The Most Profitable SIMPLE Trading Method

Let me try and post outlines of pretty simple trading system based on pure price, volume and pace action.

Major postulates:

I. In a range buy low sell high. Define range as situation where you can draw horisontal lines through lows and highs of the day on NAS futs or NDX chart. Being rather trend trader I try to stay not aggressive during range market.

II. In uptrend buy high sell higher. In downtrend sell low cover lower. Define uptrend as series of higher lows and highs, downtrend as series of lower lows and highs. In order to realise this:

1. Find stocks that hover near the high and near the low while market is in the range. You want liquid stocks that apparently are influenced by broader market.
2. Watch volume action: you want to deal with stocks that see volume increase when they near the high (let's talk about uptrend only simplicity sake, reverse will be true for downtrend) and volume decrease on retreat.
3. When market breaks the range you buy your stock as it breaks day high. Your stop is just below the support stock formed when moved up and down near the high. There are three ways to do it depending on your personal aggressivness and strength/choppiness of the market:
a) aggressive way: you buy before actual breakout as you feel it's going to happen. You get better price, easier fill, tighter stop. Trade-off is lower certainty as you enter before confirmation.
b) regular way: you buy actual breakout. You get not as great price as in first case, execution is often harder, your chances for success is higher as you buy confirmation of price break.
c) conservative way: you let break occur, then wait for new high and retreat and buy only if you see new support (former breakout level) holding. You get worse price, you risk to miss play altogether if break produces immeadiate large movement, but your entry is as safe and confirmed as possible.
4. As stock goes to new high you trail your stop under breakout level considering it new support. Depending on your objectives, risk tolerance and temperament your exit strategy differs from pure scalping (selling on first pause/weakness) to scaling out which allows to utilize the trend better. One of conservative scaling out strategies is: 1/2 of position sells out on risk:reward 1:1 if stock pauses there; 1/4 more on 1:2 risk:reward. The rest is being rode up with stop trailing under each new support until stock reverses and takes out your stop. Yiou mifght also want to liquidate last portion on furious vertical spike with huge volume increase as it often indicates trend reversal. More aggressive way to scale out would be trailing stop for entire position until risk:reward 1:2 is reache where first portion is sold. Some prefer scaling 1/2 and 1/2, some 1/3 x 3.
5. Some misculaneous points:
- this is done on 1 or 2 min chart for the stock, 2 min chart for NDX.
- use 20MA as confirmation of strength/weakness, you want your breakout candidate to remain above 20MA as it hovers near day high.
- define your position size depending on logical stop and portfolio size, considering 1-2% of your trading account maximum risk on any given trade. With 25K trading account I would try to keep losses as small as $250/trade. If breakout level is 20 and support is 19.75, you are OK with 1000 shares, but if support is 19.50, you might want to decrease shares size to 500 or even skip the trade as untolerable risk wize.

Best regards,

Vadym

 

Jeffo,

Here's the chart I am talking about. To me (and perhaps only me) it does not seem reasonable to connect tops at 120 and 104 (the equivalents of the ones you and Chartwiz used on the COMP) which both took place over a year ago to define the weekly trend when the stock is at 40.

To my eye the trend line on the log chart looks more credible. If you ignore the absolute top in March of last year and draw a trend line from the September rally peak on a linear-scaled chart of the COMP you would have a trend line quite similar to mine, but with not so many close approaches. In fact the breaking of the trendline would have occurred earlier on the linear scale. The breaking of either led to a very tradeable rally on the daily.

So I guess the discussion is more about where you start the trend line than it is about log vs linear. When actually trading on a short term basis using smaller price range charts log vs linear doesn't matter a hill of beans, of course.

Each to his own choice.

 

first I would say it doesn't really matter no 2 traders think alike.(about log vs linear scale discussion)

IMO not trendline defined price action but other way around price action confirm trend or trendline.

sometimes for confirmation good idea to look elsewhere...

I consider best confirmation in comparison.

look on chart in attachment.

 

I agree your trendline is more relavent to the trading most of us do. The nasdaq has broken all downtrend lines and that last one is the only one left so that's why I focus on that one right now. I don't disagree with your assessment.
Jeff

 

I personally use Trendlines to try and identify Trend reversals and Trend continuations. I use horizontal lines to try and see where support and resistance lie. I see those as places where danger and opportunuty lie. I haven't been able to trade off of them though, probably because I don't have enough experience yet. As for log and linear, I think the most important thing is to figure out what "volume" is using (not what most people say they're using) and use the same thing, because that is what the largest part of the market is responding to.

 

I think the most important trendline is your equity curve. If it's going up then your method is correct.

 

Ddefina
Ohhhhh yeah. Back to basics.

 

"I think the most important trendline is your equity curve. If it's going up then your method is correct. "

See the picture. Sorry it's fuzzy, but it's just a webcam picture off the wall. Doesn't really prove anything yet but if I get a third year with similar results I just might think I know what I am doing.

Actually what I am doing is pretty simple in principle, so it may fit here. My bread and butter trade comes from selecting a universe of high relative strength stocks. Waiting for a pullback with a pronounced dry-up in volume on the daily. Entering on a clear resurgence of volume accompanied by or followed by a breakout in price from the range at the bottom of the pullback. I may also trade re-entries based on the same principles on the 30-min chart.

Like most other apparently simple trading techiques it is a bit harder in practice, particularly the exiting part.

 

Dufferdon,
I'm going to start building a curve pretty soon, one of the next things I need to do. It seems like a good idea to have it on the wall where you can always see it. I was going to keep mine in the computer but I think your way is better. It emphasizes the importance of the " #1 " graph. Good idea.
Those drawdowns must have been murder, especially the first one. GEEZ!