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
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
