Questions & Answers
Search 1st and ask 2nd!
Original question: Can you walk through an example of how you decide to enter something quiet and tight and sitting on PLL or 10ma? Are you looking at 5min charts, level 2, large volume etc.? I noticed your entries seem to work right away and huge volume comes flying in. Maybe an example where you also got stopped out too.
Example #1: $ONEM
$ONEM went sideways on proper quiet & tight (#QTS) volume signature right after it found resistance at 44$ on december 23rd. However I dont engage with those early quiet and tight days as a proper #QTS is not a one day affair. It’s a multi day or even multi week shallow pullback into logical support (PLL or short term moving average). In almost all cases I wait for the 10d MA to catch up with price (Recall that I mention this a lot of Twitter). This was the case on december 30 & 31st. Both days had low volume (First 2 green arrows). The stop was hit when price dipped below the lower PLL zone which coincides with the 21d EMA here. Once price breached that level a drop into the next PLL was likely. Last friday price again turned tight on lower relative volume which triggered a follow up #QTS. This one isn’t textbook but is still a proper one as its a minor change in character after the 3 spin-out days before. The fact that the weekly bar closed unchanged in high volume is a sign of support. Moreover a shakeout is likely to happen at one point inside the handle area of a cup base.
While the #QTS is triggered via a one day signal, the overall pattern has more to it. To decide if a setup is a proper one always involves chart reading.
Example #2: $GRWG
$GRWG flashed two proper #QTS under the 10d MA since december 2020. The first one was into a sharp little PLL and the second one was at the 10d MA (but not above it). However, in this case both quiet and tight days came after a volatile week thus signaling that sellers are out of the way. Volume was extremely low in both cases! The day marked in orange was quiet & tight as well, but just like in $ONEM above, was still too far off the 10d MA and thus prone to failure. The PLL was a minor one as well (I wouldn’t even call this a PLL to be honest).
Example #3: $NNOX
$NNOX flashed a textbook #QTS in mid november 2020. Stock experienced a shallow sideways pullback into the monster PLL. Price and volume action then went extremely tight right when the 10d MA caught up with it. Two days later, BOOOM!
Example #4: $DADA
$DADA flashed two consecutive #QTS’s right after a big bullish volume clue which repaired the chart damage for me. However I actually got stopped out the day after my entry on this -8% drop. Stock never left the wider PLL zone and I simply had too much size on which forced me out via a stop loss eventually. This was obviously a badly executed trade (improper stop loss placement) and I made up for it by jumping back in two days later on a opportunisitc entry.
Example #5: $RKT
$RKT flashed a proper #QTS as price pulled back orderly into the short term MAs and upper PLL zone limit after flashing a couple bullish volume clues during the prior little rally. However the stock lost support and my stop loss got triggered more than a week later. I placed the stop loss below the PLL zone and therefore had to go with a small position size. This is something I often do when I enter stocks rather deep down inside their patterns. I just give em more room to move.
As you can see from the examples above. Each setup involves chart reading in order to figure out if the stock is in a favourable position to muster a rally. A quiet and tight setup is not a simple one day signal which gives you green light to plunge all in.
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.
and the code directly:
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.
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 a cash heavy position 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.
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.
There are two valid buy points in an undercut and rally setup (#URS) because there are two proper undercut and rally patterns.
- 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 (#MGS) is handled.
- 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 a 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 probably not 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.
Some more examples will follow soon.
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.
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.
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. [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 dont 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!
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.
Where to find it in Tradingview (They did a great job at hiding it in plain view):
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.
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 as one of your set ups?
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. Id rather focus on reshorting weak rallies (another one of Gil’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.
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
What Is A Cup And Handle Chart Pattern? A cup and handle chart pattern is a psychological price and volume pattern with distinct phases which allows a stock to get rid of weak hands in order to enable another leg up.
Characteristics of a proper cup and handle base are as follows:
- volume dry-up around the bottom larger (above average)
- blue weekly or daily volume clues at right side
- Steady and coherent appearance and not too sloppy
- Biggest weekly bar should be blue, not red!
- Handle is going sideways
- Right side is formed more rapidly then left side
Good relative strength compard to general market pattern (v-shaped market >> well rounded cups; Market far away from pivot >> cups reach prior pivot; Jagged market pullback >> quiet sideways handle …)
A cup and handle bases is not about the shape but rather about the little price and volume clues shown above. Generally a proper cup and handle base has a good relative strength compared to the market. When the market itself forms a pattern which is shaped as a proper cup and handle base it makes the formation of proper cup and handle bases on individual stock level vey unlikely as stocks can’t have the relative strength characteristic in such a case.
Here are some examples of proper cup and handle bases:
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 larger account balance and thus meaningful returns. 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. For me it was a long journey and I recall that I had a lot of trouble to trade up above the 25k barrier back then. It was all psychological.
With my knowledge of today I would approach my early trading years differently. First of all I would start with a cash account for the first year 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 or even blow your account. 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.
However if you can’t handle the risk or even trade with money you can’t afford to lose, my advice would be to stick to a cash account and trade only 2-3 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 a cash account would allow me to trade like I do now with all that intraday tweaks you can’t hope to be able to pull this off early on. You simply don’t have the skill yet. 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 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.
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.
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.
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.
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.
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.
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.
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 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.
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?
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.
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.
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.
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.
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 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.
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.
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.
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.
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.
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.
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.
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:
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.
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.
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 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!
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.
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.
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.
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:
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.
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.
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.
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.