protege Program.

I am often asked to give testimonials for products — software, etc.  The reason you don’t see many on this site is because I only recommend what I use or have used.  Bill’s techniques helped me get a “leg up” when I started trading and they can help you, too.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

To increase success trading the market it’s helpful to unite an appropriate trading systems with the current stock market trend.  There are those that are very skilled at counter-trend trading, but it takes a lot of study and practice.  It’s much easier to follow the market — if the market is in an uptrend, go long –if the market is declining watch for shorting opportunities.

Consider devoting some of your chart-research time to following the trend on a couple of the major averages.  A good combo to watch would be the S&P 500 and the NASDAQ Composite — a blue-chip average and an index of smaller stocks.  Another pairing may be the Russell 2000 and the Russell 3000.

Put plenty of bars on the charts so you can get the long view.  A daily chart of the last 6 months, 1 year, and 2 years will surely give you the market’s direction.  Switch to a weekly chart and see how the same data is displayed with weekly bars. Note the location of tops and bottoms within the various trends

Another good study would be finding those stocks that move in lockstep with the indexes.  Finding which stocks reliably move against the trend may make for a good pairs-trading system.

The major indexes usually move quite smoothly.  As your market trend study unfolds it may be that your new skills will enable an ETF index trading system.  There are several good ETFs in this arena: DIA, QQQQ, IWM, etc.

Taking a few moments to analyze the overall trend will  keep you moving with the flow rather than fighting the current. Using a sound trading system that matches the trend’s movement will surely increase your winning  odds.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

In the meantime, there are three videos about how he trades and has made money in the market for the last 30+ years.  Check them out for a preview and some tips.

Video I The Overview

Video II More Details About His Trading

Video III Recent Trades Using The 4 Methods

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

I look for stocks that have a sizable range — range is the difference between the day’s high and low.  The best stocks to trade aren’t necessarily those with the biggest range but those that are consistent.  For example, here’s a 5 minute chart of CLF — lots of possibilities for a good day trading strategy with this one.

This is a list of stocks and ETF’s with a range greater than $2 for the last 10 trading days.  Not all of these would pass my final screen — some are very thinly traded, but I offer it for educational purposes, only.

AAPL ALX AMZN BAC.L BEN BH BIDU BLK BRKA CEO CF CLB CLF CME CMG CRR CSTR CZI DECK DRN DUG DZK EDZ EET EOG ESS FCNCA FLS FSLR FTI GOOG GS GWW HDB ICE ISRG LZ MA MITSY MKL MTD NC NEU NFLX NVR NWLI OIH PCLN PKX POT PTR RIG SDOW SEB SHLD SMDD SMN SOXL SQQQ SRTY STRA TNA TQQQ TSCO UDOW UFS UMDD UPRO URTY UYG WBK WHR WLL WLT WPO WSC WTM WYNN Y

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Avoid over optimization.  Optimizing data is manipulating the indicators within the strategy to achieve the best results for the time period being tested.  Optimizing could also be testing a specific strategy on specific issues.

Don’t delude yourself and test your long strategy during only screaming bull markets and then conclude that your method is the best ever invented.  Be realistic.  Back-test the strategy over a broad index of stocks — for example, the Russell 3000 contains 98% of the US equity market and is a fine index to use for testing.

Test over multiple time frames.  Try your strategy every year for the last 5 years and average the results.  During that 5 year period is likely found a down market or an extended  period of consolidation — that will put a little realism into the results.

You don’t necessarily need a big winning percentage for profitability — watch the profit and loss ratio.  I’ve seen some strategies have a 40% winning average and be extremely profitable.  The reason — the losses are tiny compared to the gains.

Here are a couple of my reports.  This is for a long strategy and I tested it for the year 2008 — a bearish year.  The second set of pictures is the same strategy during 2009 — a bullish year.

Here’s the same strategy tested over the bullish year of 2009 –

Bullish 2009 produced better profit results, by far.  But for the horrible down year in 2008, the same strategy eeked out profit, too.  The wins to losses ratio stayed almost constant.

Building and back-testing trading strategies isn’t for everyone.  Sometimes it’s easier to subscribe to a system that will give you nightly buy and sell signals.  It all depends on how much time you want to put into trading.

For geeky people like myself it’s fun to test an idea — usually something I’ve seen on a chart.  Most of the time my brilliant ideas don’t deliver, but how would I know if I didn’t back-test them?

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Same type of action in ’05 –

’06 was a little choppier –

Avoid stocks that look more like a roller coaster ride –

My point is this — past performance on the price chart is a pretty reliable indicator of future price performance.  Said another way, if it trended smoothly in the past it will likely trend smoothly again.

Secondly, you don’t need a lot of stocks to make money.  If you find one or two stocks that look like the first chart I showed then you can trade in and out of it for years.

I prefer to trend trade and that first stock is one of my all time favorites — can you guess?  The answer is on the chart –

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

There are all types of volatility calculations.  If you’re interested in the mathematics, etc., check out the articles at Investopedia.

Volatility has often been associated with risk and uncertainty.  That’s true.  As traders we need to find a way to use it to our advantage.  Here are a couple of ideas:  watch the over all trend of the VIX compared to one of the major averages.  Here’s an example — the blue line is the NASDAQ Composite, the green is the S&P 500, and the yellow line is the VIX.  Ignore the spikes in the VIX for now, but compare its trend with the averages and you’ll see that they’re non-correlated.

The best way I’ve found to use the VIX (Volatility Index) is using it to find extremes in market direction.  Note the correlations between low VIX readings and near tops of the two averages.

Most of the signals were good, but there were some duds — those in the boxes.

Here is a chart of VIX tops and the corresponding market lows–

Today’s market is much different than the one we’ve traded for the last 14 months.  You can see where the VIX changed its trend on the following chart.  Do you see the associated divergence?  That little divergence hint is common on many charts when a trend changes direction.

An indicator shouldn’t be used in isolation and that is very true if you choose to watch the VIX.  Pair it with your other analysis techniques and see if it doesn’t help confirm your other signals.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

He has a new stock trading system and it has a free video to introduce the strategy.  I thought you might like to watch it with me — Bill usually has lots of “on the house” information that is more valuable than most of the trading courses you’d have to buy.

Here’s the link, enjoy — MasterTheMarkets

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: mlgroveruk

A beginner investing in this market might be thoroughly confused — up 100 points one day, down 200 the next. Use this wild market activity to improve your trading skills.

To become a successful trader you don’t need to learn a lot of things, but learn a few techniques very well.  This is a mantra you’ve probably heard me chant many times.

Select a few simple concepts and study their reaction in this current market.  Trend lines on different time frames could be a good study.  The relationship of price and volume would be another.  Plot a moving average.  See what information you can glean from each.  Watch for the reaction of one to the other.  Keep a few notes of your observations and mark your charts if you have that capability.

To get you started here is a little homework:

• Is volume greater on up days or down days?  What might this mean?

• How many consecutive up days since the “flash crash” (May 6th)? How many consecutive down days?

• Is price reacting to a trend line?  On what time frame do you see a reaction?

• Is there a moving average that is acting as resistance?  Which one is acting as support?

This is a great market to study, but not such a great market in which to trade, especially if you’re new.

If you make an effort to study the day-to-day action now,  you’ll be better informed for similar markets in the future.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

A candlestick chart is a study unto itself.  It is just a different graphical representation of price.  Like bars, candlesticks trace the movement of price and show how buyers and sellers move the market.  One of the areas where bars and candlesticks diverge is in the number of formations formed by each.

I can only think of a few price bar formations, but I’m sure there are more — an inside day, an outside day, key reversal, and narrow range days.  Candlesticks have many, many patterns: spinning tops, doji, long white candle and a doji, long black candle and a doji.  That’s why I said that candlestick charting is a technique you could study all by itself.  In fact,  Steve Nison and Greg Morris have written extensively about the topic.

Candles will give you a quicker visual of price action than a bar chart.  On a candle chart the comparison between the open and close is readily available.  For example, the hollow candlestick indicates that the price close is greater than the open.  That signals buying demand.  A filled candle is just the opposite — the close is less than the open — selling pressure.

For some, candlesticks are easier to read — for me it’s personal preference.  The way I use candlesticks the most is finding support and resistance.   My method is not the normal identification of three white soldiers, spinning tops, or hammers, but it works very well, too.

One area where the users of candlestick charts  and bar charts can agree is this — price rules.  Learning how to interpret price is one of the best studies to pursue and become a better trader.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Here are a couple of ways to determine the direction of the market — from this information you’ll be able to employ the correct stock market strategy.

Pull up a chart of the averages and look at 3 months price data.  Shrink the price bars and have a look at the last year.  Now you’ll have a clearer picture of the market’s direction.  If any doubt remains, draw a line that traces the direction of the price bars.

If you’re still unsure about the direction, try this — see if you can contain the last several bars within a box.  If you can do that then the market is probably ______________.  Hint: the answer is in the first paragraph.  Here’s a current screen shot of the S&P  (click to enlarge)–

Another technique is looking at different time frames.  Here’s the same S&P chart on an hourly and a 30 minute chart.  I’ve put an ellipse within the box to show how price is currently tracking.  With the exception of a few outliers the price is currently ___________.

To deploy a profitable, successful market strategy go where the market wants to go.  Now would not be the time to use a trending strategy — the market wants to trade.

If you have a strategy for a trading market and feel comfortable investing in these conditions, now is the time to use it.

P.S.  If you’re looking for new tips, techniques, and strategies, watch the sidebar on the right side of this blog.  I’m posting mini-courses — it’s a peek inside my trading toolbox.

Don’t drag your feet — enroll in the current mini-course at the box on the right because I’m going to take it down, soon.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: Tomi Tapio

Short-term stock trading can be profitable and risky!  It really takes an unemotional trader to successfully get in and out of a quick trade.  You must trade like a machine!  Here are a few suggestions for your consideration –

• Reduce the amount at risk per trade — if normally risking 2% of your trading capital per trade cut it to 1% per trade.

• Do your homework the night before — don’t try to take a trade on the fly during the morning or intraday.

• Know your stop price before you enter the trade.

• Obey those stops without question — there are unlimited trades — trading capital is limited, don’t blow it!

• When you have a couple of unsuccessful trades, stop trading.  This type of trading might not be your style — that’s okay because there are all sorts of trading methods.

One of the better ways to find stocks to short is to find those stocks that are already weak.  Trading below the 200 day moving average is a sign of weakness — one of my trading idols, Larry Connors, recommended this criteria.  Stocks under the 200 will try and move back to the moving average, but it will act as resistance.

Here’s one of my scan’s to find potential shorting candidates — set up your charts like this:

• On a daily chart plot a 5 period simple moving average and a 200 day simple moving average.

• Plot a 2 period RSI (Relative Strength Index)

• Volume should be greater than 500,000 for the past 20 days — no thinly traded stocks.

Here’s the set-up:

• The price must be less than the 200 day moving average

• Go short when the RSI is 98 or greater

• Cover when price closes the 5 period moving average

Make sure to set a stop in case price continues to rise — good luck!

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: jurvetson

Choosing investment tools should be done carefully and cautiously.  It’s not necessary to have fancy or expensive tools — but you need good tools.  Those are the tools that do the job you need to have completed.

Understanding the type of trader you want to become will tell you what investment/trading tools you need.  If you’re going to subscribe to a service that picks your trades then you don’t need software.

Some traders want to follow a particular guru.  Most of these traders have software for sale that selects the trades based on a nightly data scan that meets their trading method.  That’s fine.

Other trading packages use canned data.  The software takes that data and finds a stock that meets the criteria.   This is black box trading.  The best thing about black box or computer trading is it removes human emotion from the decsion process.

Black box trading is usually very secretive –the selection parameters are never revealed.  That’s a problem.  How do you know if those parameters will work in the current market conditions?  The selected stocks might work in a trending market, but what if the market is currently moving sideways?

When I first started trading I was very excited to look at the many different types of trading and charting software.  I’ve tested and reviewed most of the trading packages, charting programs, etc. — you’d recognize the names.  Most don’t consistently make money.

No matter what anyone says the element of discretion is a necessary component to successful trading.  It’s like driving a car.  You couldn’t just start it and let it go where ever — a little steering, braking, and acceleration are necessary for a successful trip from point A to point B.

I never made any serious money until I did the work myself.  By that time, I knew what kind of trader I hoped to become — trend trading was, and still is my calling.

In essence, I’m a blue-collar trader.  I want to do the work myself.  That way I know how I came to the answers and my mistakes will be easier to discover.

The investment tools that I use are very few — Telechart and Amibroker.  One set of investment tools doesn’t have everything I need, but the TC/Amibroker combo does — historical data, date sorting, back testing, scanning, and bar replay.  Telechart has reliable data and lots of historical data — Amibroker easily reads the Telechart database, so I don’t need a second vendor.  Clean, reliable, data is expensive.

I’ve yet to find any short cuts to becoming a successful trader.  It takes time, effort, and lots of study.

Be wise with your money — don’t fall for a dashboard of blinking lights and whistles.  It’s unlikely those flashy investment tools will make you consistent money in the market.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: nDevilTV

Your stock market results will depend on several factors: picking the correct time to enter the market, choosing the correct instrument, and having a sound trading method.

The first two are relatively easy to manage.  If you want to buy stock it’s best to do it when the market is rising.  Don’t laugh — there are many traders/ investors that don’t grasp this concept.  The adage of buying low and selling high is a wonderful old saw, but it implies picking bottoms and tops.  That isn’t so easy.

Choosing the correct stock or ETF is also a function of your particular trading method.  Let’s leave the trading method aside for a moment.  One way to find stocks or ETF’s to trade is by screening-out those that fail to meet minimum price and volume requirements.

Finding or creating a sound trading method takes study, hard work, and lots of trial and error.  If you’re new to trading and want to learn correctly try and find a successful trader willing to take you under their wing, so to speak.  This is by far the best way to learn the trading profession.

If you think that mentoring is too expensive — try ignorance! I’ve seen many potential traders blow their capital because they didn’t know what they were doing.

Most of us who trade full-time have done it for years.  I’ve heard, from where I don’t remember, that it takes 10,000 hours to master a profession — that surely applies to stock market trading!

The results you achieve in the stock market are related to the time and effort you devote to learning.  Try and learn all that you can before you risk your trading capital.  Follow along with someone who has trading experience and learn from them.  This is not a profession that rewards intuition, luck, hope, or good intentions.

A wise and successful woman said, “Success doesn’t come to you — you go to it.” — Marva Collins

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: Incase.

The technical analysis of the financial markets is an exercise that some of us traders find very useful.  When I first started trading, the P/E, book value, ROE, etc. were all calculations made with great care.

It wasn’t until seeing an interview of John Murphy that I discovered an alternative to my number crunching.  I couldn’t get a copy of Technical Analysis Of The Financial Markets into my hands fast enough.  After finishing the book I knew that I’d found my tools.

Somehow it seems that charts speak to me.  The visual images help me establish entries and exits with no emotion because I’m unconcerned with the noise.    It’s emotion that is the buzz-kill — worry, second-guessing, Joe Blow analyst said such and forth, etc.

Price and volume are my primary interest when looking at charts.  Most of my favorite technical analysis indicators are very uncomplicated.  They rank as my favorites because year after year they have consistently made money for me.

The point I’m trying to make is this:  find a focus and become good at it.  If pattern recognition intrigues you then become the best pattern trader you can.  If fundamental analysis does it for you then go for it.

Narrow your focus, work at it, and you can become a successful trader!

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: pfala

A very useful options trading strategy  in a choppy market is hedging.  Here’s a quick example of how to use a hedge for a long stock position.

If you have a stock that has unrealized gains from an increase in share price a protective put strategy can help safeguard those gains.  It’s like buying insurance when the market has downside risk — the insurance, IE. protective put,  may increase in value while the stock price declines.

During the period the protective put is held the investor still owns his stock and accrues all of its benefits ( dividends, voting rights, etc).  The protective put limits downside loss if the market quickly declines.  The  put holder can sell the option for a profit.  Often times this will offset the loss in share price during the market decline.

This is a very simplified explanation of an options trading strategy.  There are many more decisions to make when employing a protective put strategy — strike price,  expiration, etc.

When I first started trading I didn’t know a thing about options.  In fact, they seemed rather risky and unpredictable.  One of the best things for me was to get some training.  I turned to Henry Ford at the Pitbull Investor — it was one of my better decisions.   Henry has a way of writing that is clear, concise,  and shows you where to focus your efforts.

Profitable options strategies don’t need to be complex.  In fact, you should quickly grasp the concept underlying the method or else walk away from it.

If the current market conditions find you sitting on the sidelines it might be a good time to learn about using a simple options trading strategy to protect your profits.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

They trade like stocks, so they are very liquid.  Because an ETF is composed of a basket of securities they offer instant diversification.  With ETF’s you avoid stock-specific risk.

Consider this made-up example — ABC stock, the greatest widget maker in the world,  has been on a tear as price has doubled in the last 90 days.  ABC has become a story-stock with its meteoric rise –  lots of traders have piled-in pushing the price to all time highs.

ABC ran into trouble, today.  It is being sued by the world’s second largest widget maker for patent infringement — the stock plummets.

Owning ABC stock could create a nasty dent in your trading profits.  Yet owning the widget ETF was not as damaging — it has 28 widget-makers in its portfolio so the risk is spread among the 28 instead of focused on the ABC company.

I don’t know if ETF’s will ever replace mutual funds.  They’re surely  much more cost efficient because there’s no middle man to take a cut.   There are lots of ways to diversify — across sectors, indexes, countries, bonds, the list grows more everyday, it seems.

I trade ETF’s when the is market is trading on technicals — like we’re currently experiencing.  My favorites to trade are the double leveraged ETF’s.  Often times  gauging buys and sells near areas of support and resistance can be very profitable.  Trading almost becomes mechanized buying at this level and selling at that one.

You may want to make yourself a list of the bigger ETF’s, maybe a 20 day moving average volume of at least 500,000.

And I almost forgot — you can put a nice hedge on a portfolio with ETF’s.  For example, if you’re long the market, but fearful of a pullback buy a few shares of an inverse or bear ETF.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

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This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: stepleton

The technical analysis of stocks is the process of trying to determine the future movement based on prior movements. What technical analysis does not do is make hard and fast predictions about the future.

Knowing the limitations of technical analysis makes a better technical analyst.

The curse of chart-reading is in its flexibility. That’s why the majority of the technical indicators I use have a rule attached. Remember my demonstration of drawing trend lines? It had rules.  It was always too subjective to hear “connect a low point to a high point and make sure price touches the line three times.”   That doesn’t work for me because I always wondered which three points should touch my trend line?

Keep learning, but don’t become overwhelmed thinking that you must know every indicator or every price pattern.  If the correct indicators are applied to the correct market conditions you can have success.

Focus.   Learn a few simple technical analysis techniques and use them over and over. That’s how most successful traders do it — they know a few techniques very well and use the same ones repeatedly.

It doesn’t take an advanced degree to become a good technical analyst. If you correctly learn a technique or two, practice it, and have a little patience with yourself you will be able to successfully perform technical analysis on any instrument that trades: stocks, commodities, currencies, etc.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

New traders are hungry for stock trading training and strategies.  I’ll be the first to admit that a lot of the stuff written to help is either sales-oriented or just not very good.

If I may be so bold as to make a suggestion — if you’re a self-starter and you like to read try to find a copy of this book — it’s not a new book. In fact it’s 30 years old and not very expensive. The information inside its pages is timeless and sound.

One of the great aspects of the book is the quiz at the end of each chapter.  Those quizzes showed me where I needed more study and practice.

My copy is turning brittle and brown.  I probably should replace it while it’s still in print.

Of all the fancy-shmancy trading books in my library the Weinstein book is in my top 5 best ever.

The reviews on Amazon.com are great — so don’t take my word for it — go get a second or third opinion!

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

It’s not news that the Euro has been extremely weak, but so have all the world currencies.  The Australian Dollar, Yen, Swiss Franc, and the British Pound are all wobbly.

The Canadian Dollar is at support while the US Dollar has been on a tear.  Yet even the US Dollar index is nearing resistance at $90.

As equity traders there are lessons to be learned from watching the world’s currencies.  Today’s lesson is obvious — it’s a complex and unsettled world in which we are living, tread carefully.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: jking89

Short term trading may mean a minute, an hour, one day, or a few days. Because we all should know our risk tolerance, short-term trading is different for each of us.

Given the extremely negative trading environment that is currently upon us a Larry Connors short-term strategy came to mind and it is offered for your consideration. Gee, that sounded formal, didn’t it?

All joking aside, this is a pretty good little trading strategy if you’re alert and can take the potential draw down. This works on all time frames, so pick your interval — here are the rules:

1. The price must close above the 200 EMA
2. The price must be less than the 5 Simple Moving Average
3. The price high must be lower than the previous high for the last three bars
4. The price low must be lower than the previous low for the last three bars

Buy at the open of the next bar.
The sell signal is when price closes above the 5 MA. Sometimes I use an alternative close — when the current bar’s low is higher than the prior bar’s low.

Short-term trading can be profitable, but realize that trading against the trend can be painful if you’re not prepared.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

It’s always surprising to hear someone visiting about the market and wondering if it’s time to buy when the market has been declining.

I’ve also had conversations with people who were adamant that it was time to sell because the market couldn’t go any higher.

A lot of this confusion can be eliminated by employing one basic concept. Know the current position of the major indexes — S&P 500 and the NASDAQ Composite. Are they near new highs or lows? Have they been moving up or down? Or have the markets been moving sideways?

Most stocks move with the major averages. As traders, it’s much easier to go where the market wants to go instead of trying to trade against it. Think of swimming against the current and how difficult that can be as opposed to floating with the current.

Take a few moments every night and look at the major averages. Even better, draw a trend line on their charts. Draw an arrow that follows the slope of the price bars if you’re unsure of the direction. These simple steps will help keep you on the right side of the market.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

photo credit: jaci XIII

Today I wanted to reveal a secret — something to consider when putting together your system because your goal should be to have a better trades system.

All traders know that good entries and exits are important and they’re correct.  But successful traders know the secret . . . it’s not that your entry was so good or that you ticked the top of the move.

It’s not the number of wins versus losses.  The truth is it’s how big your wins are compared to your losses.

Don’t fall for the hype that some system has an 80%, 90%, or 100% win rate.  That type of come-on is a “never sell” system.  Stop and think, if you have a losing position and never sell it there are no losses!

There will always be losses in trading.  A better trades system is one that manages losses — keep them small!  Here’s an example, say we have two trend traders and we’ll call them A and B.

Both traders follow a system.  The system is one that trades once per week on a valid entry signal.  Traders A and B both traded the same stocks once a week for a month.  Here’s how they did for the month –

Trader A:

$200 Win, $100 Win, $300 Loss, $10 Win = $10 Profit

Trader B:

$50 Win, $100 Win, $25 Loss, $25 Win = $150 Profit

A big winning percentage isn’t necessary, but controlling the size of losing trades is imperative.  I could show you systems I’ve built that have 60% winning trades and are extremely profitable.

As we move forward I’ll have more ideas that will help you achieve the big wins/small losses better trading system.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Supposedly, there are many ways to detect a trend change.  One of the easiest and best ways to see when and where the stock market trend is apt to change is by correctly drawing a trend line.

My method for drawing a trend line is different than most you’ve probably seen — it’s a technique I’ve used for years, but don’t remember from whom I learned it.  What I like about this method is that it leaves no guess work — no more three touches for a valid line that make you ask, “where do I draw the three touches?”

Here’s how to correctly draw a trend line (don’t panic, I’ll post an annotated chart below so you can see how, too).  For a down trend line find these three points on your chart: the most recent highest high,  the lowest low, and the last high before the lowest low.

The daily chart shows a trend line drawn on the NASDAQ during the down move from January of this year until early February.  If you want a closer look just click on the charts.

To draw an up trend line find these three data points:  The most recent lowest low, the highest high, and the last low before the last high.  The next chart is the same NASDAQ chart from the February lows to the April 2010 highs.

The last chart shows the trend line on the current move.

There are few indicators on my charts, but I always use a trend line.  If you study these charts you will see that these simple lines can show where the stock market trends change directions.

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

My early trading career centered around crunching the numbers and doing all the fundamental analysis steps to evaluate prospective investments.  It wasn’t until technical analysis became my focus that profits soon began to flow from my efforts.

I hope to pass on a few of my trading strategies that will help you make better trades regardless of whether you day trade or invest in ETF’s.  We’ll start with the basics — every good builder knows he must lay a solid foundation, so that’s what we’ll do first, we’ll cover the stock trading basics.  From there we’ll put in the sub-floor and then start to frame a resilient trading strategy.

So get ready — pull your chair a little closer to the screen — we’re almost ready to start!

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.

Enjoy — we’ll be getting started soon!

This post is from the: Stock Trading Systems blog where more useful tips and techniques exist.