Stock Trading FAQs

Original question: In the article “do you use a wide screen to filter for quality” one of the filter criteria is “Shares/float ratio <20”. How is this calculated and why is it important?

Market cap is calculated by multiplying the price with the total amount of oustanding shares. The float is the amount of shares the company makes available on the open market. If this float is small compared to the outstanding shares it has an influence on how the stock “behaves” in the market.

Example: Company A is trading at 10 $/shares and the total outstanding shares are 100M. As a result the market cap is 100M shares multiplied by 10 $/share = 1B USD market cap.

A 1B dollar company with 100M shares provides a high liquidity for orderly trading in the markets.

Now imagine that from those 100M shares only 1M are available on the open market (1M share float). Now the company has a share/float ratio of 100M/1M= 100 with supply/demand dynamics based on only 1M shares. So the “effective market cap” is 1M shares multiplied by 10$/share ) = 10M efffective market cap.

The stock of the same 1B dollar company suddenly behaves as a 10M dollar micro cap compared to a liquid 1B dollar small/mid cap stock.

When the float is low the company can also suddenly dilute the stock by increasing the float thus killing any potential price advance momentum. Some dilution is fine and most high potential IPOs can handle a reasonable secondary offering quite well. But if the float is only a fraction of the shares you simply don’t have the “quality” you think you have based on the normally calculated market cap.

A share/float ratio < 20 is appropriate to filter out the low float junk which is prone to pump & dump schemes and dilution. The best stocks have a share/float ratio < 2

Original Question: In two Q&A answers (“How to become a good stock chart reader?” and “Do candle formations have an important role in charting reading to you?”), you mention a large series you were working on called “Chart School” composed of 6 chapters. Was this ever finished and published?

I started to work on that series a long time ago but decided to put it on hold to first cover more fundamental topics which are on the lower levels of the pyramid such as Portfolio Management and some general articles focusing on psychology & mindset.

After that the start of the service has interfered.

The Chart School Series is next on the list. I also need it to finally continue writing the main article about my methodology which is stuck in “work in progress” for a long time as well (ZYLCE: Trade with a winning edge in today’s noisy markets).

I plan to publish the first chapter of the series (Chart School I: Reading Stock Charts) within the next couple weeks.

Here is a preview of the content:

Original question: Do you plan on making BTC / ETH as a trade idea if/when they become opportune? Or strictly stocks?

Good question! The trade ideas I publish in the service are ideas which I consider as suitable trades for my personal trading account as well.

Here is a list of instruments I trade:

• Common Stocks long and short
• ETFs: SQQQ UVXY long only to play market declines
• Crypto: GBTC as a vehicle for bitcoin and ETHE as a vehicle for ethereum.

Besides a brief period of dabbling in long options many years back I did not trade anything else and therefore don’t expect to publish any “Stock” Ideas other than the ones mentioned in the list above.

Keep it simple stupid or K.I.S.S. for short is a mantra that has left a deep impression on me since I read about it during my early market years. I think I got it from William O’Neil, but I also attribute it to Ed Seykota, but I’m not sure.

Original question: Do you have a screenshot of your basic quality screen settings on finviz? I’m a little confused about daily dollar volume.

Daily dollar volume is price multiplied by average volume (50d moving average). I want to know how much money is changing hands each day in a stock. When daily dollar volume aka liquidity is too low for my account balance, I have to skip the trade. My rule is that I am not allowed to put on more than 5% of the daily dollar volume of the respective stock. I sometimes also check the chart for volume dry-up days. If those days have extremely low daily dollar volume I might even reduce my initial position size in order to avoid getting trapped in a narrow exit door if things turn sour.

Here is my basic Finviz wide screen. You shoul split this one in two seperate screens, one with EPS growth next year >30% and leaving sales Q/Q blank and one with sales Q/Q >30%, leaving EPS growth next year blank.

Screenshot:

and the code directly:

v=151&f=cap_0.22to99999,fa_epsyoy1_pos,fa_salesqoq_o10,sh_avgvol_150to99999,sh_price_o7,ta_sma200_pa,ta_sma50_pa&ft=4&o=-marketcap

On Finviz you navigate to screener and then click on Save screen in the dropdown menu:

Your screener overview will open up with a new screen marked in yellow at the top. Here you copy & paste the code from above, assign a name and click save at the bottom.

Recall that daily dollar volume and effective market cap have to be calculated manually. However you can simply use our Stock Quality Checker, which is doing that for you.

Original question: Hi, thank you for the resources & and the experience you share, they’re invaluable. I have a more technolical question regarding the tools you use – by tools I mean the hardware. What is your trading setup? I know this has no impact on performance, but wondering if in your experience is a laptop vs a desktop preferable? Thank you!

I currently use a windows 10 desktop computer with exactly….*drumrolls please*…. one screen as well as an iPhone 11 Pro. Tools on boths are: Tradingview, Finviz (a pain on mobile), Interactive Brokers TWS, Twitter and StockTwits occasionaly.

I rarely have to react to stuff quickly intraday as most setups are valid end-of-day or before the open (Momentum Gaps). I have a -rather large- watchlist and can quickly to react to price action happening within that list. But I try to be in those names before the action takes place most of the time. As a human being I don’t have the ability to monitor what’s going on on 3+ screens at the same time anyway. Others might have that superpower, I don’t. I also don’t like anything flashing at me in bright and alarming colors. However I do understand it when traders use multiple monitors in order to reduce interaction via mouse and keyboard which helps to avoid common computer related hand injuries such as the carpal tunnel syndrome .

Since having a larger smartphone (Late 2019) I do more and more via mobile. When I tweet with a lot of typos you know that I am on mobile and forgot to switch the keyboard layout and thus autocorrect back from German to English. I also execute trades more and more on mobile as well as I try to reap the fruits of having a lot of time available. Not sitting in front of the monitor all the time is desirable for me these days. My trading style allows for this fortunately.

I want to switch to MacOs (more steamlined and more secure) but had to postpone this due to the upcoming release of M1 iMac (hopefully with a redesign). I am also building a standing desk but due to the pandemic I am still waiting for my custom made bookshelf (Will attach the desk to this) to arrive.

Make sure to spend most time looking at a large screen with high refresh rate and in a natural body position. This can be done with a laptop, larger smartphone, tablet or desktop PC… it doesn’t matter.

original question: Made the switch to TradingView (TV) & FinViz (FV). Please can you tell me if there is a way to export results from a FV custom screen including both the ticker symbol & the exchange it is traded on as required by TV?

There are two ways to do this.

1. After screening you click on “save as portfolio”. When the portfolio opens you click on “open in screener” again. This makes all tickers appear in the ticker input field seperated by a comma. You can now copy that list into a .txt file and import it in Tradingview.
2. After screening in Finviz you only display the ticker in your custom display and export that list as a .csv. Open the .csv in excel and change the type from number to text. Now import that .csv in Tradingview.

I actually never do this as I screen in Finviz and then go over the charts manually and add only selected stocks to my Tradingview watchlist. I don’t see the need to import a large list of tickers into your watchlist anyway. If you have to do this on a regular basis you better switch to a different screener as both Finviz and Tradingview have bad synergy in that regard. Or maybe use the Tradingview screener. My advise is to screen wide and then go over the individual charts one by one. While living the process you will quickly figure out that you may only find a couple fresh ideas each week. If you “find” 50 stocks a week you either search too hard or you just started and don’t have a well maintained watchlist yet.

Original Question: How to find quiet and tight setups in real-time without the hassle of actively screening.

Finviz ELITE provides you with real time quotes; a real time screener with 10s autoupdate (2) and a awesome screener alert (3).

The alert allows you to create a quiet and tight screen by using the relative volume (1) and distance to 20, 50 and 200d SMA. Once a ticker fullfils this criteria intraday you get a notification.

The “create alert” link opens a popup which allows you to copy & paste the screening criteria in string form. The currently activated screener is linked already when you click on “create alert”.

Her is my IPO quiet and tight screen. This is a stricter version but I also screen wider without the MA constraints.

v=151&f=cap_smallover,ipodate_prevyear,sh_avgvol_o100,sh_price_o7,sh_relvol_0.1to0.35,ta_sma20_sa50,ta_sma200_pa,ta_sma50_pa&ft=4&o=relativevolume

Some parameter are only available in the ELITE subscription. So you have to adjust it slightly if you are only using their free service.

The relative volume figure becomes more reliable over the course of the day as it has to do less guessing. Therefore it is much more reliable to run your normal quiet & tight screen once early in the session and then another time 2 to 3 hours before the close. After running the screener a second time you set the alert in order to get a notification once a stock sees a sudden volume dry-up in the second half of the trading session. But you can also just launch the alert sooner. This FINVIZ ELITE feature is not an exact science but a very potent tool for easily finding those high probability setups in real time with little effort.

Finviz is dirt cheap for the efficiency it provides and many Thweis followers already joined their service. I use it for many years now and I used to have MarketSmith and HGSI memberships running during my first half decade in the markets. The real time speed of finviz allows me to have the chart reading throughput/capacity needed to find ideas in realtime. They don’t have a modern mobile app but that is only a minor drawback. So charting is best done on the desktop. The screener alert however can be used from mobile without problems.

There are referral links in the text above. Clicking on those links will associate your visit to finviz with ThweisSXFX.

Full question: Do you subscribed to real time data both on TradingView(TV) and Interactive Brokers(IB)? Given that your realtimesignals/alerts are generated from TV, realtime market data subscription is not necessary on IB. Of course, with market data subscription comes more convenience, appreciate if you can share what’s your optimal configuration when it comes to execution.

Good question. I subscribed to real time data in TradingView*, Finviz* and my InteractiveBrokers Workstation. I do all the charting in Tradingview due to the speed advantage but I always check the higher quality broker data before making a trading decision. Tradingview can have price anomalies from time to time. They occur infrequently but it happens. Never had such problems with the market data via Interactive Brokers and their TWS (TraderWorkStation). Real time data on Finviz is very important because it allows me to get the real time watchlist alerts. *: referral links

Full question: Do you do any day trading? I know you like to enter full size around the base/moving averages as you should in a trend trading system but do you have any playbook set ups for acting on day trading set ups such as adding more size to your existing holdings if they form an intra-day pattern where you can add size and play momentum? I know I should treat each new set up taken as a fresh idea and must keep data of the set up and then let the data decide whether I should be implementing day trading set ups into my system. I was just wondering if you personally act on those day trading set ups and if not then why not? This is something I am currently working on and admittedly the day trading set ups are my worst performing plays and really dilute my pnl on my winning stocks. I would also like to add I do not manage a big account (50k or so) and am keen on accelerating my growth and I think day trading can help me generate more alpha. I apologize for the lengthy question but thanks in advance. Love your work mate, Prost!

I am a trend follower at heart and started with O’Neil’s CANSLIM moved over to Dan Zanger’s very opportunistic momentum trading without much success and later switched over to a more active O’Neil style approach as proposed by Gil Morales. Dan is using add-on entries a lot which stems from his .com runup experience where he made some 20k% in one year (Guiness World Record). However this approach didn’t work for me.

Nowadays I just read volume and price action based on original work of Richard Wyckoff and basically try to catch the swings between consolidation areas just like O’Neil but without sitting through the bases. I used to trade O’Neils classic breakouts during the first couple years and then switched over to buy early via Pocket Pivots first and now mostly focus on quiet and tight trading and earnings gaps. Pocket Pivots or Base Breakout just give me clues but no signals anymore. I buy early, then scale-out some into strength and sit tight with the remaining position until the next proper setup shows up. There is some intraday action when stocks hit initial scale-out territory and also during the process of establishing the initial position size (It is not always just a straight out full size order). When stocks break I don’t necessarily wait for the close to exit but already act intraday as well.

However I am not day trading at all. I never enter a trade with the idea that price hits my target the same day. It might hit the scale-out on the same day though as my timing with quiet and tight entries is pretty sharp sometimes.

I make roughly 120-200 trades per year but there are activity peaks when I sense that a window of oportunity is open but not much in between.

Write this down: A multimonth 100%+ swing move is not initiated by an intraday pattern. Stocks must undergo accumulation over weeks or even months in order to muster a real price expansion.

The volume-by-price indicator is called Volume Profile in Tradingview. I call the peaks in the profile “Peak Liquidity Levels” or short PLL. My way of reading and interpreting this indicator requires a very high price resolution. Tradingview allows to have 5000 increments on any given price axis and is still relatively fast with the background calculation. The indicator loses a lot of it’s significance if the exact levels can’t be pin-pointed due to a insufficient resolution. I used to distinguish between bearish and bullish volume but this info did not help me identify the path of least resistance in any consistent manner, hence I dropped it.

Here you can learn some more about how I personally read and interpret the volume-by-price indicator aka PLL.

And here some infos about how to scale your charts in order to get a deeper insight about the strength and importance of the respective PLLs.

Where to find it in Tradingview (They did a great job at hiding it in plain view):

My settings:

In no way! William O’Neil’s books are great and got me hooked in the first place. I actually label myself as a technical fundamentalist or technofundamentalist. However over the years I realized that you have to look beyond the CANSLIM ‘frontend’ with all the labels and ‘simplified’ rules. While I rarely buy any of the CANSLIM chart patterns I am always aware of them.

One can argue that in todays age of instant information base breakouts are late entries. The mass psychological mechanics behind the patterns are still sound of course but you have to make sure that a pattern isn’t too obvious.

Tight weekly closes are golden and are often the breeding ground for my favourite quiet and tight swing entries.

I trade in my own little universe of quality and fundamentally strong names which I scan for opportunisitc and non-obvious entries. I realize profits into unusual strength and logical price targets. Small and mid cap names often turn into swing trades naturally due to my aggressive scale-outs while large cap names rather turn into classical position trades.

I never hold stocks through larger consolidations or earnings and I only enter or add when a stock flashes me a proper fresh money entry according to my rules.

My current stock trading is solely discrete (read: non automated), my trading partner however is trading the currency markets fully automated. He is working on our automated system for over 5 years now and is making huge progress. One major improvement was the adaption of my PLL technique for forex, based on tickvolume.

Compared to the currency markets, where a million eyes watch the same couple charts, stock selection plays a major role in developing an edge in the stock market. I don’t believe that stock picking can be automated as it is impossible to create an algo which is able to see and prioritize the various price and volume clues. However I believe that it is possible to automate the stock handling part. Teaching an algo to prioritize the various support and resistance levels is rather simple (technical pivots, sloped technical trendlines, major moving averages and the peak liquidity levels and peak liquidity zones).

To make a long story short, I am thinking about a semi-automated approach to the stockmarket for years. Once our forex algos are finished (2021), my trading partner will likely start to work on the stock market via the TWS API from Interactive Brokers.

Original Question: Do you trade option ? Can we apply your theory to option trade ; if so whats the expiry we should take once the stock in QTS ?

I don’t trade option! The reason is very simple. Why the heck should I make trading harder by having to get two things (Direction and timing) correct instead of just one? INCREASE IN LEVERAGE DOES NOT MAKE UP FOR THIS HANDICAP!

Not being able to make a fortune in stocks and then trading options is like trying to swim in the wild ocean hoping that you manage to learn swimming there when it didn’t quite worked out in the indoor pool before. Or trying to ride a unicylce because you didn’t manage to ride a normal bicyle. Or… you get the point!

Option trading for retail is a massive con in my opinion. Options don’t provide a better risk risk reward ratio compared to stocks. If you are lured into them just because of the leverage consider yourself to be a gambler.

But maybe I am ignorant and simply suck at options. If you manage to make it work for you than more power to you.

Original Question: I’m new to trading and i have a small account. Do you have any recomendation to trade in a margin account around pattern day trader rule? Should i switch my account to cash?

I have only recently started to think about this topic in more detail and it will be covered in a future article.

I never traded a cash account because I didn’t know it existed back when I opened my first account in 2010/11. It is a double edged sword. The problems with trading a small account are manifold. You actually should learn to trade properly from the start but that could mean that it will take you a long time to reach a meaningful account balance and thus meaningful returns to make a living from your trading. You also want to get the major sandtraps out of the way early on. Getting them out of the way means to step into them as you won’t be able to dodge them all. For me it was a long journey and I recall that I had a lot of trouble to trade up above the 25k day-trading barrier back then ( I started with 10k). It was all psychological.

With my knowledge of today I would approach my early trading years differently. First of all I would trade with only cash for the first year leaving margin alone and learn to stick to stops and just trade and watch charts day in and day out. After that I’d switch to a margin account and start to trade with higher risk (~3% of account balance for the stop loss hits) and employ margin to the fullest. When you learn to trade it is helpful to explore the boundaries of your comfort zone and there is nothing wrong with increasing risk to leave the 25k barrier behind you quickly. It also helps if you can show to yourself that you can actually recover from portfolio drawdowns. If you follow such an approach your must realize that you could create deep drawdowns. If that is fine and if you don’t have a hard time saving another stake then this is probably the way which allows you to gather the most experience in a short amount of time so that you are primed to trade properly once you are above 25k. I would also use some part of the portfolio to just buy and hold a big cap growth stock to learn about the market cycles early on. Simply hold it and watch it.

However if you can’t handle the risk or even trade with money you can’t afford to lose, my advice would be to get a margin account but simply never go beyond 100% and trade only 3 or 4 stocks at a time with reasonable risk (2 – 2.5% of account balance for the stop loss hits). If you have the base levels of your trading pyramid covered you can hope to create constant profits rather quickly. But you must cope with your urge to “get rich quick” because it won’t be quick. Make sure to focus on your defense as you want to avoid deep drawdowns as the time to recover is long and taxing.

While I have various little intraday techniques in place now and ‘work’ my positions a lot, you as an aspiring trader can’t hope to be able to pull this off early on. You simply won’t have the skill yet. Better keep it simply. Best way to do this is to leave intraday and margin trading alone early on. So with regards to the pattern day trader rule you just have to apply proper positing sizing and stop loss placement and then mostly trade quiet and tight setups and some momentum gap setups or even the pocket pivots from Gil Morales. Focussing on only two setups will help to keep overtrading in check. Quiet and tight setups can be easily scanned for in advance before the session just like momentum gap setups. And you also want to focus on quality stocks only according to my rules. You enter with a market order at the open and quickly set your stop loss orders. Fire and forget. If you can watch the market intraday you can gradually try to handle them properly with the scale-outs and all that.

In the end it depends on your personality as well. I was a strict robot following CANSLIM rules during my first year. I sticked to my stops but was buying way too late right into ensuing pullbacks. I was eaten alive by my stop loss hits. And then I started to trade recklessly trying to recover. Which I did multiple times. Once I recovered I switched back to my robot self and the bleeding started all over again. Rinse and repeat. It took me a very long time to realize that I only traded fearless and with self awareness when I tried to recover from drawdowns. Over time I learned to merge both personalities into one and got rid of my robot self eventually.

Full question: Would you go long on a stock that was flashed by a short seller report, like MuddyWaters? ( Assuming of course it has a nice setup!)

I don’t care much about what Muddy Waters, Citron or even Einhorn have to say. According to my experience the price and volume signature of individual stocks allows you to reliably judge the quality of a setup at hand .

Being able to read a chart correctly is a hard learned skill after all and worth a lot more than some forecast based on fundamentals. Citron bashed $GSX but the stock simply resolved higher in 2020 and topped via easy to see bearish price and volume clues.

This kind of stuff is exactly the type of misleading noise you want to avoid.

When a stock is acting constructively on a technial basis despite being “featured” in one of those short seller reports it actually increases the odds of having a strong and actionable swing. Such a swing is then backed by strong hands as the weak ones probably have been succesfully pushed out by the report. You also want to be aware of potential hidden agendas.

Original question: What (kind of backtesting) do you do to understand if your rules or system is likely to have a positive expectancy?

I don’t do any backtesting at all. It doesn’t work as no algo can see what a trained chart eye can see. My “backtesting” is simply my own trading history. History is 2400 trades rich (1700 with basically an identical system) so I was able to drew a lot of conclusion from analyzing my own data. I believe that analyzing ones past trades and getting rid of stuff which simply doesn’t cut it is a major part of refining or honing any trading system.

I do a basic t-test analysis of my trades to learn about the probability that my expectency is real and not just part of a normal distribution with a mean value of 0. Once that probability is at >99.9% I call it good and try to keep it at that level. I also include the initial risk of my wins in my calculation of the expectency. Then I go on and only monitor this calculated expectency and try to keep it positive. Doing it that way helps you to be detached from any monetary value. I even go one step further and cap all real wins at ~3 times my average loss for the sake of the expectancy calculation and try hard to keep that capped system positive. In reality I do have many wins above that capping threshold but for the sake of the calculation I ignore them. Psychology wise this simple technique is almost holy grailish, but don’t tell anyone 😉

As you may know, trading outcomes shouldn’t be normally distributed in a >3R system with a winrate of 30-40%. You typically have a huge peak at -1R, which is basically your maximum risk. Ideally 1R should be between 0.5 and 2.5% of your account balance! Most of your trades will end up being stop loss hits at around that level, hopefully ;-). Then there should actually be a void all the way up to around 2 – 3R where you realize your baseline R-multiple wins. Most traders have a lot of trades around breakeven. This is a signal of a weak trading system and shows that the trader in question likely moves his stops to breakeven due to psychological pressure. Anyway, it is clear from the above that the outcome isn’t normally distributed but rather lognormal (inlcuding negative values) with a peak around 2-3R. I applied some transformations to my data to make it normally distributed before applying the t-test but that didn’t change much hence I skipped it.

As a matter of fact the outcome histogram of your past trades is actually your trading fingerprint. Analyzing it tells a lot about your weaknesses and strengths at a glance. Therefore this will be a major part of the upcoming methodology/coaching service. One can use a histogram of the R-multiples or the “% of account balance” directly. Former distribution can be tricked by trading small positions so I advice you to use the latter in combination with a calculated expectancy and statistical validation (t-test) including the initial risk of winning trades as outline above.

If you are not aware of your outcome histogram you lack one vital tool in your toolbox for sure.

Get out of that losing trade if you are still in it, stick to your safety net rules and ignore your account balance! Continue to trade as if it was just a regular stop loss hit. In trading it is all about preserving emotional capital and remaining in a position of strength so that you can seize fresh opportunity ahead. Treat such a loss like a failed exam and simply keep studying. If the loss was huge it also helps to take time off the markets. After a couple days/weeks the joy and passion should be back and you should be eager to improve. If you truly stick to the safety net rules chances are very slim that you’ll ever experience a huge loss. If you blew your account, save up another stack if you still feel the passion, if not leave trading alone.

No I am not, but the odds are slim. There are certainly techniques which put the odds a little more in your favour than others and applying advanced statistics like the rest of the corporate and scientific world will make any system more efficient. But those kind of things require an experienced trader to pull-off correctly. Maybe you are lucky and pick a method which suits your personality and at the same time provides you with an inherent edge!

But even if you pick such a system it still requires an experienced and skillful trader behind the screen. So you would need to hire one early on until you accumulated the experience and skills yourself. Automated trading systems will certainly get a boost from artifical intelligence in the future so will see where this is heading.

Original Question: Do you trade option ? Can we apply your theory to option trade ; if so whats the expiry we should take once the stock in QTS ?

I don’t trade option! The reason is very simple. Why the heck should I make trading harder by having to get two things (Direction and timing) correct instead of just one? INCREASE IN LEVERAGE DOES NOT MAKE UP FOR THIS HANDICAP!

Not being able to make a fortune in stocks and then trading options is like trying to swim in the wild ocean hoping that you manage to learn swimming there when it didn’t quite worked out in the indoor pool before. Or trying to ride a unicylce because you didn’t manage to ride a normal bicyle. Or… you get the point!

Option trading for retail is a massive con in my opinion. Options don’t provide a better risk risk reward ratio compared to stocks. If you are lured into them just because of the leverage consider yourself to be a gambler.

But maybe I am ignorant and simply suck at options. If you manage to make it work for you than more power to you.

Trades on which you only lose a predefined maximum risk % of your account balance are an integral part of my (or just about any) active trading system. Depending on the desired risk-multiple you know how your ratio of wins to losses has to be in order to statistically come out ahead in the end. In my case I have a win rate of around 27% for my 3R and greater wins. This means that I can easily digest 3 stop loss hits before I need to score a 3R win. However I run a capped system so my real wins are oftentimes larger than 3R so I will be fine if only every 5th to 6th trade is a win.

Being able to absorb many stop loss hits allows me to act on opportunity without fear and using that stop loss hit as feedback which tells me if the market is ready or not. Receiving this feedback in real time is crucial because when a cycle started and stocks made moves it is already too late.

As you see a stop loss hit is…

A) a perfectly fine piece of my system just like a 3R win and

B) a important feedback mechanism for me to adjust exposure.

Every piece of a system which works as intended is good, hence stop loss hits are good trades.

The only bad trades are those who exceed your max risk. Even trades where large paper profits vanished and then go on and even hit your stop loss are actually good trades as it is simply a stop loss hit which can easily be digested and is nothing to worry about. You’d be upset but you also know that this is fine. For this to work you must trade a system and have to trust your expectancy number and ignore your account balance. If you are fixated on your account balance, a trade where you give back all profits can indeed harm you fragile trading mind. Always trade a system and if that system has a positive expectancy then you must start to ignore the account balance. Once you see that your system is not profitable because wins are way too rare in between the steady stream of stop loss hits, you probably have to change/tweak your setups and stop loss placement.

The Blueprint: Your goal as a trader is to create a steady stream of stop loss hits which never exceed your maximum risk and then work on increasing the frequency of wins in between. Once your frequency of wins is where you need it to be you can start to put some more icing on the cake by letting those winners run more and more. In any case you want to maintain the integrity of your base risk multiple system and truly treat the profis beyond your goal risk multiple as extra. This is what I do in my capped portfolio approach. Meanwhile statistics will tell you how to adjust/tweak your base goal risk multiple to make it easier to maintain that profitable base system.

My setups work very well when working with daily and weekly charts within my normal time horizon raning from days to months. Index ETFs or passive trading in general are dominated by huge funds (e.g. pension funds) or other big operators with very long time horizons. The techniques will likely work to a degree but if it’s good enough to create a working trading system is something I don’t know as I never gathered any data in that regard.

If someone tries to apply the techniques I am very interested in the data!

In general all of the techniques I use are based on psychology and therefore should work wherever humans are involved. Timing plays a very important role in trading and if timing is off it can push a otherwise working system into the abyss easily.

Here a correlated question about the applicability of my techniques on an intraday level thus covering the other side of the timing spectrum.

OriginalQuestion: How often, or do you ever get to 100% cash when the market starts to roll over? Or do you just switch to short positions instead? (e.g. selling the previous leaders)

Well, I often go to almost 100% rather quickly when things get ugly. I quickly part ways with recent trades in order to have a more easy time to hold onto the longer term position trades (Position trades typically make up between 20 to 50% of my overall equity. However before things get ugly I oftentimes try to catch a climax move short sale in one or maybe two prior leaders. Other than that I rarely short the intial breaks off the highs but rather wait for shortable weak rallies into major resistance level after such breaks (A very good timing technique I adopted from Gil). Currently (Jan 2021) many big stocks are trapped in volatile topping formations ($MSFT $AMZN just to name two). Here I would short right away when I see weakness in the form of meaningful bearish price and volume clues. Being both long and short happens quite often in such an environment. I don’t see this as hedging in the classical sense but rather seizing opportunity in both directions when the market underlying direction is not clear yet.

In 2020 I had several weeks where I was in 100% cash waiting for proper setups. I actually was in cash for the majority of the crash. Typically I am in cash for a couple weeks each year as I wait for proper setups to emerge.

related Q&As:

How do you decide when to be fully invested and when to keep some cash?

How would you increase exposure coming from cash and managing a large portfolio?

Original Question: How often are you fully invested? How big is your typical cash position at any given time? How do you decide when to go full and when to keep some cash?

Related Q&A: how-would-you-increase-exposure-coming-from-cash-and-managing-a-large-portfolio/

Fully invested means that I am 100% invested. The other 100% margin is only used to add to already established positions or to engage with opportunistic setups. You always want to keep some buying power for those sepcial occasions when your skilled chart eye sees a major opportunity.

Over the year there are typically 3-5 opportunities to make money. Those typically come right after a market pullback and spring to life in midst of uncertainty. My approach allows me to catch those waves early on and I typically end up being fully invested a couple weeks after the start. Normally I am almost fully invested around the time when the rally and thus a looming market leg up becomes rather obvious to the crowd. Then I sit tight and scale-out depending on the action of my individual holdings. This makes room for one or two fresh money buys just when other stocks reach limits and fresh setups emerge. Once sell signals hit I tend to be more cautious with fresh money buys and only focus on the very best and less obvious setups. When I made a couple fresh money buys I also tend to rather cut back those trades which allows me to sit tight in my longer term trades from earlier in the cycle. I also try to engage in early short sale opportunities off the peak by shorting at least one stock off the peak. Once we reach this phase my rules push me to a larger cash postion naturally and I make sure to accept that feedback and avoid arguing with the market by plunging into obvious lagging setups which are just there to lure in the slow animals right before a correction starts.

So in short: I go from net short or small (up to ~30%) long exposure to 100% within a couple weeks. Depending on momentum and setups this can also reach margin territory of up to 180% for brief periods or on a intraday basis sometimes. I never ever go above 200%! Once the sell signals emerge I quickly go below 100% (typically this happens automatically) and then go on and let the market push me in the right direction. All this above typically unfolds within weeks to months.

This last transitional phase is crucial as this is the time when most active traders lose money by quickly overcomitting to the long side again. This is very skill dependent and you need to develop a feel for the market and you need to have a handle on overtrading, fomo and all those destructive emotions.

I oftentimes sit between -30% to 30% (-30% means I am roughly 30% short, which means two regular positions) in predator mode for weeks or sometimes even months waiting for opportunity. Sometimes the short side provides more and sometimes less opportunity. I always try to test the waters on the short side when big stocks rally into resistance following destructive high volume breaks off the top. Depending on opportunity I sometimes can quickly plunge heavy into shorts to catch a swift decline. However compared to the long side, the trades on the short side unfold swiftly. Here I can reach -200% intraday just to scale-out back to 0% exposure within a day or two. Short selling is not needed nor recommended to make money in the stock market. Once you really are in sync and have many years of experience you can start to look into it, but not before! It can greatly mess with your fragile market timing sense without making up for it on the profit side.

Then when you least expect it fresh setups pop up out of nowhere and a fresh opportunity cycle springs to life.

The trick is to just enter setups when they show up in real time. I may get stopped out a couple times before hitting the homerun. When I hit it I brag about it on twitter while I sweep the stop loss hits needed to ‘nail’ it under the carpet. Joke aside, my typical 20 trade rolling winrate fluctuates between 25 and 45% most of the time. When I am actively seeking an entry I often experience stop loss hits. However those stops are very small.

Doing it that way isn’t needed and you always walk a fine line between improving your entry price and overtrading. When you can’t watch markets intraday you simply enter with your regular stop loss. However when we talk about quiet and tight setups popping up during prolonged sideways action some can fail and it can indeed require one or two stop loss hits before the stock -and market- give you green light.

Short answer: No I don’t move stops to breakeven!

Long answer: I never ever move my initial stop loss before a trade hits my R-multiple threshold. However this is mainly due to my sharp stops. If you use wider stops it might make sense to sell on a proper red flag before hitting the R-multiple threshold. But in my honest opinion it is better to avoid any intervention after the entry thus allowing the market to do the magic for you!

I do use scale-outs to avoid being shaken out on natural pullbacks which more often than not coincide with stocks hitting the widely followed 3R mark from widely followed entries such as pivot breakouts and pocket pivots. Once I scaled out the initial stop loss becomes meaningless and I will trail it up to the next logical level of support. However this is a just a safety mechanism for protecting me against a flash crash as I will sell on a proper red flag independent on the “trailing” stop. Also be aware that such a protection trailing stop must be placed ABOVE support so that you are getting filled before all the other stops in the case of a sudden crash. This is the exact opposite to a regular stop loss, which must be placed below PLL support in order to avoid regular shakeouts. A protection trailing stop is just an intraday protection mechanism when you are not sitting in front of the computer.

Actually that is exactly the opposite of what I really do or try to do. Most of the time I have a couple position trades running which matured over time (couple months). Many of those started as swings. I then add most fresh money swing trades when I see quality setups showing up after a period of market turmoil. This is what I often refer to an opening window of opportunity. Those early movers of an opportunity cycle are the stocks I focus on the most as most traders will miss out on them waiting for more confirmation. When these early movers ran their course and start to hit logical resistance or even flash red flags I DO NOT just rotate to the next hot group. This is because those early movers are in sync and the next hot thing is obvious to everyone and often attracts the late comers and FOMO traders. I don’t say that they can’t go up, but overcomitting to those stocks more often than not messes with my market timing.

The cardinal sin of swing trading is to not be able to sell into strength when swings reach their natural price targets. If you are unable to fight your greed and stick to swings with full position you will be forced to sell them on the way down which puts you in a weak position. The cardinal sin of position trading however is to overcommit to the next hot group which then corrects and increases the heat until you are forced to sell your strong position trades. If that happens always sell the recent swings you entered!

The correct thing to do is as follows. You must be able to engage with the early movers without fear when others still lick their wounds. Then you sell partial profits of your swings into unusual strength when the late comers push the markets higher. Then you wait for those early movers to go through a natural pullback or correction. You can of course always engage with fresh stock ideas along the way but make sure not to overcommit! Try to stick to your position trades all way through and even think about adding swings (scale-in) on top of your regular position when a proper setup emerges in one of them. All this is an organic process without strict rules, you go over charts and listen to the feedback of stocks.

Over time you will learn to create a feel for the market and understand how it moves in a waves in order to inflict specific emotions into the crowd at specific times (the 90%+ who lose so that you can excel). Once you manage to be ahead like this you turn into an observer from above, reading the collective hive mind ready to strike at the correct opportunistic moment. For this to work you MUST isolate yourself from all the noise. It is all hidden in the charts, trust me! It will take time to develop this skill.

That is a very good question indeed! From hearsay and my own experience I can tell you that most money is lost when traders jump back into a stock too early. While nobody can predict the short term, let alone long term price development it is very important to always have a couple realisitic scenarios in the back of your mind. This means that when a stock made a move and starts to pullback or flash topping signs I start to imagine what a proper consolidation could look like at this point. This thought process forces you to be objective and helps to tackle down feelings such as hope (The hope that your beloved stock will stop going lower) or fear (The fear that it will quickly turn around and continues to rally without you on board).

When a stock ran up 150% in 3 months then it will take time to digest the move and you must not jump back in on the first little rally off a logical but weak support. You can watch it and it often flashes setups which then falter. Generally speaking the most powerful stocks must digest the move and draw the attention away. Realistic consolidations typically have 2 or three little waves down or they at least test prior lows or former pivots. In order to get the timing right you must realize that stocks often wait for the 50d MA to catch-up with price. The most explosive names just wait for the 20d or even 10d MA on their way up. However once a short term top is in (Stock printed a clear red flag) it is often the 50d MA which comes into play.

Give a stock time to go through the much needed psychological stages of A) Getting rid of weak hands B) Drawing attention away and then C) Attracting smart money again. This can take weeks to months. Rinse and repeat.

The market pushes me to short at least one of the high flying big stocks at the time when they flash some climax reversals. Other than that I rarely short the initial break off the highs but rather wait for reaction rallies into resistance in the former leaders which had the most severe, high volume breaks off the highs. Regarding ETFs I only go long $UVXY sometimes.

This sums up my approach to the short side which I adopted from Bill O’Neil and Gil Morales.

The answer is probably a lot more simple than what you expect. A quiet and tight setup (QTS) is not a one day signal! It happens when a shallow and constructive pullback pattern into support plays out nicely and then turns tight compared to the prior daily range of the stock with volume disappearing. This tells you that sellers are out of the way. Once buying kicks in price will rise quickly.

So I know when to scan for #QTS once I see multi-day or even multi-week quiet and tight setups unfolding in front of my eyes. More often then not this takes place during market pullbacks when volume is running low across the board. The act of scanning is then only a matter of finding that quiet and tight day which can act as the catalyst for a price explosion.

You will get a feel for this when you go through your charts daily.

Original Question: By the time you undergo all your scale outs in a winning play and you “bullet proof” your hold in the set up as you like to say, how much of the principle buy-in size is the position trade typical worth for you? I find myself scaling out aggressively and not having enough ammunitions left in my position trades to make it worth while. This has happened with multiples names like LMND, PINS, NIO. I am typically left with a quarter of the buy in for swings that turn into position trades. By having a quarter size, I am able to absorb shakeouts but some of the set ups in the past year were high octane and made their swings without any severe shakeouts and I found myself undersized for the ride.

This is a very good question! There are no hard rules for this and you must not try to get hard values from me for reasons I am about to explain.

The amount you scale-out must be enough so that your trades don’t trigger the base profit lock-in (2.6R rule) all the time. The basic idea of the scale-outs is twofold… First you want to secure some profits when stocks go crazy and pop 10% or more intraday, second you want to be in a position to let a trade turn into a longer term position trade without being shaken out when the crowd joins in the causes the usual shakeouts. Recall that most of my entries are early inside of a base!

It is also very important that you refill your position back up to your regular position size once you are provided with another proper setup along the way! That’s the idea of my system which is explained in great detail in my comprehensive money management article.

Now back to your question of how much should YOU scale-out and keep for the ride.

If you feel that you are undersized then you scaled-out too much, simple as that! All those thresholds I use suit me perfectly and allow me to trade with great ease without triggering any emotions. Even my wins usually don’t trigger excitement anymore. Whenever an emotions comes up I act and make sure the get rid of it asap. I don’t care if I lose profits that way. For me, it’s about denying the market any opportunity to evoke emotions in me!

When a stock goes nuts and pops 10% on an almost daily basis I scale-out aggressively and sometimes I am left with only 1/8th of my initial position after a week or two. This means the price and volume action of the stock naturally turned the trade into a pure swing trade. Most of the time I simply keep the remaining size as a core in order to force myself to follow up on the name at a later time. This is the core principle of my hybrid Swing and Position trading approach.

Normal strong multi day moves often leave me with 2/3 to of my regular position size. But I sometimes double my regular position size intraday on QTS setups with the idea to catch the initial pop with a larger size. This requires active intraday trading in order to manage risk.

Rule of thumb is to scale-out 1/4 to 1/3 when a stock is up roughly 3R or when it shows a double digit percentage pop right out of the gate.

Again, the idea is to fill up your position back to normal when another proper setup shows up. Don’t expect me to always point this out in active trades where we found an earlier entry.

Pulling this off in real time requires practice so that you can adjust the thresholds to better suit your own risk allowance (to avoid emotions). I am an active full time stock trader and I don’t sell or provide a streamlined product. I simply share what I do but try to formulate some concepts into easier to follow rules whenever possible.

Just get familiar with this concept and trade it. Once you accumulated some experience tweak it to suit your needs. In any case I strongly urge you to act around strong PLLs.

More power to you!

Original Question: Aim is to make 3 x the risk I take.  Therefore if I have an initial stop of 3-4% the aim is to make at least 10% on the trade. If my account equity is $9000, my risk per trade is $90 and my profit target $270 Once I reach my profit target of $270 (profit on the trade), I move up my initial stop loss to 2.6R which will be $234, wherever that may be on the chart.  This is a mental stop and not a hard stop as with the protective stop.  Or is it a hard stop placed with my broker?

First of all don’t be too strict with the exact values. 2.6R just came out mathematically when I crunched some numbers based on my own trading history with the quiet and tight pullback entry a couple years back. In practice it doesn’t matter if you go for 2.3R or 2.8R. The closer to the goal profit/loss ratio (aka risk multiple) the better.

So what you wrote is almost correct, let me explain.

The aim is to let the trade unfold and only lock-in 2.5R if it was up >3R before.

The portfolio base-profit lock-in is indeed a hard stop order at the broker. Recall that my initial stop loss evolves over time. In the beginning it’s the original stop loss, then I move it up to secure the base profit and later it transforms into a protection stop loss (Not to be confused with a trailing stop!).

Recall that the goal is always to be able to scale-out some when a trade reaches 3R or beyond. So when I place a trade I am very aware of the logical levels and I sometimes decide to go with the stop loss level which will also provide me with a more logical scale-out level around the 3R mark. Sometimes it all aligns but sometimes not so much. It’s about getting as close as possible to such an ideal overall arrangement as possible. I don’t want every second trade to trigger the base profit lock-in so scale-outs around 3R are crucial to give you more room to the downside.

You want to lock in roughly 2.5 times the dollar value of your INITIAL stop loss ONCE the trade was up >= 3R. So if the initial stop was 20k USD you want to secure a 50k USD win. The more you scale-out around 3R or above the more the price can drop before it undercut that 2.5R threshold. If you scale-out well before the trade was up 3R the rules still apply:

i) Trade was up roughly three times the dollar amount of the initial stop loss ==> Base profit lock-in stop is set around 2.5 times the initial stop loss dollar amount.

ii) Trade was not up three times the dollar amount of the initial stop loss yet? ==> Let the market do it’s magic and get initial scale-outs in place when the opportunity comes up. When the market is really directionless and when there is no established uptrend yet, you should realize some profits when you have them. It makes no sense to let many 2R wins turn into losses again. But I simply don’t have rules for that. It involves discrete trading decisions in real time to stay in a strong mental position. Be reasonable!

I do have some hard coded rules but I also follow general principles! The principles are harder to grasp but even more important. The principle to stay in a strong mental position is a major one. Every trader knows the feeling of being with your back to the ropes receiving painful punches to the gut. If you know that you will feel that way if your current 1.5 or 2R trade turns into a stop loss, then you have to exit, simple as that. I am pretty good as being truly emotionless if a 2R trade turns into a stop loss hit because I don’t overtrade.

I trade much less when the window of opportunity is closed than what many you would think. I always make sure to control open heat so that I can give the trades all the room they need. Intervals between Stock Ideas within the Membership Service will help you get a better feel for this.

But please be aware that my approach is specifically designed to let winners run well beyond 3R. My goal is not to collect only 3R or 2.5R wins. My goal is to let trades develop into 10R+ trades and I am fine when they do this with only 2/3 or 1/2 of the initial position due to early scale-outs. But the stocks almost always provide you with another proper entry setup down the road so that you can refill your size back to normal. 10% rule can be triggered anytime. A 10% move is simply too good to let it evaporate quickly, especially in a choppy and directionless environment. Major resistance level are oftentimes roughly 10% apart. So the idea behind the 10% rule is twofold, A) you scale-out some when a stock is up double percentage digits (many screen for this!) thus attracting momentum chasers who increase volatility and pullback probability and B) a 10% intraday move almost always “connects” two major support/resistance levels. In an ideal world your 3R level is located right at such an important level.

This is the overall idea and I try to “plan” a trade in advance based on the chart with all that in mind. However, I am not super strict but rather go with the flow of the chart. If it all aligns, fine! If not, also fine.

As Bruce Lee famously said: “Empty your mind, be formless, shapeless like water…”

It is super important that you apply those techniques with ease by understanding the principle ideas behind them. Don’t get lost in exact values and rules. Goal is to ride those winner AND to stay in a strong mental position by not letting solid trades turn into losses again!

I was able to combine short term swing trading and long term position trading into one fluent hybrid approach. For this to work out I had to take some of the guess work out of the equation by having a couple hard-coded rules at hand (mainly the 10% scale-out rule and base profit lock-in rule) to not get lost in the transition zone. I often enter inside the base, the transition zone would then be the actual breakout or the post breakout action. Quite often this aligns with the position being up 2 to 4 times the initial stop loss.

My stock handling methods are not a black box and require skill and patience as I just share what I do myself. I did not create a product which you can buy & use. I just perform the art of trading in real time and let you follow my actions as closely as possible w/o violating the legal boundaries. I am an active trader following the markets throughout the session ready to react to real time events. I trade what I see.

When direction is less clear I sometimes “work a trade” intraday until I have established a solid initial position, this can mean that I enter in anticipation of a QTS just to exit again 5min later. I do such things to receive market feedback which tells me a lot about the underlying currents and shifts unfolding in real time. Once the picture becomes clear(er) I wrote that insight down in my journal which happens to be my Twitter feed.

The stock picks within our Membership Service simply provide high potential stock ideas according to my believe. I provide the entry and a logical stop loss level. Once an idea is extended it will switch from “actionable” to “hold”. I will then follow up with another proper entry opportunity or a true red flag exit signal, whatever comes first. I will also try to notify members if scale-out opportunities are present via blog-posts or even public tweets.

But members are free to handle those stock ideas based on whatever method they want. Any method derived from O’Neil and CANSLIM should work.

I will support you as good as I can in applying my own techniques!

Read some more about this base profit lock-in technique here:

https://thweis.com/the-definite-guide-to-money-management/#Mind-Trick-2-Secure-your-base-profitrisk-multiple-via-scale-outs

https://thweis.com/faq/can-you-elaborate-more-on-your-portfolio-driven-rule-for-trimming-your-winners/

https://thweis.com/faq/protection-stop-level-when-the-2-6r-rule-is-triggered/

It depends. On the first logical market bottom I engage with at least two or three stocks, each one with roughly 1% Maximum Risk per trade. I am not talking about the first reaction bounce but rather the first real skill based bottoming “call” based on perceived bullish clues in individual stocks and the broad market indices. Therefore open heat ranges from 3 to 4.5% in most cases. If the market adds another leg down (or leg up) I quickly reduce this to two or maybe even just one name. You can’t afford to lose 4% three times in a row. If you are not sure then simply go with 2 stocks and roughly 2-3% open heat and reduce it to just one if the search for a bottom continues.

Original Question: How do you calculate your position size when you are testing the water?

When I am testing the waters after a period of little opportunity (typically coming from a market correction) I follow my normal position sizing procedure as explained here. However I control risk by keeping my open heat in check. Open heat refers to the percentage of your trading account which you would lose if all recent fresh money trades (longs or short) would hit their stops at the same time. There is no such thing as hedging when it comes to open heat so shorts don’t offset long trades and vice versa.

Here are some related Q&As:

Should I reduce size when losses start to add up?

How would you increase exposure coming from cash and managing a large portfolio?

You just rotate to different groups of stocks that are hot at that time. Right?

Original question: Do you trade smaller when you notice your trades are not working out as they used to?

Not an easy one to answer.

Altering position size based on portfolio issues is generally a flawed approach. I have touched the theme here in this article about proper position sizing. Position sizes should always be a function of the charts. When you reduce position size based on your drawdown or losing streak you mute further drawdown potential but you’ll also mute recovery potential. You are also forced to react from a position of weakness, which is bad practice according to my belief. Now you have to get the timing right for both cutting size and then readjusting back to normal size when things are normal again.

If you would possess that timing ability you could make better use of it by simply not engaging with trades until proper setups show up again. Learning to pull this off is a serious skill and reducing size so that you can continue to trade won’t allow you to accumulate quality practice for that skill. It’s a major part of my own trading and one of the main goals of our Stock Ideas Membership Service.

Here’s a a good place to start learn proper market timing!

I believe that trading small, or even very small, sizes when the market is dull is a deeply flawed approach, as it does not help you do the right things, quite the opposite! I only reduce size when I test a new setup in real trading or on rare occasions when I have to fight severe boredom.

But, it can be a valid safety net for sure if you are prone to overtrading and simply can’t handle it any other way. Any strategy that helps keep your account from spiralling into a drawdown that is difficult to recover from is sensible, because the stock market can be the meanest place on earth if you are not humble enough.

But*But, in that case it would be better to follow sound protection rules and go with a lower maximum risk per trade to avoid running into serious trouble in the first place.

If your drawdown is already so large that your mental barrier begins to crumble (you can’t trade without that barrier!) you can try to follow the tips in this Q&A here: I experienced a huge loss, how can I cope with that?

You can always simply reach out via mail directly: stocks(at)thweis.com

I will always have an ear and hopefully a good advice for anyone calling for help during dire times. After all I lost 75% of my initial 10k stake during my early years myself. This wasn’t a small amount of money for me as a student in my mid twenties. I saved every penny for 3 years and saw it being eaten up by a myriad of stop loss hit. Painful memories indeed. But I now know that it can get much more serious when someone has to not only take care of themselves and trade with money they can’t afford to lose.

Original Question: I’m new to trading and i have a small account. Do you have any recomendation to trade in a margin account around pattern day trader rule? Should i switch my account to cash?

I have only recently started to think about this topic in more detail and it will be covered in a future article.

I never traded a cash account because I didn’t know it existed back when I opened my first account in 2010/11. It is a double edged sword. The problems with trading a small account are manifold. You actually should learn to trade properly from the start but that could mean that it will take you a long time to reach a meaningful account balance and thus meaningful returns to make a living from your trading. You also want to get the major sandtraps out of the way early on. Getting them out of the way means to step into them as you won’t be able to dodge them all. For me it was a long journey and I recall that I had a lot of trouble to trade up above the 25k day-trading barrier back then ( I started with 10k). It was all psychological.

With my knowledge of today I would approach my early trading years differently. First of all I would trade with only cash for the first year leaving margin alone and learn to stick to stops and just trade and watch charts day in and day out. After that I’d switch to a margin account and start to trade with higher risk (~3% of account balance for the stop loss hits) and employ margin to the fullest. When you learn to trade it is helpful to explore the boundaries of your comfort zone and there is nothing wrong with increasing risk to leave the 25k barrier behind you quickly. It also helps if you can show to yourself that you can actually recover from portfolio drawdowns. If you follow such an approach your must realize that you could create deep drawdowns. If that is fine and if you don’t have a hard time saving another stake then this is probably the way which allows you to gather the most experience in a short amount of time so that you are primed to trade properly once you are above 25k. I would also use some part of the portfolio to just buy and hold a big cap growth stock to learn about the market cycles early on. Simply hold it and watch it.

However if you can’t handle the risk or even trade with money you can’t afford to lose, my advice would be to get a margin account but simply never go beyond 100% and trade only 3 or 4 stocks at a time with reasonable risk (2 – 2.5% of account balance for the stop loss hits). If you have the base levels of your trading pyramid covered you can hope to create constant profits rather quickly. But you must cope with your urge to “get rich quick” because it won’t be quick. Make sure to focus on your defense as you want to avoid deep drawdowns as the time to recover is long and taxing.

While I have various little intraday techniques in place now and ‘work’ my positions a lot, you as an aspiring trader can’t hope to be able to pull this off early on. You simply won’t have the skill yet. Better keep it simply. Best way to do this is to leave intraday and margin trading alone early on. So with regards to the pattern day trader rule you just have to apply proper positing sizing and stop loss placement and then mostly trade quiet and tight setups and some momentum gap setups or even the pocket pivots from Gil Morales. Focussing on only two setups will help to keep overtrading in check. Quiet and tight setups can be easily scanned for in advance before the session just like momentum gap setups. And you also want to focus on quality stocks only according to my rules. You enter with a market order at the open and quickly set your stop loss orders. Fire and forget. If you can watch the market intraday you can gradually try to handle them properly with the scale-outs and all that.

In the end it depends on your personality as well. I was a strict robot following CANSLIM rules during my first year. I sticked to my stops but was buying way too late right into ensuing pullbacks. I was eaten alive by my stop loss hits. And then I started to trade recklessly trying to recover. Which I did multiple times. Once I recovered I switched back to my robot self and the bleeding started all over again. Rinse and repeat. It took me a very long time to realize that I only traded fearless and with self awareness when I tried to recover from drawdowns. Over time I learned to merge both personalities into one and got rid of my robot self eventually.

Full question: Can you elaborate more on your portfolio driven rule for trimming your winners? When an open position drops below the threshold do you exit right then or you usually wait to see if end of day it is still below that threshold? How far lower from your goal risk-multiple do you usually set your threshold? Thank you!!

Yes, this is a hard rule. Once it hits the threshold after being a legit goal risk multiple trade before, I will close the full position right away.

For a 3R trade I set the threshold to 2.6R. In general it is roughly half the risk but that value stems simply from experience. The goal is always to create a trade which has a logical scale-out level around my desired goal risk multiple. Once the desired scale-out is in place a trade rarely hits the threshold at all as it would now need to drop so much that I would sell anyway.

This however depends on the amount and therefore the magnitude of the cumulative scale-out. It’s when I wasn’t able to scale-out that this rule shines the most. It oftentimes allows me to secure my desired wins with regard to my win-rate. Both parameter are closely correlated

OriginalQuestion: How often, or do you ever get to 100% cash when the market starts to roll over? Or do you just switch to short positions instead? (e.g. selling the previous leaders)

Well, I often go to almost 100% rather quickly when things get ugly. I quickly part ways with recent trades in order to have a more easy time to hold onto the longer term position trades (Position trades typically make up between 20 to 50% of my overall equity. However before things get ugly I oftentimes try to catch a climax move short sale in one or maybe two prior leaders. Other than that I rarely short the intial breaks off the highs but rather wait for shortable weak rallies into major resistance level after such breaks (A very good timing technique I adopted from Gil). Currently (Jan 2021) many big stocks are trapped in volatile topping formations ($MSFT $AMZN just to name two). Here I would short right away when I see weakness in the form of meaningful bearish price and volume clues. Being both long and short happens quite often in such an environment. I don’t see this as hedging in the classical sense but rather seizing opportunity in both directions when the market underlying direction is not clear yet.

In 2020 I had several weeks where I was in 100% cash waiting for proper setups. I actually was in cash for the majority of the crash. Typically I am in cash for a couple weeks each year as I wait for proper setups to emerge.

related Q&As:

How do you decide when to be fully invested and when to keep some cash?

How would you increase exposure coming from cash and managing a large portfolio?

I typically buy the position at once if possible. However when liquidity is on the lower side I do make a test buy (1/3 of normal position size) first. This is important when you enter into quiet and tight action as liquidity can be a little lower. Depending on how the stock absorbs my test buy I make a decision to add to full right away or even add to double my normal position size intraday with the idea to capitalize on the initial pop. If the stock doesn’t pop or if price pulls back to half my stop loss I cut back to my normal size.

The momentum gap setup is an exception as I only always buy 1/3 to 1/2 of normal positon size for this setup right at the open.

Original question: What (kind of backtesting) do you do to understand if your rules or system is likely to have a positive expectancy?

I don’t do any backtesting at all. It doesn’t work as no algo can see what a trained chart eye can see. My “backtesting” is simply my own trading history. History is 2400 trades rich (1700 with basically an identical system) so I was able to drew a lot of conclusion from analyzing my own data. I believe that analyzing ones past trades and getting rid of stuff which simply doesn’t cut it is a major part of refining or honing any trading system.

I do a basic t-test analysis of my trades to learn about the probability that my expectency is real and not just part of a normal distribution with a mean value of 0. Once that probability is at >99.9% I call it good and try to keep it at that level. I also include the initial risk of my wins in my calculation of the expectency. Then I go on and only monitor this calculated expectency and try to keep it positive. Doing it that way helps you to be detached from any monetary value. I even go one step further and cap all real wins at ~3 times my average loss for the sake of the expectancy calculation and try hard to keep that capped system positive. In reality I do have many wins above that capping threshold but for the sake of the calculation I ignore them. Psychology wise this simple technique is almost holy grailish, but don’t tell anyone 😉

As you may know, trading outcomes shouldn’t be normally distributed in a >3R system with a winrate of 30-40%. You typically have a huge peak at -1R, which is basically your maximum risk. Ideally 1R should be between 0.5 and 2.5% of your account balance! Most of your trades will end up being stop loss hits at around that level, hopefully ;-). Then there should actually be a void all the way up to around 2 – 3R where you realize your baseline R-multiple wins. Most traders have a lot of trades around breakeven. This is a signal of a weak trading system and shows that the trader in question likely moves his stops to breakeven due to psychological pressure. Anyway, it is clear from the above that the outcome isn’t normally distributed but rather lognormal (inlcuding negative values) with a peak around 2-3R. I applied some transformations to my data to make it normally distributed before applying the t-test but that didn’t change much hence I skipped it.

As a matter of fact the outcome histogram of your past trades is actually your trading fingerprint. Analyzing it tells a lot about your weaknesses and strengths at a glance. Therefore this will be a major part of the upcoming methodology/coaching service. One can use a histogram of the R-multiples or the “% of account balance” directly. Former distribution can be tricked by trading small positions so I advice you to use the latter in combination with a calculated expectancy and statistical validation (t-test) including the initial risk of winning trades as outline above.

If you are not aware of your outcome histogram you lack one vital tool in your toolbox for sure.

Original Question: Portfolio Management(rather than individual trades): How would you increase exposure coming from cash and managing a large portfolio? ie, how to decide how many initial stocks, kept for how long before investing more, how much open risk, etc?

Answer: I try to act on early opportunistic signals to get quickly involved in a reaction rally or ensuing uptrend. I only engage with one or maybe two names to counter any FOMO. I am careful not to increase open heat (read: Open risk) too much. Then I continue to act on proper setups until I am 100% invested. I then go on an use margin mostly to add to my positions when they flash proper entry signals in the weeks/months ahead. I sometimes double my regular position size intraday with the idea to catch the take-off and then scale back before the close. I only do this in quality names and when I am able to watch the position like a hawk.

When we enter a correction I try to trim my fresh positions and thus decrease open heat even more to make sure that I don’t feel any pressure to sell my longer term multi month holdings.

Here are some rough position-size guidelines:

For a small <200k Portfolio 3-4 stocks to be 100% invested

For a 500k Portfolio you can increase this to 5-6 stocks to be 100% invested

For a >1M Portfolio one can increase this to 8 stocks. With 8 stocks you are properly shielded against single stock black swan events already. Handling 8 stocks is a major challenge.

For new postitions aka fresh money buys I employ a logical bottom up position sizing technique based on the real support and resistance levels of the respective stock chart. Once a stock is a winner (trading above my desired risk multiple) I set protection trailing stops. Such stops are not to be confused with trailing stops. A normal trailing stop would be placed in a way to avoid shakeouts at a nearby support level with the idea to realize profits.

I DON’T DO THAT!

What I do with winning teade is, I place a PROTECTION STOP further down the chart. Then I go on and handle my trades the normal way, selling on sell signals and scaling out into strength. The sole purpose of the protection stop is to protect me against a intraday flash crash. I experienced two of them already during my decade in the market and trust me, you don’t want one of them to hit the markets when you are away from your screen. To ensure that I get filled on my protection stop I actually place them right above support to get filled before the crowd who place stops below or at support.

Recall that I don’t add to positions in the classical sense. I wait until a stock flashed a proper setup and then I pull the trigger and fill the size up to my regular position size limit if I scaled-out before. However I am reviewing this technique right now and I explore a procedure where I add a normal position including a new stop even when I already have a position in the stock. I would then exit this position when the stop is hit but keep the early position alive. Goal is to sit tight in core positions over months or even years. I will keep you guys posted.

Position trades typicially consume between 40 to 60% off my account size. I use the remaining 140 – 160% for swing trading in more explosive names. I rarely go over 200% on an intraday basis and when I do it it is mostly on the short side. I scale out of my swing trades aggressively and find myself mostly in position trades after a while. Rinse and repeat.

I use a bottom up position sizing technique where I calculate the correct size according to logical stop loss and price target levels of the stock at hand. I only trade the ideas which exceed my profit/risk threshold (Risk multiple). I set the max risk I am willing to lose on each trade via this technique.

You can use our Max Risk Calculator for that purpose:

Trades on which you only lose a predefined maximum risk % of your account balance are an integral part of my (or just about any) active trading system. Depending on the desired risk-multiple you know how your ratio of wins to losses has to be in order to statistically come out ahead in the end. In my case I have a win rate of around 27% for my 3R and greater wins. This means that I can easily digest 3 stop loss hits before I need to score a 3R win. However I run a capped system so my real wins are oftentimes larger than 3R so I will be fine if only every 5th to 6th trade is a win.

Being able to absorb many stop loss hits allows me to act on opportunity without fear and using that stop loss hit as feedback which tells me if the market is ready or not. Receiving this feedback in real time is crucial because when a cycle started and stocks made moves it is already too late.

As you see a stop loss hit is…

A) a perfectly fine piece of my system just like a 3R win and

B) a important feedback mechanism for me to adjust exposure.

Every piece of a system which works as intended is good, hence stop loss hits are good trades.

The only bad trades are those who exceed your max risk. Even trades where large paper profits vanished and then go on and even hit your stop loss are actually good trades as it is simply a stop loss hit which can easily be digested and is nothing to worry about. You’d be upset but you also know that this is fine. For this to work you must trade a system and have to trust your expectancy number and ignore your account balance. If you are fixated on your account balance, a trade where you give back all profits can indeed harm you fragile trading mind. Always trade a system and if that system has a positive expectancy then you must start to ignore the account balance. Once you see that your system is not profitable because wins are way too rare in between the steady stream of stop loss hits, you probably have to change/tweak your setups and stop loss placement.

The Blueprint: Your goal as a trader is to create a steady stream of stop loss hits which never exceed your maximum risk and then work on increasing the frequency of wins in between. Once your frequency of wins is where you need it to be you can start to put some more icing on the cake by letting those winners run more and more. In any case you want to maintain the integrity of your base risk multiple system and truly treat the profis beyond your goal risk multiple as extra. This is what I do in my capped portfolio approach. Meanwhile statistics will tell you how to adjust/tweak your base goal risk multiple to make it easier to maintain that profitable base system.

Original question: On you charts there are grey PLL-zones and sometimes lines within them. Do you draw these zones and lines by hand or is this some setting in the VRVP indicator?

I draw the horizontal lines and zones by hand based on the volume-by-price profile in TradingView. However I also let TradingView add an automatic line at the peak volume level of the current chartview.

Original Question: How do you draw the clothesline? After a downtrend, when the uptrend resumes, where is the starting point? I refer here to the NDX clothesline when you mentioned 12900 …I did not understand why this is a point of importance.

You start drawing the clothesline once you have two significant price peaks which you can connect.

Here is an example:

The clothesline is a trend line on a chart with a logarithmic price scaling. Therefore a straight line represents an exponential growth. This corresponds to the typical expansion behavior of businesses in their hyper-growth phase. Consecutive constant quarterly EPS or sales percentage increases also represent exponential growth.

Stocks and indices oftentimes follow such a trend line loosely. Typically the price peaks reach exactly this line. The timespan between those visits can be anything from weeks to month to years. I refer to these visits as laundry “pegs” because the appearance of the charts resembles drying laundry on a clothesline.

I often get out of long-term trades when the clothesline is hit. Or at least I scale out some. Stocks do actually rally past their clotheslines sometimes but more often than not this represents a final climax moves before a long term top.

Please read some more about the clothesline here:

https://twitter.com/i/moment_maker/preview/928260044256407553

or here in my first article: https://thweis.com/how-to-set-up-effective-stock-market-graphs/#Logarithmic-scaling

The NDX follows two such trend lines PERFECTLY and anyones how ignores the concept doesn’t understand the sound foundation explained above.

A pivot is the upper or lower boundary of a meaningful technical price range. It is basically a form of support and resistance where volume doesn’t play a role. A pivot represents a key or pivotal price level that -when broken- has the power to show the path of least resistance. However, from a technical analysis perspective, such a pivot price level can also be represented by a sloping trend line.

I usually use the term pivots only when referring to base breakouts, but the neckline of a head and shoulders formation is also a pivot line.

A pivot for swing traders or trend followers has nothing to do with the definition found on Investopedia.com and cannot be calculated. In reality, the pivot price level is not an exact level either, but rather a small range, so don’t be too strict. Intraday action around a pivot level is oftentimes meaningless and you should wait for the close and evaluate the situation on an end-of-day basis once the (intraday) dust has settled.

Unless specified otherwise, a pivot usually refers to a base breakout line. (See example #1).

Here are a few examples:

It’s not rocket science.

Original Question: By the time you undergo all your scale outs in a winning play and you “bullet proof” your hold in the set up as you like to say, how much of the principle buy-in size is the position trade typical worth for you? I find myself scaling out aggressively and not having enough ammunitions left in my position trades to make it worth while. This has happened with multiples names like LMND, PINS, NIO. I am typically left with a quarter of the buy in for swings that turn into position trades. By having a quarter size, I am able to absorb shakeouts but some of the set ups in the past year were high octane and made their swings without any severe shakeouts and I found myself undersized for the ride.

This is a very good question! There are no hard rules for this and you must not try to get hard values from me for reasons I am about to explain.

The amount you scale-out must be enough so that your trades don’t trigger the base profit lock-in (2.6R rule) all the time. The basic idea of the scale-outs is twofold… First you want to secure some profits when stocks go crazy and pop 10% or more intraday, second you want to be in a position to let a trade turn into a longer term position trade without being shaken out when the crowd joins in the causes the usual shakeouts. Recall that most of my entries are early inside of a base!

It is also very important that you refill your position back up to your regular position size once you are provided with another proper setup along the way! That’s the idea of my system which is explained in great detail in my comprehensive money management article.

Now back to your question of how much should YOU scale-out and keep for the ride.

If you feel that you are undersized then you scaled-out too much, simple as that! All those thresholds I use suit me perfectly and allow me to trade with great ease without triggering any emotions. Even my wins usually don’t trigger excitement anymore. Whenever an emotions comes up I act and make sure the get rid of it asap. I don’t care if I lose profits that way. For me, it’s about denying the market any opportunity to evoke emotions in me!

When a stock goes nuts and pops 10% on an almost daily basis I scale-out aggressively and sometimes I am left with only 1/8th of my initial position after a week or two. This means the price and volume action of the stock naturally turned the trade into a pure swing trade. Most of the time I simply keep the remaining size as a core in order to force myself to follow up on the name at a later time. This is the core principle of my hybrid Swing and Position trading approach.

Normal strong multi day moves often leave me with 2/3 to of my regular position size. But I sometimes double my regular position size intraday on QTS setups with the idea to catch the initial pop with a larger size. This requires active intraday trading in order to manage risk.

Rule of thumb is to scale-out 1/4 to 1/3 when a stock is up roughly 3R or when it shows a double digit percentage pop right out of the gate.

Again, the idea is to fill up your position back to normal when another proper setup shows up. Don’t expect me to always point this out in active trades where we found an earlier entry.

Pulling this off in real time requires practice so that you can adjust the thresholds to better suit your own risk allowance (to avoid emotions). I am an active full time stock trader and I don’t sell or provide a streamlined product. I simply share what I do but try to formulate some concepts into easier to follow rules whenever possible.

Just get familiar with this concept and trade it. Once you accumulated some experience tweak it to suit your needs. In any case I strongly urge you to act around strong PLLs.

More power to you!

Original question: In some of your articles and Q&As you briefly mention, “working an entry” or “working a trade” and “during the process of establishing an initial position size, it is not always just a straight-out full-size order”. Can you please elaborate more on how you go about doing that and include an example with an intraday chart?

In most cases I do buy a full position right away, but I sometimes do this in anticipation of a setup. A proper setup, such as QTS, should close the day with a QTS bar in place. When I try to anticipate a setup I enter and then work the trade by cutting and adding when price loses or regains support on an intraday basis. Once it becomes clear that the setup will remain valid into the close I make sure to have a full position.

There are no rules to how I act. I simply react to PLLs, MAs and or other technical levels. I do use intraday charts for this (mostly 15min).

The momentum gap setup (MGS) is all about working the entry on the gap up day as I never enter with a full position right away:

https://thweis.com/faq/how-do-you-go-about-entering-a-trade-on-a-powerful-breakaway-gap/

https://thweis.com/faq/what-role-does-intraday-charts-play-in-your-trading/

I also test setups intraday with the idea to gain traction, this is mostly on a discrete basis.

I also have to test liquidity in smaller names. I buy some to see how quickly my buy order is absorbed.

Original Question: Aim is to make 3 x the risk I take.  Therefore if I have an initial stop of 3-4% the aim is to make at least 10% on the trade. If my account equity is $9000, my risk per trade is $90 and my profit target $270 Once I reach my profit target of $270 (profit on the trade), I move up my initial stop loss to 2.6R which will be $234, wherever that may be on the chart.  This is a mental stop and not a hard stop as with the protective stop.  Or is it a hard stop placed with my broker?

First of all don’t be too strict with the exact values. 2.6R just came out mathematically when I crunched some numbers based on my own trading history with the quiet and tight pullback entry a couple years back. In practice it doesn’t matter if you go for 2.3R or 2.8R. The closer to the goal profit/loss ratio (aka risk multiple) the better.

So what you wrote is almost correct, let me explain.

The aim is to let the trade unfold and only lock-in 2.5R if it was up >3R before.

The portfolio base-profit lock-in is indeed a hard stop order at the broker. Recall that my initial stop loss evolves over time. In the beginning it’s the original stop loss, then I move it up to secure the base profit and later it transforms into a protection stop loss (Not to be confused with a trailing stop!).

Recall that the goal is always to be able to scale-out some when a trade reaches 3R or beyond. So when I place a trade I am very aware of the logical levels and I sometimes decide to go with the stop loss level which will also provide me with a more logical scale-out level around the 3R mark. Sometimes it all aligns but sometimes not so much. It’s about getting as close as possible to such an ideal overall arrangement as possible. I don’t want every second trade to trigger the base profit lock-in so scale-outs around 3R are crucial to give you more room to the downside.

You want to lock in roughly 2.5 times the dollar value of your INITIAL stop loss ONCE the trade was up >= 3R. So if the initial stop was 20k USD you want to secure a 50k USD win. The more you scale-out around 3R or above the more the price can drop before it undercut that 2.5R threshold. If you scale-out well before the trade was up 3R the rules still apply:

i) Trade was up roughly three times the dollar amount of the initial stop loss ==> Base profit lock-in stop is set around 2.5 times the initial stop loss dollar amount.

ii) Trade was not up three times the dollar amount of the initial stop loss yet? ==> Let the market do it’s magic and get initial scale-outs in place when the opportunity comes up. When the market is really directionless and when there is no established uptrend yet, you should realize some profits when you have them. It makes no sense to let many 2R wins turn into losses again. But I simply don’t have rules for that. It involves discrete trading decisions in real time to stay in a strong mental position. Be reasonable!

I do have some hard coded rules but I also follow general principles! The principles are harder to grasp but even more important. The principle to stay in a strong mental position is a major one. Every trader knows the feeling of being with your back to the ropes receiving painful punches to the gut. If you know that you will feel that way if your current 1.5 or 2R trade turns into a stop loss, then you have to exit, simple as that. I am pretty good as being truly emotionless if a 2R trade turns into a stop loss hit because I don’t overtrade.

I trade much less when the window of opportunity is closed than what many you would think. I always make sure to control open heat so that I can give the trades all the room they need. Intervals between Stock Ideas within the Membership Service will help you get a better feel for this.

But please be aware that my approach is specifically designed to let winners run well beyond 3R. My goal is not to collect only 3R or 2.5R wins. My goal is to let trades develop into 10R+ trades and I am fine when they do this with only 2/3 or 1/2 of the initial position due to early scale-outs. But the stocks almost always provide you with another proper entry setup down the road so that you can refill your size back to normal. 10% rule can be triggered anytime. A 10% move is simply too good to let it evaporate quickly, especially in a choppy and directionless environment. Major resistance level are oftentimes roughly 10% apart. So the idea behind the 10% rule is twofold, A) you scale-out some when a stock is up double percentage digits (many screen for this!) thus attracting momentum chasers who increase volatility and pullback probability and B) a 10% intraday move almost always “connects” two major support/resistance levels. In an ideal world your 3R level is located right at such an important level.

This is the overall idea and I try to “plan” a trade in advance based on the chart with all that in mind. However, I am not super strict but rather go with the flow of the chart. If it all aligns, fine! If not, also fine.

As Bruce Lee famously said: “Empty your mind, be formless, shapeless like water…”

It is super important that you apply those techniques with ease by understanding the principle ideas behind them. Don’t get lost in exact values and rules. Goal is to ride those winner AND to stay in a strong mental position by not letting solid trades turn into losses again!

I was able to combine short term swing trading and long term position trading into one fluent hybrid approach. For this to work out I had to take some of the guess work out of the equation by having a couple hard-coded rules at hand (mainly the 10% scale-out rule and base profit lock-in rule) to not get lost in the transition zone. I often enter inside the base, the transition zone would then be the actual breakout or the post breakout action. Quite often this aligns with the position being up 2 to 4 times the initial stop loss.

My stock handling methods are not a black box and require skill and patience as I just share what I do myself. I did not create a product which you can buy & use. I just perform the art of trading in real time and let you follow my actions as closely as possible w/o violating the legal boundaries. I am an active trader following the markets throughout the session ready to react to real time events. I trade what I see.

When direction is less clear I sometimes “work a trade” intraday until I have established a solid initial position, this can mean that I enter in anticipation of a QTS just to exit again 5min later. I do such things to receive market feedback which tells me a lot about the underlying currents and shifts unfolding in real time. Once the picture becomes clear(er) I wrote that insight down in my journal which happens to be my Twitter feed.

The stock picks within our Membership Service simply provide high potential stock ideas according to my believe. I provide the entry and a logical stop loss level. Once an idea is extended it will switch from “actionable” to “hold”. I will then follow up with another proper entry opportunity or a true red flag exit signal, whatever comes first. I will also try to notify members if scale-out opportunities are present via blog-posts or even public tweets.

But members are free to handle those stock ideas based on whatever method they want. Any method derived from O’Neil and CANSLIM should work.

I will support you as good as I can in applying my own techniques!

Read some more about this base profit lock-in technique here:

https://thweis.com/the-definite-guide-to-money-management/#Mind-Trick-2-Secure-your-base-profitrisk-multiple-via-scale-outs

https://thweis.com/faq/can-you-elaborate-more-on-your-portfolio-driven-rule-for-trimming-your-winners/

https://thweis.com/faq/protection-stop-level-when-the-2-6r-rule-is-triggered/

Original Question: Can you elaborate more on your approach going short when the stock goes for a climax run and when you short weak rallies. Which criteria so you look for in the chart and what stocks do you consider?

I basically follow the approach outlined by Bill O’Neil in his book How to Make Money Selling Stocks Short. Gil Morales co-authored Bill’s book and later wrote his own, which contained many more short selling techniques. However I never really focussed much on those.

The bottom line of the former book is that you only short former leaders after they flashed a major bearish break. Following this short selling mantra helps you stay in sync and only hit the market on the short side when it’s ready. I always monitor former leaders for red flag exits and big price breaks. Once the break is in you can put it on a short sale watchlist if you want. The entry is triggered once price rallies into a major resistance level from below. It is basically a Wyckoff test of resistance. However on the short side things tend to unfold quicker and with a larger magnitude. This is due to the fact that fear is a much stronger emotion than hope or greed. Therefore a retest of resistance has a more jagged appearance compared to a retest of support on the long side. Proper short sale targets also tend to have several weak rallies into or even above key support levels following the break. A weak rally can easily be identified when price is rising on low volume or when the ATR becomes tight below resistance compared to tight trading after it blasted higher through the resistance. The latter would actually be constructive. Quite often those leaders rally in tandem with the broad market so it pays to also watch the indices for weak rallies as well.

Short selling into a climax is a different beast altogether. The idea here is to catch an early short sale entry when you sense that the market overheats after an anything goes phase. In that regard it is paramount to focus on the hottest speculative stocks of the time. I am talking about the ones who are extended 30, 40 or 50% above their 10d MA. The entry can be timed by proactively selling into a century mark or clothesline hit.

And here is an article available for the members of our Stock Ideas Subscription which explains our methodology and our setups, including the short sale setups, in more details: Our Stock Trading Methodology

Here are some related Q&As:

Do you go long a stock covered in a short sale report?

How do you decide when to be fully invested and when to keep some cash?

Do you go to 100% cash when the market rolls over?

Original Question: My question is regarding your protection stop on winning trades, once you are up more than 3R and trail your stop to 2.6R (even after a scale out), where do you place your protection stop? Higher that the 2.6R?

First of all this question shows how well you already understand my methods. This is awesome!

The 2.6R base profit lock-in rule is just the one for my main setup (quiet and tight setup aka QTS), for other setups the actual numbers can vary slightly. It depends on the goal risk-multiple I have to reach with regards to the win rate of the respective setup. For QTS this is actually 3R as I can often place sharp initial stops around -3% to -4% on chart level. 3R would then translate roughly to a 10% stock advance which oftentimes aligns with natural scale-out levels on the charts. This is based on my observation over the years and works well in practice.

Now back to your question: The protection stop is a stop I place in trades which are actually extended well beyond their base goal risk-multiple! I do not trail my stop but instead employ the 2.6R rule early on and then later switch to a protection stop in order to be protected against flash crashes and other extreme volatility scenarios.

So a protection stop and a 2.6R rule stop are mutually exclusive! In real trading however it could make sense to split the 2.6R stop into two stops sometimes. This is true when the 2.6R stop would be right below a major technical resistance level. In such a case one could split the stop order and place one a little lower and the other a little higher so that it gets triggered quickly in case of a sudden break. This technique could give you a better exit.

However I actually did that only once or twice since 2018…

In reality I oftentimes simply place the ‘2.6R’ stop order at slightly better level and not where I expect the crowd to place their stops. (The PLL concept help with this). A trade is only a data point and it is more about the average over many trades than hitting the exact values (2.6R rule or maximum risk %) on each trade like a robot. Trading calls for discretionary intervention of varying magnitude but don’t use this as an excuse to violate rules all the time. Especially not when you are a novice trader with little experience. Again, If you do this you must employ statistics in order to make sure that you do hit the values on average!

So basically the order and nature of my stop placements is as follows:

#1 The initial stop loss order for the trade to make sure that I don’t lose more than my maximum risk per trade

#2 The base profit lock-in stop order (2.6R rule) to secure my required base risk-multiple. (can be slightly different than 2.6R for other setups)

#3 The protection stop which slowy trails price during any ensuing rally beyond my goal-risk multiple. This is NOT a TRAILING STOP with the intend of being triggered!

Each stop order replaces the one before.

Once a trade made progress beyond the goal risk-multiple (~3R) I wait until there are a couple strong potential support levels between the stop #2 and the current price. When the cushion is large enough I do trail the stop by replacing #2 with #3.

!Important! I do give my stocks room to move and always try to intervene as little as possible in order to let the market do it’s magic for me. This is especially true once a trade is extended and trades well beyond it’s goal risk-multiple.

I don’t move stops to breakeven early on. Furthermore I do seek scale-outs to give me as much room as possible when the goal risk-multiple comes into play. And I certainly give stocks all the room they need later on when they are big winners already.

The defensive stops are complemented with proactive, price and volume based, red flags which make me exit or realize partial profits into strength.

In stock handling I generally try to act more like an artist without strict adherence to rules. I only turn into a robot when it comes to selling into weakness aka when my stop order is hit. On the other side even the 10% scale-out rule allows for some discretionary intervention if a nearby PLL, pivot or other significant price level comes into play.

What Is A Cup And Handle Pattern?

A cup and handle pattern is a price and volume formation based on mass psychological principles with 3 or 4 distinct phases. Such a pattern shows that a stock got rid of weak hands and that big operators accumulated size. It takes time to go through the distinct phases, hence the setup will need anywhere from 10 to 15 weeks to form. There is no such thing as a proper cup with handle on a intraday chart!

Should you buy a cup and handle breakout?

The short answrer is no! The long answer is as follows:

The classic approach to such a base as suggested by the inventor William O’Neil in his famous trading bible “How to make money in stocks is to buy once price moves up through the pivot on high volume. When you decide to do it like that it is prudent to go with a 7 to 8% stop loss as suggested by O’Neil. Please be aware that such a fixed stop is only valid for buying breakouts. However in my honest opinion it is much better to go with a logical chart based stop loss based on the distinct support levels of the stock at hand.

But should you actually act on the breakout then?

My answer to this is a clear no!

There are much better techniques to buy in anticipation of a strong breakout. I am executing such techniques for many years and my fellow traders over at Twitter can tell you that I tend to nail strong breakout which lead to 100% swing moves on a regular basis.

The reason why buying into breakouts is generally tough in today’s market is manifold. First of all, today’s powerful and free charting tools allow traders to find such obvious decade old pattern with ease. They are spread across social trading hubs within minutes. Secondly, traders are way too sloppy with the definition of such patterns. They simply didn’t listen carefully to what Bill O’Neil actually said and focus way too much on the general shape instead of the important psychological clues. I don’t believe that buying into strength is enough to develop a winning edge in today’s markets. Cup and handle pattern failure is the norm unfortunately.

However, the good cup and handle patterns are still out there to be found. But they are much more rare compared to the faulty and obvious ones.

Refer to the following chart with proper examples.

Cup and handle pattern examples

The 6 characteristics of a proper cup and handle formation:

• Volume dry-up around the bottom
• Blue weekly or daily volume clues at right side
• Steady and coherent price action. Not too sloppy or volatile!
• Biggest weekly bar should be blue, not red!
• Handle is going sideways flashing tight weekly closes
• Right side is formed more rapidly then left side

It should also show good relative strength if compared with what the broad market is doing.

• When the market is v-shaped, a proper cup and handle should have a well rounded cup!
• When the market is far below it’s pivot, a proper cup and handle should have already reached it’s pivot!
• When the market flashes a jagged little market pullback, a proper cup and handle should form a tight sideways handle instead.

Let me share a little secret with you! When the market itself forms a pattern which is shaped as a proper cup and handle base, it greatly reduced the odds that the -now way too obvious- cup shaped bases in individual stock make you any money!

The 4 psychological phases cup and handle stocks

A proper classic cup and handle pattern needs time to go through the following specificmass psychological phases.

Left side base decline: Selling on large volume with price dropping through key support levels in order to shake out the longs. [Big operators cash in on their previous buying campaign]

Bottom phase: Combination of shakeouts and volume dry-ups to shake the tree some more and draw attention away. [Big Operators accumulate stock silently as they absorb any continued selling]

Right side base rally: Bullish volume clues and a rather swift rally towards the highs to create some fomo eventually. [Big Operators continue their accumulation campaign and cant hide it anymore]

Sideways handle: Attention is drawn away again. [long sentence ahead: Big operators pause their accumulation to make final tests to check if sellers are truly out of the way before pushing price into all time highs thus igniting a rally driven by price chaser who can now easily push the stock higher into the vaccum of potential sellers.]

Such things require weeks and don’t happen intraday. As a swing and position trader you want to follow the big operators who trade with a longer time horizon. In trading in general you want to join in on moves which are initiated by the less nervous players.

Due to going through those phases first, a proper cup and handle can ignite a multi month or even multi-year rally.

Here some more chart reading related stock trading FAQs to read:

Original question: Where is the buy point with the Undercut and rally setup? How do you scan for this setup?

There are two valid buy points in an undercut and rally setup (#URS) because there are two proper undercut and rally patterns.

Undercut and rally buy points

1. Price undercuts a prominent prior low a couple days/weeks or even month ago and closes at the bottom of the daily range on high volume, giving the impression of weakness. In this case price normally gaps up through the prior low-line the next day (because selling is exhausted) which then triggers the entry right away at the open similar to how a Momentum Gap Setup) is handled.
2. Price undercuts a prominent prior low, reverses on the same day and closes green on normal volume. In this case you just buy when price rallies up through the low-line. Could be on the same day or the very next. Reading the volume correctly can be tricky here. When volume is not coming in on the undercut it is generally a sign that selling pressure is low [bullish]. This can result in a low volume rally up through the low-line. However sometimes buyers simply step in with authority thus absorbing any selling for good. In such a case the volume will be high [also bullish].

A shakeout can cover a large range so it is oftentimes not feasable to place the stop below the lows of the undercut day. It is better to place the stop below the low line and idealy below any PLL created inside the bar on the day of the undercut.

The undercut and rally setup is my least preferred long setup because it is so easy to spot on a chart that almost all weak bottom-fishers use it. Screening for it is not straight forward (I don’t screen for it) but it’s also not needed. When the market flashes some forced selling following an initial correction, you simple go through the charts of the former leaders trying to spot any proper #URS. Buying the setup in the post IPO phase can allow one to catch a sharp entry but from a risk/reward standpoint, it is hardly every worth it. However the #URS can be the first bullish clue and sign of strength in such names thus is an enabler for proper follow up setups.

Learn some more about chart patterns here:

Original Question: Are you always looking at log charts or only when you are drawing the clothesline profit targets?

Always!

There is no other valid chart type than a log chart to be honest. A straight line on a log chart represents a constant exponential growth (constant percentage growth rate). So when the stock price is trading along a straight line on a log chart, it means that the stock maintains it’s growth. This implies that a log stock chart helps you to easily spot any change in the growth character at a glance. It also comes in handy when you try to relate the price advance with the quarterly earnings and sales growth, both also published as a percentage growth.

Generally speaking the log chart is the tool when you have to work with percentages and handle data which covers orders of magnitude.

The recent pandemic introduced the log chart to a wider audience as the ‘spiky’ non log charts made people freak out. At least those who are not used to look at exponential data. A virus is also spreading in exponential fashion with a specific percentage growth rate expressed by the basic reproduction number.

A log chart allows one to better see the details as the attention-grabbing exponential nature is now visually suppressed.

The same is true for stock charts.

Original question: In your Defense article, “My rules to minimize losses in the stock market“, in the Layer 6 section, you say, “Be careful trading in stocks with a high outstanding/float share ratio”. Approximately how high of a ratio would you consider a cutoff limit or at least a red flag?

Let me first elaborate a little further.

The share float or public float in comparison to the total outstanding shares issued by a publicly traded company is a ratio which tells something about the ‘real size’ of a stock.

• When the float is much smaller it increases the potential volatility
• When the float is small it introduces dilution risk just like secondary offerings.

You could argue that the volatility doesn’t change when the float remains constant, which is true! However, a trader who buys based on the market cap (total outstanding shares multiplied by share price) could be hit right between the eyes. Imagine you buy a 500M cap stock and place a normal stop based on your experience with that kind of cap. Your stop could be triggered easily.

How can I improve my edge with the outstanding / float share ratio?

Well, It can be used to calculate, what I call, the effective market cap. The absolute value of the ratio isn’t as important as the resulting effective market cap. When a ratio pushes the effective market cap below my 220M USD market cap limit, I have to pass on the stock as it failed my Basic Fundamental Quality Check.

But it is also not a good omen when the share float is much much smaller than the total share count even when the effective market cap is above the threshold as the dilution risk is still there. Imagine that -for whatever reason there is- all the privately held or restricted shares are unloaded into the open market. This would create a severe short term supply/demand imbalance depending on the actual numbers. I don’t want to be hit by that ever. It is a hidden risk just like ‘drug-trials gone bad’ in the biotech sector.

If you can be sure that the private shares will not hit the market anytime soon then a ratio of 0.5 (The open market float is 50% of all shares) would still be ok. One reason for that would be the IPO lock-up period. Anything below 0.5 raises a red flag and demands more research. I violated this soft rule in the past as well, especially in IPOs.

It helps when you learned to identify illiquid trading behaviour from the chart on the spot. You can also check the weekly and monthly volatility directly in the Finviz Screener or indirectly via our stock quality checker. Monthly volatility should be reasonable and comparable with other quality growth stocks in the same EFFECTIVE market cap range.

Full question: As your trading was influenced by Gil Morales, what is your take on the undercut & rally set up and why are you not using it often in real time.

Well, first of all Gil didn’t use the Undercut & Rally (#URS) a lot back when I was a member of his service half a decade ago. I don’t know what he is doing now but I recall that he just started to focus a lot more on swing trading with the help of Richard Wyckoff’s techniques back then. He also had a novel U-turn pattern where he simply bought into bear flags as they oftentimes resolved to the upside in the QE environment.

Anyway, the undercut and rally setup is basically what Wyckoff described as either a terminal shakeout or normal shakeout. The low volume retest is also a Wyckoff setup which I use occasionally. It’s similar to the undercut and rally but without actually undercutting the lows. That being said I don’t use the U&R setup much because it doesn’t fit well into how I handle and navigate the opportunity cycle.

Each setup has a purpose and is most suitable in a specific phase of that cycle. Being aware of this is important in order to increase your overall win-rate.

The Undercut & Rally would come into play during market corrections mostly on the day of the broad capitulation selling climax (See Put/Call ratio for clues). However during that phase I am typically short a couple big stocks and will realize profits in those names. I sometimes do buy into one or two undercut & rally setups but it depends on how heavy I am playing the short side. It is simply too easy to mess up when switching from short to long and vice versa too quickly. I’d rather focus on re-shorting weak rallies (another one of Gil’s and O’Neil’s techniques) and monitor speculative stocks for Quiet & Tight Setups (#QTS) or similar bullish clues.

The undercut and rally setup is a bottom fishing technique after all and my desire to avoid buying stocks which did not repair their chart via bullish volume clues yet, is a major part of my proven protection plan.

Learn more about the undercut and rally and cup and handle chart pattern:

As a matter of fact the undercut and rally setup is based on a shakeout.

However if you are referring to shakeouts in stocks which are close to breaking out, then the answer is a yes!

A shakeout is a test of demand and supply.

When a stock is able to absorb swift selling by closing strong the same day on high volume, it can be considered support! If a stock sells off some and closes at the lower end of the daily range on normal or low volume, then you would have to wait for the next day to see if buyers are able to win the argument over sellers. A sell-off closing weak (under PLL or short term MA support) on high volume is a red flag and probably not a shakeout.

However sometimes when volume is generally low a perceived high volume sell-off day can be followed by an ever higher blue bar or even a breakout. Therefore price and volume has to be analyzed relative to the history of the stock at hand.

A shakeout is needed in most cases, especially in todays environment. Stocks move in a way to leave most weak hands behind. They do this by either…

A) blasting higher in rapid fashion

B) gapping up overnight

C) going higher after severe shakeouts.

In the case of C) the shakeout is often followed by some quiet and tight action to further draw attention away.

Take a look at the following questions and answers to learn more about the undercut and rally setup:

Full question: You mention that you need to put in the chart reading time to become proficient, however do you have any ideas on how to do this? Are there any specific exercises that one should perform? Or certain things to look for while going over charts?

Well the procedure of becoming proficient in chart reading requires a structured long term approach but it’s much easier than what you probably think right now. It can’t be forced however and time plays an important role in this as stated in your question. The basics/details you requested (see Step 1 and 2 below) are too much for a simple Q&A article. Once the service starts the “Charting School” articles will be available.

So here’s generalized approach:

Step 1: Understand the basics of price and volume and how they are theoretically related with each other. For this you simply study Richard Wyckoff’s work on the matter.

Step 2: Understand the basics of longer duration patterns. For me this means to understand the work of O’Neil on chart patterns. Even if you don’t trade them you need to be aware of them in order to not run with the #Canslim crowd all the time.

Tip: Here it helps to analyze past monster stocks and big winners in order to learn how those theorectial basic patterns actually look like on a real chart. It is very important to do this for both, the daily and weekly chart. Once you did this for a while you shouldn’t spend much more time going over past winners and simply trade in the present. Your winning edge is to be discovered in real time with all the noise, distractions and uncertainty involved. You won’t find it by only studying past winners. Pareto principle (80/20 rule) can be applied here. I do spent roughly 10 to 20% of my time to study new things or former leaders. This is mostly done by reading new books or rereading old ones.

Step 3: With the knowledge of step 1 and step 2 you then simply go over many many charts and trade those patterns over and over again. Over time you will learn to prioritize all the information you soaked up in those first two steps. This has to be part of your everyday routine as described here in great detail! Going over many charts each day is actually much more important than you think as it is not only about finding fresh trade ideas. By going over many charts one can communicate with the market as a whole!

A good example is the cup and handle pattern. When you trade cup shaped based (I did this a lot between 2010 and 2016) you realize that from all the “required traits” O’Neil mentioned in his books, only a couple are really important and true requirements. This is true for pretty much everything in trading. During your initial study years (You did read many books right?) you are loaded with information but oftentimes have an underdeveloped sense for how important each little piece really is. Trading literature does a great job of making clear that adhering to stops is the number one priority just like people know that brakes on a car are more important than the windscreen wipers.

However not everything is so clear as the stop loss. In chart reading a major performance factor is the ability to spot a change in character in time. This can be a change in the average true range (trading turns tight and coherent/steady) or the takeout of a multi-month trendline.

Once you learned the importance of each clue (Will be covered in an upcoming “Chart School” article series) you then simply let them accumulate until you have seen enough in order to make a trading decision. Sometimes a stock has many bullish clues but they are then killed-off by a single and much more important bearish clue.

This blueprint described above can be generalized. It’s the blueprint to reach mastery in pretty much any craft you want. Research shows that one need to accumulate thousands of hours in order to reach elite level. I found that that profitable trading doesn’t require elite level chart reading capabilities IF one gets all the other aspects right before. You can read more about this here.

Can cup and handle patterns, undercut and rally setups or quiet and tight setups be used within intraday charts? Constructing a clothesline oftentimes requires to check the hourly chart to make sure it connects the significant tops which could be invisible on the daily. Proper setups however are only proper on a daily chart if you are looking to capture multi-day/week/months swing moves.

Humans act in a specific way and need time to digest information. The natural day/night rhythm has a major influence on how someone acts on information. Recall the phrase “consult one’s pillow”! A proper setup, such as the Quiet & Tight (#QTS) or the classic Cup & Handle pattern, needs time to go through specific phases which are closely linked to mass psychology. A cup and handle pattern has no meaning on an intraday chart. If price goes higher it is simply a result of proper price and volume action in my opinion. The idea behind a proper cup and handle pattern is that the stock goes through several distinct phases which require weeks to form and don’t happen intraday.

As a swing and position trader you want to follow the big operators who trade with a longer time horizon and not some day traders creating and working intraday patterns. You want to join moves initiated by -less nervous- players.

Due to going through those phases first a proper cup and handle can ignite a multi month or even multi-year rally.

The proper #QTS ideally also requires a shallow pullback into support for at least some days before the final quiet and tight day trigger event. Volume dry-ups in general however tend to precede swift price moves which also happen intraday. But then the ensuing price reaction will also only be confined to the intraday session [driven by professional day traders] and the odds are slim that it carries over into the following session.

Red flags are oftentimes a combination of daily and intraday action. This is because a red flag is raised in the heat of the action and most of the time you can’t afford to wait until the daily close without increasing “risk” to much. Watching an intraday chart in order to better identify a selling climax or buying climax makes a lot of sense. Price more often then not reacts perfectly to major PLLs or other logical support/resistance levels during a fever pitch so you want to pay close attention to those levels.

Intraday charts can help but don’t go below 15 or may 5 min!

Full question: Can you elaborate more on your portfolio driven rule for trimming your winners? When an open position drops below the threshold do you exit right then or you usually wait to see if end of day it is still below that threshold? How far lower from your goal risk-multiple do you usually set your threshold? Thank you!!

Yes, this is a hard rule. Once it hits the threshold after being a legit goal risk multiple trade before, I will close the full position right away.

For a 3R trade I set the threshold to 2.6R. In general it is roughly half the risk but that value stems simply from experience. The goal is always to create a trade which has a logical scale-out level around my desired goal risk multiple. Once the desired scale-out is in place a trade rarely hits the threshold at all as it would now need to drop so much that I would sell anyway.

This however depends on the amount and therefore the magnitude of the cumulative scale-out. It’s when I wasn’t able to scale-out that this rule shines the most. It oftentimes allows me to secure my desired wins with regard to my win-rate. Both parameter are closely correlated

My setups work very well when working with daily and weekly charts within my normal time horizon raning from days to months. Index ETFs or passive trading in general are dominated by huge funds (e.g. pension funds) or other big operators with very long time horizons. The techniques will likely work to a degree but if it’s good enough to create a working trading system is something I don’t know as I never gathered any data in that regard.

If someone tries to apply the techniques I am very interested in the data!

In general all of the techniques I use are based on psychology and therefore should work wherever humans are involved. Timing plays a very important role in trading and if timing is off it can push a otherwise working system into the abyss easily.

Here a correlated question about the applicability of my techniques on an intraday level thus covering the other side of the timing spectrum.

Original question: What is your average stop loss? At what point are you willing to move it up?

Average stop loss on a total equity basis is currently 1.17% (based on >1600 trades from 2015 until today). This includes the actual losses but also the initial risk of the trades which turned out to be wins. On a individual stock level it makes no sense to calculate that number because the stop loss on stock basis can range from 1 to 15%. Recall that I use the bottom up position sizing technique described here in great detail. The stop is always placed with respect to the logical support levels of the chart at hand. If price is too far extended beyond such a level I have to skip it, unless there is a reasonable price target which would validate the trade.

Once a trade was up 3 times the initial risk I will move the stop up to around 2.6 times the risk. This is a portfolio driven rule to secure my desired risk multiple in any given trade. Other than that I never move my stops.

Related Q&Q: Do you believe in moving stops to breakeven or do you let the trade play out unless there’s a ‘’red flag’’?

Original question: When you buy a stock but it doesn’t rally in 1-2 days although the setup is still somewhat valid, how long do you wait until you scratch the trade?

When I enter a quiet & tight setup I wait until the stock launched either higher or price and volume action renders the setup invalid. There is no time limit. However in most cases the stock makes up it’s mind within 1 to 4 days. The longest I ever had to wait was in a #FFF setup. Here I had to digest a one day shakeout but the stock turned tight again the next day and made me reenter.

I typically buy the position at once if possible. However when liquidity is on the lower side I do make a test buy (1/3 of normal position size) first. This is important when you enter into quiet and tight action as liquidity can be a little lower. Depending on how the stock absorbs my test buy I make a decision to add to full right away or even add to double my normal position size intraday with the idea to capitalize on the initial pop. If the stock doesn’t pop or if price pulls back to half my stop loss I cut back to my normal size.

The momentum gap setup is an exception as I only always buy 1/3 to 1/2 of normal positon size for this setup right at the open.

Full Question: Do you invest as well in addition to your post and swing trades, meaning, long term investments (held for several years for growth and dividends)? If so, what percentage of your overall $ in financial instruments (%) do you have in longer term investments?

I do invest in bitcoin since 2017 but other than that I follow my swing/position trade system. I don’t have to make a deliberate decision if a trade is a swing or position. I simply enter my proven setups with reasonable position sizes based on the chart at hand and then handle the trade according to my ruleset. This ruleset automatically turns a trade in either a short swing trade or multi-month position trade. The multi-month positions are then held ( sometimes with smaller size as a core position) for as long as they remain valid (no red flags etc.)

$TSLA is a good example. I hold a core position since may 20th 2019 when the stock bounced off the lower box boundary. This is basically an investment if you differentiate between swing (short term), position (intermediate term) and investing (multi-year; long term) based on holding duration. I traded $TSLA heavily on top of the core position a couple times since then.

Dividends don’t play any role in my trading as I trade strictly for profit from the price moves of the underlying stock. If a long term core position shows a major red flag I will run for the exit. I would never ever sit in a drawdawn in order to reap dividends. However dividends do play a role in taxation and it’s more work for me so I try to avoid them if I can.

Original question: In the Q&A section, you say that, “Climax moves are typically measured as a extension above the 10d or 50d moving average and they tend to peak via violent daily reversals”. Approximately how high on a percentage basis above these MA would you consider it a red flag and be on watch for a reversal?

An extension of >20% above the 10d MA is already a lot. However the real value is totally dependant of the history of the stock at hand. You actually have to back and study the history of the stock. This will tell you what is too much. But more often than not the stock flashes a visible red flag in the form of a violent top reversal on volume anyway. No need to sell into the actual extension unless there is a clothesline. When to do this and when not is part of the discretionary (read: skill & experience) process. But again, check the history and you will get a clear idea. And remember that it is always better to sell into strength than to sell into weakness.

For the 50d MA, well I don’t really use that often for timing climax moves. In almost all cases the 10d MA is the one to watch. But for the 50d MA the same rules would apply. Namely, go and check the history of the stock at hand.

The daily chart is your bread and butter timeframe. It is meaningful because many traders act end of day or use the daily closing price as a signal generator for the next day. Thats why you often see a continuation or carry over of end-of-day action into the next trading session.

While I also employ the weekly, monthly and 15min charts, I don’t think my trading would suffer much if I had to rely only on the daily. In my opinion one should actually focus almost all of the time on it while only checking the weekly every once in a while. I like to put the (messy but useful; PLL anyone?) volume-by-price indicator on my weeklies so that my dailies remain clean and easy on the eyes. I also check the weekly to judge the quality of bases.

Oftentimes a stock appears choppy on the daily, but when you check the weekly a lot of the daily noise is hidden. I sometimes dismiss non-ideal daily price & volume action when it’s hidden in a very constructive weekly chart. Reason is that big money rather focus on the long term. They accumulate based on the weekly/monthly and fundamentals.

I do watch 15min and sometimes 5min intraday charts to figure out how price acts around major support and resistance levels on an intraday basis. The two occasions where I always check intraday charts are both related to the momentum gap setup #MGS. Here I use them to evaluate if a intraday bottom is in by reading the price and volume signature. I also use them for the 15min Opening Range Breakout #ORB add-on signal. Other than that I avoid paying too much attention to every little intraday wiggle.

For new postitions aka fresh money buys I employ a logical bottom up position sizing technique based on the real support and resistance levels of the respective stock chart. Once a stock is a winner (trading above my desired risk multiple) I set protection trailing stops. Such stops are not to be confused with trailing stops. A normal trailing stop would be placed in a way to avoid shakeouts at a nearby support level with the idea to realize profits.

I DON’T DO THAT!

What I do with winning teade is, I place a PROTECTION STOP further down the chart. Then I go on and handle my trades the normal way, selling on sell signals and scaling out into strength. The sole purpose of the protection stop is to protect me against a intraday flash crash. I experienced two of them already during my decade in the market and trust me, you don’t want one of them to hit the markets when you are away from your screen. To ensure that I get filled on my protection stop I actually place them right above support to get filled before the crowd who place stops below or at support.

Recall that I don’t add to positions in the classical sense. I wait until a stock flashed a proper setup and then I pull the trigger and fill the size up to my regular position size limit if I scaled-out before. However I am reviewing this technique right now and I explore a procedure where I add a normal position including a new stop even when I already have a position in the stock. I would then exit this position when the stop is hit but keep the early position alive. Goal is to sit tight in core positions over months or even years. I will keep you guys posted.

The volume-by-price indicator is called Volume Profile in Tradingview. I call the peaks in the profile “Peak Liquidity Levels” or short PLL. My way of reading and interpreting this indicator requires a very high price resolution. Tradingview allows to have 5000 increments on any given price axis and is still relatively fast with the background calculation. The indicator loses a lot of it’s significance if the exact levels can’t be pin-pointed due to a insufficient resolution. I used to distinguish between bearish and bullish volume but this info did not help me identify the path of least resistance in any consistent manner, hence I dropped it.

Here you can learn some more about how I personally read and interpret the volume-by-price indicator aka PLL.

And here some infos about how to scale your charts in order to get a deeper insight about the strength and importance of the respective PLLs.

Where to find it in Tradingview (They did a great job at hiding it in plain view):

My settings:

Whenever I enter a swing idea and the stock blasts higher and exceeds +10% on an intraday basis I automatically close out 1/4 to 1/3 of the position into strength. No questions asked! Depending on the average true range of a stock and/or closeby major PLL levels, this threshold could vary. Origin of the rule was a tweak to avoid that gains in swing trades entered via quiet & tight setups vanish one day after a one bar wonder and to secure or lock-in the setup specific R-multiple in general. Subsequent trigger events call for reduced scale-outs.

My bread and butter entry is a shallow, perferably multi-day, quiet and tight pullback (#QTS) into a PLL or the 10 and 20 day moving average. Quiet means that the volume should be well below average and tight means that the daily price range is small compared to the recent past. Such a setup tells me that the attention is drawn away from the stock and that it is ripe to blast higher leaving the crowd and late comers behind. The other one is a powerful breakaway gap in leading mid to large cap names. The latter is usually earnings related.

I did use them during my early years but over time I slowly realized that finding stock picks is the easy part of trading and that chart reading simply needs a lot of experience. All you need is a lightning fast charting package and a slim real time screener. Finviz and Tradingview have perfect synergy when it comes to speed and ease of use.

You can read more about the tools and how I use them in everyday trading in the article describing my trading routine.

I watch out for Peak Liquidity Levels (PLL) and Low Liquidity Levels (LLL). The former is a price level where a lot of shares changed hands (high volume in the volume-by-price indicator) while the latter is a price level where little actual trading took place in the recent past (low relative volume in the volume-by-price indicator).

Weekly chart where I construct the PLLs:

Daily chart where I analyze the PLLs:

Price can often launch off a PLL (zone limit or sharp level) and then rally up through a LLL zone aka “a void” without much resistance due to a vacuum of potential sellers (Net buying). PLLs often deviate from pure technical support and resistance levels such as pivots. In my opinion a PLL is a much more reliable level for potential support and resistance. The reason why some traders are always taken out via shakeouts can be contributed to the fact that they place their stops below an obvious technical level. By doing so they falsely believe that they created a nice cushion or leeway while in reality they placed their stop right at a major PLL (This is holy grail material so please don’t tell anyone). Always place your stops with respect to PLLs to avoid shakeouts.

I also distinguish between sharp PLLs and wider PLL zones. Inside a PLL zone, price can roam freely between the upper and lower limits while the argument, between buyers and sellers about the correct price, is still ongoing.

This means that price moves inside the limits of the zones are not meaningful. However, when the zone is wide enough one can “play the limits” as trigger levels for smaller scale-ins and scale-outs.

Oftentimes intraday price moves out of a zone reverse just to make sure to close inside the PLL zone “overnight shelter”. Once price managed to leave the PLL zone for good, it revealed the path of least resistance as it requires net buying (for uptrends) and net selling (for downtrends) to move price from one major PLL to the next through a LLL volume void. Such a move is a meaningful price expansion and catching them is a core part of my swing trading method. Movements inside a PLL zone are not a price trend, they are just noise!

Yes, I narrow down the us stock market to a way smaller list of quality growth stocks to engage with. I only trade in names which fulfill the following criteria: Effective Market Cap >200-250M $; Price >7$; Shares/float ratio <20 (I violate this occasionally); Average Daily Dollar Volume > 2-3M $. I also want to see strong fundamentals in either forward EPS and current quaterly sales.

You can also use our Stock Quality Checker for that purpose:

Short answer: No I don’t move stops to breakeven!

Long answer: I never ever move my initial stop loss before a trade hits my R-multiple threshold. However this is mainly due to my sharp stops. If you use wider stops it might make sense to sell on a proper red flag before hitting the R-multiple threshold. But in my honest opinion it is better to avoid any intervention after the entry thus allowing the market to do the magic for you!

I do use scale-outs to avoid being shaken out on natural pullbacks which more often than not coincide with stocks hitting the widely followed 3R mark from widely followed entries such as pivot breakouts and pocket pivots. Once I scaled out the initial stop loss becomes meaningless and I will trail it up to the next logical level of support. However this is a just a safety mechanism for protecting me against a flash crash as I will sell on a proper red flag independent on the “trailing” stop. Also be aware that such a protection trailing stop must be placed ABOVE support so that you are getting filled before all the other stops in the case of a sudden crash. This is the exact opposite to a regular stop loss, which must be placed below PLL support in order to avoid regular shakeouts. A protection trailing stop is just an intraday protection mechanism when you are not sitting in front of the computer.

As a general rule of thumb you want price to hold important reference levels on a closing basis. This means that you can allow for an intraday move below the mark. This is commonly referred to as a shakeout. However you must be aware that some shakeouts can be severe, especially in the high octane swing stocks. Due to this it totally depends on the individual situation if a trader should scale-out some quickly on the first intraday violation of support or wait until end of day with the risk to fall victim to a nasty shakeout. If a stock closes below the expected “support” w/o a shakeout it tells you that:

A) The stock changed character and could be in for a deeper pullback/consolidation or maybe it is gone for good

B) You failed at identifying a proper support level

C) The stock has only strong hands on board which are not prone to overreacting.

If the latter is the case you can scale-out and then simply scale-in again once price moves up through the mark tomorrow and or the days ahead. Large cap stocks which are widely followed move more like a ocean tanker so support and changing direction can be a multiday process which often sees closes below support.

The quintessence is this: You want your stock to show you that it adheres to proper support in one way or the other. If a stock stops doing what you want it to do you have to think about letting it go.

The 10% rule helps to secure my desired risk-multiple of the given setup. Most setups are between 2.5 and 3R. Independent of the 10% rule I always exit the trade when it drops below a specific risk-multiple threshold after hitting the goal risk-multiple before. This rule is portfolio and not chart driven! A quick sell signal is also triggered once a stock retraces a big initial move on the very next day.

Moreover I trim winners on my various sell signals. These can be divided into proactive and reactive signals. To the former belong climax moves, clothesline and century mark hits. Climax moves are typically measured as a extension above the 10d or 50d moving average and they tend to peak via violent daily reversals. The clothesline is more relevant than the century mark in almost all cases as a price target tool.

On the reactive side I trim when a stock violates a moving average that it has respected for a given time period (months and not weeks!). Stocks dropping through major support levels such as base breakout pivots and/or major PLLs will also make me sell as some sort of last chance exit, but I rarely let it get that far.

Original Question: I often see you mention island gaps, inside and outside days… Do candle formations have a important role in chart reading to you?

First of all candlesticks and HLC or OHLC bars contain the same information. So what we are talking about are price and volume formations as measured on a daily basis.

To make this story short, the interpretation of such price and volume formations are actually the A to Z of chart reading right where the action takes place or where the rubber meets the road as Gil used to say. Learning to read this signature should be your top priority over the years. I am currently working on a large series called Chart School and it comes in six chapters. Inside, outside days, reversals, price volume anomalies, volatility contractions and change in character are all part of this. What I don’t like about candlesticks is that people are way to strict with how they should appear on the chart. And putting labels on daily formations such as shooting star or hanging man is just another added layer of unnecessary complexity. Even when you use candlesticks you should ignore the candlestick labels and learn to just READ the price and volume signature. It is hardly ever the same but it oftentimes ryhmes. You’ll get a hang of it once you put in the practice hours needed.

Explaining all this is obviously way too much to be covered in a simple Q&A post.

A momentum gap setup or short #MGS is one of the best entry setups out there if you adhere to a couple rules and concepts.

I always enter a initial position (typically 30-60% of regular size) right at the open of a powerful #MGS. Once price pulls back intraday I wait and scale-in once I sensed that a intraday bottom has formed. I am not referring to the normal little pulback happening within the first 10mins of a session! A proper intraday bottom will form mostly around major support levels such as gap fills, ATH pivots or major PLLs. Once support is in the next potential opportunity to scale-in is when price goes above the highs of the first 15min bar of the day. This is called a 15min opening range breakout or short #ORB. However I rarely use the #ORB and see it more as a technique to get involved if you missed the intraday bottom or generally failed in establishing a meaningful position size. I simply hate buying into intraday strength like this.

As with the #QTS I also double my initial size sometimes in the #MGS on an intraday basis only. This is a skill based technique I employ and I will quickly cut back if it doesn’t quickly resolve to the upside in runaway fashion. I won’t sit with a double position waiting for a intraday bottom! But this stuff is not needed nor recommended.

I also stick to my scale-out rules here and realize some profits once the stock is up double percentage digits intraday (excluding the overnight gap). Once the gap-up day is in the books you simply sit tight. #MGS’s often pullback to test the lows of the gap up day or even go for a little shakeout below in the days following the gap. This is normal behaviour and actually provides another proper setup to add some size. A fellow trader uses those low volume retests in earnings momentum gaps calling them Fishhook. I adopted this term. The strongest runaway gaps also tend to go sideways for days or weeks following the gap day as they try to digest the move and want to give the impression of a lack of buying interst. More often then not there will be a proper follow on setup popping up during that phase.

Generally speaking the #MGS is a pure psychological setup which scares away most traders. The best setups are those who blast into ATH ground coming from a steady uptrend. Only few traders have the guts to buy them right at the open and thus those early and most scary ones tend to turn into the most powerful runaway gaps.

Establishing a strong postion in a #MGS is tricky and requires skill and experience in navigating the intraday market. You must not hesitate but also can’t allow mindless scale-ins on the first little sign of support. You also need to have a big enough initial position to avoid any FOMO setting in if the stock simply runs away from the open and never looks back.

If you struggle to get a grip on the #MGS it is best to enter via the normal position sizing technique. Enter with a small position and a stop below support. Due to the nature of gap this means that the position size has to be very small in order to not exceed your maximum stop loss. Here it is all about being honest and placing logical stops.

No never! It makes no sense to place trades outside of market hours as there is not enough liquidity to truly find the correct price direction. It is basically a giant mosh pit and I don’t want to be involved in this at all.

When a stock gaps down overnight exceeding my stop loss level I exit right at the open the next day. No need to try getting out at a slightly better price. Stock flashed a red flag and I exit to be ready to engage with fresh opportunity elsewhere. In the end a trade is a data point and single trades don’t have a huge impact on performance if you stick to your stops.

I adopted a ZEN like approach over time where I focus all of my attention on mastering the “simple” concepts rather than adding complexity. I don’t do options, futures, out-of-session trading or intraday +200% margin.

Good question! First of all there is no consistent manner. What you want to do and what I can’t show you by simply posting charts is to figure out where and when the PLL was/is formed aka where and when the volume came in. Tradingview only shows you the PLL information based on the section of the historical chart you see. This is awesome and allows us to dissect the volume signature.

What I typically look out for by scaling and moving the chart section is this:

A) I check if there is a major PLL around current price levels.

B) Then I go on an check if this PLL was formed recently or if it is old. Post IPO PLLs are high in volume and I often neglect them.

C) You also want to check if the PLL is actually just forming right now and thus is not a reaction to former price & volume levels. If that is the case I see the support volume as less reliable.

D) When you had a recent high volume move it oftentimes makes sense to scroll the chart so that the recent move is not visible and thus doesn’t show up in the PLL’s. This helps figure out what I explained in C.

E) I also oftentimes switch from weekly to daily to get a better feel. The reason why I don’t always show the PLL on the daily is to have a more clean daily chart with less distraction.

Don’t forget that the PLL concept is only 2 years old. I am still improving and tweaking as my experience grows. Feel free to join me on this journey and stop trying to get precise and rigid rules from me. They are simply not there yet.

Average holding time when only considering winners is 13 trading days. But the range goes from a couple days up to half a year. When you include stop loss hits it is shorter but I never calculated that number. I am not a day trader and while I scale-out quickly (intraday sometimes) depending on price action I also sit tight once those scale-outs are in place and made the position bullet proof.

Mostly huge climax reversals and bearish outside day reversals on large volume and moving average (MA) violations where a stock loses support after adhering to a MA for weeks to months. But I also run for the exit quickly when a stock retraces a huge move right after flashing me an entry. (Note: Due to tight stops in Q&T setups, typically my stop loss gets hit before a red flag is in the books.)

You must know that swing trading was my solution to engage in smaller high octane stocks. Most of the time I can only make an educated guess beforehand. But typically the smaller names will have the most aprupt moves which will make me scale-out more aggressively. Scaling out a lot obviously turns any trade into a swing trade.