Back to the Basics

I appreciate this thread. We always have to get pulled back to the basics else we circumvent them.
By the way have you had your eyes checked. Most of the time headaches are due to eyes. Especially sitting in front of monitors all day. And from your writings night as well. We need very good lighting as well. Preferably daylight but it must be very good light. Not darkness else we get blind in a hurry. Also eyes need to rest.

 

One of the things most critical to your long term success as a trader is losing correctly. If a trader learns to lose correctly (s)he will eventually come out a winner. The hallmark of a true professional is small wins....and smaller losses. Most professional traders will be "right" 30 to 50% of the time, the rest of their trades will be very small stops or break even trades. Most novices however, are forever on the search for the holy grail technique that will be right 80% of the time of more. While a professional knows there is no such thing, there are unfortunatly a lot of dishonest people willing to sell such a dream.

Brandon

 

Below is an article written by Jeff Semmel. The original can be found @ http://www.tradingscans.com/education/BASIC SWING SETUP EDUCATION.htm


INTRODUCTION TO SWING TRADING

Every stock has only a limited time in which it is a very decent trading stock This is true in all time frames, including the daily time frame which we will be discussing here. When it's time has passed, other trading stocks must be found. The purpose of TradingScans.com is to find these stocks daily, relieving the trader of the burden of hours of searching each night. TradingScans.com’s exclusive and proprietary software scans 30,000 stocks nightly and finds approximately 1,000 stocks that can potentially meet the TradingScans.com setup criteria. From these selected stocks, usually about 100 are presented to TradingScans.com subscribers in various categories. TradingScans.com’s system produces daily charts showing candlesticks, volume, 20- and 40-period moving averages, along with text describing the various technical indicators analyzed.


THE TREND IS YOUR FRIEND

Up trends are defined as a series of higher highs and higher lows. Remember we are discussing swing trades here. Once you have a stock that has made a higher high and a higher low, then you have an uptrend. TradingScans.com determines when stocks have pulled back from a prior high, or a 52 week high and thus are beginning (breaking out), or continuing (retracing from), an uptrend. If you have a solid uptrend then almost every decline is buyable while the trend is intact, up until the stock becomes "extended".

Downtrends are the opposite, and every rally is short-able, regardless of news or anything that caused the minor rally. The question is when to short and how, not if. If you have a solid downtrend then almost every rally is short-able.


WHEN TO ACT

Most people won't be able to tell you whether a decline is buyable or something to be frightened of. That is one of the keys to being a success, because you will be able to take advantage of those individuals who are panicking when they should be buying. In an uptrend you know that declines are opportunities, they are not reasons to panic. You want a lot of individuals to misunderstand this concept, obviously. You want them selling their stock to you. You want stocks that are moving into an area where you will be able to buy at the day of the low, or at the very worst one day off the low.


THE BASIC SWING SETUP: DEFINITIONS

All major up trends are made up of a series of minor up trends and minor retracements. Opportunities exist when the minor uptrend and major uptrend match. A minor uptrend starts when the conditions of a minor downtrend change, when there are no longer lower highs and lower lows. It is at that instant that we act.

We examine every stock that is in the process of a normal retracement from a recent high (of no more than 6 days ago). We then look for three consecutive days where the day's high is lower than the prior day's high (3LH). Secondarily we note if three days where the opens were higher than the closes (3LH 3red), and three days where the low's were lower than the prior day's lows (3LL). We also look to avoid imbalances in the sizes of the bars, extreme size bars, or large gaps between the bars. Our goal is to identify and prioritize "orderly" retracements.

Buy the stock during the day of the exact low or the next day, never later.

Liquidity is important, TradingScans.com selects stocks with average volume greater than 500,000. Price is important. TradingScans.com checks for stock prices greater than $5. Daily volume is important. TradingScans.com notes appropriate volume associated with the daily bars and computes average, above average, and climactic volume.

This is the basic swing setup, which should always come after a prior upward move has cleared a prior high. TradingScans.com finds the prior high within the last 8 - 20 days (20 being the safest) depending on overall market conditions, making sure that there isn't a higher high within those days, thus insuring the existence of an uptrend or breakout. Currently this amount is set at 20 days (and the prior high must be 1% higher to qualify as a prior higher high) insuring better and less risky, setups, which is a design goal of TradingScans.com


THE THREE TYPES OF BARS

In the TradingScans.com way of thinking, there are three types of bars: 1) Narrow Range Bars (NRB), 2) Regular Range Bar (RRB) and 3) Wide Range Bar (WRB). TradingScans.com defines NRB’s as bars which fall below 50% of their 5 day average range, or a bar with the narrowest range in the last 7 bars (NR7); WRBs are bars that range in size above 125% of the average from the past five days; and RRBs are all the rest.


TRADINGSCANS.COM RETRACEMENT WATCH (WRB) LIST

TradingScans.com LONG Watch List is three or more lower highs, and three or more lower lows, with each bar being red and the current bar is a WRB We ideally want three consecutive very dark bars with lower highs and lower lows. This tells us that sellers are dominating the market in this stock. They are pushing the buyers further and further back. The last bar should also ideally be abnormally larger than the prior bar. This is the key criteria. What are we watching and waiting for? Gaps! More precisely, Novice Gaps, those gaps created by an abundance of market orders received by market makers (or specialists) after the close of the trading day. We are also watching for the formation of a Narrow Range Bar that we can closely watch for the next several days. We also can be more aggressive and base our entry using intraday charts.

Please note that the Watch List criteria as described above differs only a little from TradingScans.com OOPS List. In some cases it does not differ. The differences are as follows: 1) The Buy OOPS list does not need three lower highs. One or two red bars is the minimum requirement. and, 2) The stock does not need to be in an up trend. That is it. Many plays that would fall into this list would also fall into the Watch List.


TRADINGSCANS.COM PREFERRED RETRACEMENT (NRB) LIST

TradingScans.com Action List is three or more bars with lower highs with the current bar an NRB (Narrow Range Bar). This setup would tend to produce buys (action) early in the very next day a high percentage of the time. Here is the basic concept - the NARROW RANGE BAR (NRB). NRBs are bars with smaller than average distance between the highs and lows. It tells us that there is virtual equilibrium between buyers and sellers. They are beating each other up and both are getting nowhere. It is visual in basis. NRBs are only significant after a several day move. A potential change of trend is incredibly close at hand. Turns after NRDs tend to be a lot more potent than the turns from a regular buy. When we get an NRB development with the basic swing buy/short setup we increase our lot size. The basic swing buy/short setup combined with the formation of an NRB presents a near perfect buying opportunity. Here is the setup: three or more consecutive bars with lower highs followed by an NRB. This tells us that the sellers have run out of ammunition(stock), and they can no longer push the stock down like they have done before. Place an alert above the NRB. We recommend buying multiple lots. It almost doubles the accuracy of the basic swing buy. The tails of an NRB should be small because the distance between high and low must be very small. So we are talking about a relatively small narrow range day. Another reason why we recommend buying multiple lots above the NRB is that the stop is below the low of the NRB, relatively close to the entry point. we are willing to increase the size because if we're wrong, the loss is smaller. We prefer the NRB to be below the prior day’s low (bending the rubber band to cause the snap back). Use similar methods for shorts, emphasis on the context that the stock is in a downtrend.


TRADINGSCANS.COM BASIC RETRACEMENT (RRB) SETUP LIST

The TradingScans.com Basic Setup List is the heart of the system. TradingScans.com LONG basic setup lists are three or more bars with lower highs. Ideally we want three dark bars. There may be times when there can be a bar that is with a higher close than the open, but ideally we want dark bars. We also ideally want to see retracements from a prior high in the 40% - 60% area.


HOW TO PROCEED

We want to buy the stock above the prior day's high, thus changing the definition of the minor downtrend. The stop is .01-.05 below the low of the day. Set your alerts the night before .01-.05 above the high. If the alert does not happen during that day then the next day adjust the alert to the new bar’s high and try again the next day. Keep doing this. However you must keep the major uptrend intact, therefore if a stock causes the major uptrend to break then it is no longer a candidate.

TradingScans.com 30 minute rule: An alternative way to enter a stock trade where to wait for the entry requirement would be to give up too much of the potential gains. If the entry price is too far away for comfort, let the stock trade for 30 minutes and then you can buy/short above/below the high/low of the first 30 minutes. This is based on studies that stocks that make a new low on the day after 30 minutes of the day will remain weak for entirely the whole day. Your stop would then be based on the current day, rather than the prior day..

 

WHAT IS REALLY HAPPENING

Professional market makers are always willing to buy stock from you (today they have to). He has to take the other side of your sell order. When he buys from your selling he can take in that stock and drop his bid lower. The stock moves down and eventually hits his bid there, then he takes more in and moves lower. Market makers buy all the way down. They have to. That is their job, their function. And they want to because taking the other side of the public’s order is making them wealthy. By the time three days in a row has happened, market makers are saturated with inventory. Now every single market maker in that stock has one objective – get the stock higher. This is when we want to step in. They will use everything they can to get the stock up. The reverse is similar; the market makers are selling on the way up. Sometimes they become “net short.” At that point they desperately want the stock to go down.

WHAT WE ARE REALLY DOING

What we are actually doing here is monitoring the buyers and sellers. Who is in control? You know who is in control by the simple definition “lower highs and lower lows.” Sellers are in control. But this situation ends eventually.

WE PLAY THE PERCENTAGES

Trading is a lot like marketing, or basically any other business. Consider the following: you run a club that needs membership and officers and workers. Every year you have a membership drive to acquire new members and elect new officers. If you know historically that you will get 20% of the people you ask to join actually joining, then if you need 20 new members you must ask 100 people to join. Also If you know that 1 % of the people you solicit are capable of becoming president of your organization you must solicit 100. You get the point. Same scenario in trading. We are looking for 5-10 stocks per day to trade because that is all we need to handle in a day. History says that only 10-20% of our candidates will trigger (cross their entry point) on the average. Historically we know that for every 10 stocks triggered, 2-3 will be very successful, 2-3 will fail, and 4-5 will be average gainers. Occasionally we will hit a "homerun" that will be outstanding. Never will we get a stock that will collapse, because of our stops. Yes, maybe once or twice a year a stock will collapse overnight due to news, but the homeruns should more than make up for this unforeseen occurrence. That is the nature of trading, percentages. The trader who only looks for the absolute best trade and plays that one with all of his funds will be disappointed. To trade effectively you must divide up your bankroll and split up the trades evenly, occasionally taking multiple lots for the exceptional setups, but never risking more than 2-3% of their capital on any trade.

 

I was willing to give you the benefit of the doubt, and accept that you were trying to help new traders. But after seeing your thread advertising your "mentor" services, I now know you are doing nothing more than trying to take advantage of these forums to push your services.

Does Elite Trader monitor these boards?

 

Why is the market up? Everyone seems to want to know this, but it seems to me its usually just to pat themselves on the back. A long wants to hear the reasons to validate his long position, to pat himself on the back and feel really smart. On the other side, the guy who is short wants to know the reason too, but will probably have an opposite reaction to the whole thing. This person probably wants to argue with the market, to say this is the dumbest thing and tell you exactly why. This allows them to feel like smart guys and pat themselves on the back too.
As traders our focus needs to be more on the what, not the why. We can always lie to ourselves about why, come of with great little tales to tell ourselves and feel real good. What does not lie though.

If you are long and havent a clue as to why the market is up, you still get to keep all the money you made..minus the brokers cut. If you are short and know every single reason the market is up and why it should not be, it really does not matter though now does it, you still have to pay up..plus commissions.

Be careful when you are more concerned with the why than the what.

Brandon

 

Here is the problem in a nut shell kg, I really want to keep the thread on topic (ie info for newbies, not people bitching about me, I did start a thread for that though if you want to go there http://www.elitetrader.com/vb/showthread.php?threadid=17778 ). It doesnt help anyone to have to go through a bunch of crap to get to the content, and I think there is good stuff here, though I have an obviously biased opinion. So, when things are off topic, or they are personal attacks, they can be removed.

Brandon

 

When I was in high school I worked on a turkey farm as a hired hand. My job consisted of hauling grit and bring dead turkeys out of the bar. Turkeys die. The farm I worked on raised about 200,000 turkeys each year. Of those about 12,000, give or take a few, would die. Nothing can be done about it, its just the 33 turkeys are going to die each day. If we went 10 days in a row with out a dead turkey at all, then on the 11th day I just might end up having to haul 363 dead turkeys out of the bar. This never bothered the farmer when he had dead turkeys. He knew that turkeys die. When they got sick he would medicate them so as to reduce the loss, but its accepted that a certain amount of turkeys will die for one reason or another. Those dead turkeys are like losses in the market. There is nothing you can do about it, your going to take the losses as sure as Pete Hermanson is going to lose 12,000 turkeys this year. The distribution of these losses may be fairly random, meaning for some time you may take no, or very slight losses, but at some point you are going to take the losses inherent in your system. Its not personnel, its just a fact. If you are to be a turkey farmer you can not cry over dead turkeys. If you are to be a trader you can not let losses effect you. You can only control them and move on.

Brandon

 

One tool I find enormously helpful in evaluating trades is to keep a trading journal where I log all relevant information regarding a position. I can then use this information for future reference to identify problem areas, strengths, mistakes, etc. The following are key sections in my journal that you might find helpful:

DATE:
SYMBOL:
SECTOR (if known):
BUY/SHORT (circle one)
TYPE OF SETUP:

ANALYZING THE POSITION:
PROS:
CONS:

CURRENT MARKET CONDITIONS:

EXPECTATIONS:
PRICE TARGET:
REASON FOR PRICE TARGET:

ANTICIPATED RISK TO REWARD:
ANTICIPATED RISK LEVEL (rate 1 to 10 with 10 being high risk and 1 low risk):

ENTRY TIME(S):
ENTRY PRICE(S):
REASON FOR ENTRY AT THAT PARTICULAR TIME AND PRICE:

STOP PRICE AND WHY IT'S SET AT THAT PRICE (also note when the stop was adjusted and why):

EXIT TIME(S):
EXIT PRICE(S):
REASON FOR EXIT:

OUTCOME OF TRADE:
EXPECTATIONS MET? YES/NO (circle one)
TRADE ANALYSIS (Include thoughts on the trade such as what could have been improved, what
you felt you did correctly, areas you may need to work on, etc.)