Saturday, 16 February 2008

My Strategy and Q&As

I won't take credit for this, since my strategy is based pretty much on the TraderX blog strategy with a few minor adjustments which fit in with my views on trading. Check out his blog, it's one of the best out there.

Anyway here are the main components (and I like to keep it as simple as possible):

  • Trade gap stocks (Nasdaq and NYSE) only both long and short.
  • Only trade gap stocks which are trading outside the previous days range.
  • Only trade in the same direction as the gap.
  • Currently trading off 15min charts.
  • I use the 5ema and volume as the indicators on my charts.
  • Use of price action as denoted by candlestick behaviour and patterns.
  • Use of the opening 15min candle to denote an "opening range".

You may think that I can't trade many times, which is true to a certain extent. But you can find setups on most days and even you can't then that is no bad thing. This is one of most valuable lessons I learnt over the past 6 months and which subsequently struck a chord when I read TraderX blog.

The various components of the above will hopefully become more clearer as we go through the charts and trades every day. But in the meantime, here are some Q&A which may well be asked and which I will try to answer in advance.

What set ups are you looking for ?

See the TraderX blog for more details. But one pattern is to trade from the 15 min Opening Range breakout or trend which has ideally been preceded with bullish/bearish price action behaviour and an entry on a pattern candle (e.g. hammer, narrow range bar).

Another pattern is a trend in direction of the gap then a pullback to Fib Level or support/resistance level with a pattern candle.

Where do you set your stops ?

In most cases it will be the opposing end of the entry candle. Occasionally it will be at an alternative support/resistance level.

How do you exit ?

This is an area which I am still working on and trying to improve to get better rewards. That aside, currently I take partial profits at 1 point gain, at 2R, and at Fib Extension (1.382) of the previous day high/low cf to Opening Range high/low (see TraderX for the Fib Extension explanation). No hard fast rules here though as it is more discretionary and depends on how the stock is behaving.

If price moves against me then I let the stop do the work. OR if there is a strong reason in price action and/or a candle pattern then I will close the trade at that point. The question I try to ask is: does your reason for entry still seem valid or has it now been superceded.

Do you move your stops ?

The answer is yes and no. I never move my stop further away from my entry price. I do move my stop to breakeven once the 1R point has been reached. I also move my stop to breakeven and/or obvious support/resistance areas or candle patterns once I have taken partial profits.

How many trades do you make a day ?

In region of zero to five.

When is the earliest you enter a trade ?

The very earliest I would trade is after 2 candles have formed, so 30 mins after market open. But most of my trades are normally after 5 or 6 candles.

What is your current % success rate ?

70% (on basis of 2 months live trading). And 75% on paper trading for past 6 months.

How do you select stocks ?

I get a list of gappers for the day, then cut them down so that they fit my criteria. TraderX outlines various ways of finding gappers. I use those methods as well. I will have a max of 20 stocks to watch on a given day, and in some cases only 10 or so.

My criteria includes: stocks in the range $15 to $150, good volume on first 15 mins > 150,000.

Why trade 15min charts ? Do you not get more opportunities on 5 min charts.

People have different views of this point. Personally I think that there may be more opportunities on 5mins but is a more difficult job to weed out the sub-par setups in time taking into account the faster pace. It all depends on what you are comfortable with. At this moment in time 15mins suits me and allows me to "relax" and take a more considered approach to a trade.

What are your money management rules ?

I "pretend" that I only have 1/2 of my current trading capital. Based on that, I use the %Risk model. I will risk 1% of that capital per trade and I calculate my position size based on the distance between my stop and my entry. In effect I will "lose" the same amount of dollars if stopped out irrespective of the price of the stock.

Do you trade for a living ?

No. I try to trade in and around my normal job and sometimes in the evening. But who knows, let's see how it goes for the coming year and whether I can get thru the tough times in terms of my approach and strategy and discipline. And there will be some tough times ahead I've no doubt about that.

4 comments:

Jim said...

TraderAm,

There is always room for another good X type blog. Keep up the good work.

Your point #2 - "Only trade gap stocks which are trading outside the previous days range" - is important and sometimes brushed over. In fact, it helps if trading outside the range of the previous several days (3-4)... clear of recent sup and res.

TraderIAm said...

Thanks Jim

Scott said...

I enjoy your blog. Whats your opinion about trading during lunch time (eastern time). There are some that believe you shouldn't open a position between 11:30AM to 1:00PM, because there is a good chance of getting whipsawed.

TraderIAm said...

Scott.

Very good question and one that I often wondered about. In my experience (paper trading and live trading) this has not been a problem. Having said that most of my trades are during the first 7 or 8 candles, which takes you up to 11:15am.

The crucial point maybe is that's it's ok to open a position before lunch and letting it run over lunch.

The other point I would make (and other people may well disagree on this )is that often in my paper trading and post-market analysis , opening a position during lunch does work as well. Stocks do set up during lunch for a potential evening run. I haven't done any significant back testing on this though. And the main reason that I don't open a position during these times is that quite simply I am travelling home from work most days. As I live in the UK, I am travelling from 5:30pm to 6:45pm (equating to 12:30pm to 1:45pm US).

Hope this helps.