Day trading with stock screener: building one trend-following strategy

[Mike Smith]

Hello.

I think that all newbie traders have period when they think: "All that I need to make money is just to find my setup (they read in a book or found anywhere else)". Their main mistake is to try trading their setups at any time without any background analysis. Usually they see their setups with good results only and begin to trade them in any conditions.

Here I want to show one simple intraday trend-following strategy trying to analyze some background details. Also I will show how I trade this strategy with stock screener.

There is no Holy Grail and all points below are well known. I just combined them in one place.

Main principles for strategy development: strategy should be simple and have logical background (also it is easier to trade when you can explain to yourself the logic of trade).

Goal: to take about 50c. - 100c. stock move by one trade per one share with risk about 10c.-15c.

So as we want to catch more than 50c. move then stock has to have Average Daily Range minimum $1. ADR can be less $1 but stock should have some reasons - news, earnings, breakout of strong consolidation/level on daily chart etc.

Let`s identify starting conditions for stocks we are going to trade (you can use finviz.com or any other free stock screener):

1. Exchange: NYSE, NASDAQ, AMEX.
2. Daily ATR >$1 or ADR>$1.
3. Price: $10-any. But keep in mind that more stock`s price, more it`s volatility, more stop-loss size, more buying power you need.
4. Average volume >1000K shares a day. We need some volume to buy and sell stocks easily.
5. Ex-funds (if you want to trade stocks only), any other selected filters.

After manipulations with filters above we have initial list of stocks that can move $1.

Basic setup:
We will build strategy using consolidation setup as the easiest one to trade.

There are some advantages of consolidation trading:

• consolidation precedes the impulse (if we want to take some impulse we should get in trade before);
• risk-reward ratio in consolidation usually is better than during ongoing impulse phase;
• consolidation makes some local level that gives chance to put reasonable stop-loss. Moreover tight consolidations with small stop-loss give a chance for newbie traders to keep their account longer (if they don`t have trading discipline);
• there is enough time to get large amount of shares with good price;
• easy setup for identification.

to be continued

 

[Mike Smith]

Strategy building

Usually strategy building process starts when trader likes some kind of charts and decides to extract useful setups (I use this way).

Let`s extract some useful features for our strategy from chart below. This is type of charts when all is clear (as usual ex post ).

This chart has some characteristics but I will write about some more possible cases below:

1. Breakout of consolidation or some support/resistance level on daily chart. Breakout of some consolidation is very strong signal and stock can make large move in one direction after. Also it can be continuation of previous day`s move after breakout of strong level.

When stock trades inside of the previous day`s range it is usually not clear how far can it go - there are previous day`s High/Low resistance levels at least. So let`s leave this setup for other traders.

You should pay more attention for daily chart. But if you think that it is enough for profitable strategy you are mistaken. For example on 12/23/2015 there were 155 results out of about 500 stocks with minimum 2 days breakouts and not all of them gave good move. Look at picture below. Even 208 days breakout didn`t guarantee strong move.

2. Initial impulse or gap. Strong impulse gives direction for today`s trend (this is intraday trend only) and usually this impulse breakouts some level on the daily chart. Gap (better if it is not the large one) is some analogue of first impulse but without first impulse bars.

3. Retracements. They are very important in our trend-following strategy. Let`s highlight some key points.

• First retracement is above breakout level (after strong impulse there are not a lot of sellers to draw stock down).
• Each retracement is less or equal to previous one (higher lows for uptrend).
• Retracements is less than 50% of today`s range usually (if there is gap first retracement can be formed at the day`s low for uptrend).
• Retracements looks like more as concave curve for long trades and as convex curve for short trades (sometimes it is not obvious). Also there are rectangular

4. Consolidation. There are some places where you can trade consolidation pattern when stock moves in the trend:
- fist retracement within daily ADR (better if it is less than 50% of ADR). Usually it needs some time for well formed consolidation (say about 15-30 minutes minimum).

- fist retracement out of daily ADR. Usually consolidation is formed about 1-2 hours after strong impulse. Didn`t find this setup in last days. So if anybody knows what I am writing about you can attach your printscreens.

- soon after first retracement when support/resistance level steps up or near day`s high (for uptrend). Usually it is short base (can be just 5 minutes - look at DVN chart) and can be traded when you didn`t find entry points during main consolidation (for example if first consolidation had very wide range for your stop-loss rules or you didn`t see clear level to put your stops earlier).

- any tight consolidation near day`s high/low price. But be careful - there is less potential and it is better to focus on strong/weak stocks only. Also it is good when there is some impulse before consolidation.

- any other consolidations in different cases (not our strategy`s setup).

5. Some large volume bars (volume spikes) in retracements. I like when big money are in the stock because if they have some interest they can support any level and stock`s move.

6. Stock is stronger/weaker relative to market. Look at chart below. This is very strong signal saying that there is strong buyer that doesn`t give to go stock down with other market, he buys all seller`s shares and accumulates. Stock should show it`s strength/weakness for about 30 minutes. Also it is better if stock shows it`s strength/weakness relative to market`s move on the daily chart too.

7. Potential. To get our goal (minimum about 50c-100c per share), consolidation has to be in initial phase of stock`s move. I think this is very important point. If it is in other phase then you should reduce "profit" expectations. Better if consolidation is in the first retracement. Note that initial impulse also shouldn`t make all daily spread.

 

[tradingcomputer]

Thanks Mike, I will implement this indicator then test it. I only have Emini S&P 500 data, hopefully it will work on Emini (with some adjustment).....I will get more data source after my emini work done.

 

[arna]

Really great post. I have been trading same setups that you describe in 4 - consolidation. Especially on gappers.

 

[Mike Smith]

Entry and exit points
There is no strategy without entry and exit points. Below some ideas for reasonable entries and exits on the chart. This is for long trades only (vice versa for short trades).

Entry points:

1. Within consolidation (better to get the lowest prices of the consolidation).
2. When price is breaking out consolidation. This is more safety way but it increases your stops and decreases ability to buy more shares (price can move very fast).

Some possible exit points:

1. Below consolidation – stop-loss.
2. Some level on the daily chart (resistance) – target price.
3. When price goes below previous retracement`s low – trailing stop.
4. Below low of the bar with wide spread and volume spike (usually at day`s high) – trailing stop.

As we are not algotraders we can have more reason for exit – when something goes wrong. Also we can take some profit (when our goals are realized).

Look at DVN results if exit is done by trailing retracement`s lows (just one of possible results). $1.28 for one share with risk less than 10c. – not bad.

 

[Mike Smith]

How I trade strategy and some more comments

In the first post we found stocks with $1 potential move. Also I try to remove stocks moving with gaps usually (manual filtering). Finally there are about 400-500 stocks. And as we are going to trade strategy with stock screener let`s think how to find stocks under conditions above and what filters we can use.

I don`t know how to formulate all conditions of my strategy so I prefer screeners with visualization functions. Here I will use my current one – VISMAST stock screener.

1. Breakouts. I use filter for minimum 2-3 days breakouts. It is not necessary to wait 52-week breakouts in daytrading.

Note that there are haven`t to be any fresh strong congestion zones in previous days that can stop stock`s move after consolidation (potential resistance levels). Actually we have to be out of them (they should be our support). For this purpose you can look at any minute chart.

2. Initial impulse. Breakout of some level tells about some initial impulse by itself. But you can use such filters as:

- "3 bars Up"/"3 bars Dn" good to find some strong impulses and not only initial ones. If there was strong impulse it can have continuation.
- "Gap Up"/"Gap Dn" if you want to trade gaps only.

Finally you can`t guess how initial impulse will be realized. For me it is obviously from the chart and I use filters above as additional ones only (I don`t put them in main strategy).


3. Retracements. I didn`t find special filters for retracements in any screeners. Screener offers to use EMA filter for this purposes. It is not traditional usage of this filter (usually EMAs used to find trend but I see it without EMAs) but it gives good results when you want to find higher lows for uptrend and lower highs for down trend. As I observed this filter doesn`t work when EMA is far behind stock`s prices because of big gap. Moreover EMA12 shows some speed of stock`s move - stock prices come below EMA (for uptrend) when there isn`t enough fuel for impulse continuation and some deep pullback or reversal is possible. But it doesn`t mean that stock can`t move up after. Also it filters choppy stocks moving without any direction.

For retracements I use EMA12 for 5-min bars (it is 1 hour) with deviation of 2 bars (2 Closes can be below EMA line (for trend up) and above (for trend down), actually it can be two bars shakeout). This filter is for 5-min retracements. Use this filter carefully and control quality of retracements by yourself (you can see it better on the charts by yourself).

Also I use "Below H,%/ Below L,%" filters to find maximum 50% retracements.

4. Consolidations. To find consolidation I use "Congestion" filter (I put 6 of 8 bars in one row) and "Rng min" filter (last 3-5 bars with $0.11 range – I like this range for my stops). For good impulse after and strong support/resistance level I look at about 30-min and more consolidations (for consolidations in first retracement).

Also I have strategies with short consolidations (4 bars) at day`s high/low.

5. Volume. There is also volume spike filter with flexible settings in screener. But as this filter is additional one (firstly I want to have other conditions to be done) I prefer to observe volume on the charts.

6. Relative strength/weakness. This type of filters give very strong signal and can be used in different strategies (good signal for high probability reversals). "Strong" filters for trading long and "Weak" filters for trading short for trend-following strategy. Initially at start of the day I put 09:30 time that means all Close prices of 1-min bars are above/below first 5-min bar`s low (I put 41-min bar deviation in filter). Why? This is just assumption – if there is strong impulse and strength, stock shouldn`t go down more than lowest price at the opening. Then looking at SPY you can set up different time points to find stocks that move stronger/weaker than SPY.

7. Potential. I use ratio "Rng D/ADR" <= 100%ADR and set ADR for 20 days (about 1 month). If today`s daily range is more than average range for 20 days there is less chance to have good potential. Actually you can choose any other percentage in settings.
For initial impulse I use filter to limit first 15 minutes bar`s range - maximum 70%ADR.

Search results.

This is the most interesting part. Usually when people tell about any strategy (for example in articles, books) they show only ideal pictures that confirm their ideas. Truth is that you will see a lot of consolidation and other patterns at any period of time and not all of them give ideal results (often all of them give false signals). Sometimes there are stocks that you should send to watch list for further monitoring. Anyway you have to choose the best setups only and for this purpose you should have and keep in mind your ideal setups (charts).

Main idea in search (just my rule) – setup should be clear at first glance. If it is not obvious don`t imagine and don`t start to find reasons for trade. If you like how stock is moving but there is no any enter points take this stock in your watch-list and wait.


Let`s look at some screenshots of search results I made on 12/17/2015.

There are 7 results but actually not all of them at that moment meet conditions of our strategy. Only COP has consolidation in clear first retracement (is goings to go out of consolidation). TOT – good consolidation is building, better to put it in watch-list for further monitoring. VMW has tight consolidation but it is not the first retracement. Other stocks made great move and don`t have good consolidations.

Finally market went down strongly (SPY was added for comparison) and all our stocks in search result had good continuation in that day. But it doesn`t mean that you should trade all consolidations. There are different time periods and market can move in different directions.

More example - 12/22/2015

This is good example when SPY opens with gap. While it was closing the gap the strongest stocks in search results didn`t go below the first bar`s low and started to build consolidations at the day`s high. For me the best consolidation/base is ABBV and EMR here (I traded ABBV only).

Don`t think that screener will do all your work. As you see screener even with about 8 parameters (days out, EMA, congestion, range, strength, range day/ADR, 1st 15-min bar`s range, below high/above low) gives a lot of different results. And I am amazing when see how people try to build profitable automated trading strategies using just a few well-known for all traders indicators.

As you see there are a lot of traps. Especially it is hard to stay in cash when market goes strongly in one direction and gives different honeypots for traders (for example in first 30-minutes or in other time when all stocks go in one direction). If you see that there are a lot of false consolidation breakouts be careful. Maybe market will reverse.

Don`t hurry up. Observe and analyze conditions on the daily and intraday charts. Make printscreens and analyze search results (this is some type of testing). Using different parameters and filters you can make your strategy more or less strictly. But trading chosen strategy you have to be consistent.

Don`t trade if conditions are not comfortable for you. Just WAIT your setups. If your strategy is good you will succeed.

And keep your losses always small.


Hope someone gets useful ideas.

P.S. Happy new year!

 

[Mysteron]

So Mike Smith you are promoting VISMAST and you are a vendor???

 

[llIHeroic]

Mike,

I think your thread is fantastic. Thanks for taking the time to share a detailed explanation of a strategy you use to the community. Wish this site had a lot more quality content like what you've done here. Wish you the best going into 2016!

 

[Mike Smith]

Mysteron,

No. I am trading alone and sometimes it is very boring to sit down before monitors.
Initially I wanted to write one short post and ask daytraders how they trade trend-following strategies, what filters and parameters they use to pick stocks during trading session. But there are so many idle questions here that I decided to share with one of my strategies before questions.
As I started to write I`ve involved in writing process, made printscreens etc. Now I see that it looks like article.

If you are mod please delete this thread. But I think you`ve made ad more than all my posts with Vismast`s web-site printscreen.

And if you suspect me in screener`s promo I will say some good words about Vismast. It is good stock screener and has really new ideas and filters. There is no level 2 filters (as in TI and Madscan) and charts with 1-min delayed data (that it is not critical for my chart based strategies and I think that it is payment for real-time multiple charts) but their idea with charts instead of symbols is really the best for today to make monitoring and screening. Finviz has some visualisation (this is my second favourite and I want to promo it too) but there are no such filters and functionality for intraday trading as in Vismast. I think there are some real daytraders in Vismast`s team.
I use Vismast for about 8-9 months. Didn`t see their new site. But I think that they say right and old idea about screening - screener has to help traders to find the best stocks to trade. I agree with them.

 

[Mike Smith]

Thanks for your words.

Mike,

I think your thread is fantastic. Thanks for taking the time to share a detailed explanation of a strategy you use to the community. Wish this site had a lot more quality content like what you've done here. Wish you the best going into 2016!