Wednesday, 3 December 2008

Trades 03/Dec/2008

As mentioned yesterday, my trading time was limited today.

However I traded the last 1/2 hour before the market ended and I want to post something a bit different today. A bit more info on how I am now trying to trade the current market. So would be interested in any views and whether you find it helpful (try to ignore the profit aspect but instead concentrate on the principle of it).

Now I'm sure that most of you have noticed that with the increased volatility, the market is moving a lot of points in last hour of trading. This was just not happening in earlier part of the year. You can use this to your advantage because into the close, the moves are smoother (IMO), the trend is cleaner. You don't have to worry about the big whipsaws which can occur at market open. Also crucially you have the knowledge of what the stock has done in the whole of the session up to now.

So what did I do ?

1. Had a look at finviz (heatmap) and noted down about 10 stocks or so which were strong and weak in their sector. No scanner involved, just a quick eyeball of the big movers.

2. Had a look at the charts for each of these stocks to see if they had trended cleanly. Had they bounced off important support/resistance ? For example previous days' high / low.

3. Look at the general market is it trending up or down.

4. In this case > The market (DOW) was also trending up.

5. Wait for a pullback on DOW (1 min chart) then enter long stock.

6. Exit is a short term one as you only have about 20mins or so.

Here are the two charts that I traded. Both had moved above previous day's high earlier in the day and then tested it as support at around 2 hours before close. They were thus trending up in last two hours. And they were in a strong sector.

Yes, these were just short term scalp type trades, but still good for 30c and 70c profits.

So what is my overall reasoning on why this method ? Well I like to trade stocks long if they are strong and short if they are weak. (yes I know that is stating the obvious). But let's expand this.

a) If the stock has bounced off impt S/R levels or has crossed the OR or has moved outside the previous day's high/low and is trending then we want to trade in the obvious direction that the stock is moving. So reduce risk by going with the trend.

b) Let's reduce risk a bit more by having the market on our side. If the DOW/Index is trending up, has broken out, etc. Then trade in same direction. So we now have the market as backup. You can use oscillator indicators or ema's etc to try to judge the market direction. There are plenty in any charting package.

c) Let's reduce risk even more by choosing stocks which are relatively strong/weak compared to the market. For example, we have a weak looking stock and want to short. If the market is moving up then let's wait. When the market weakens then doesn't it make sense that our stock will fall more heavily than a "stronger" stock ? Even if the market then reverses against you, your stock is "relatively" weak and so will not move as much against you. So again we are reducing our risk?

d) How to judge c) ? This is difficult. I do it currently by eyeballing. E.g When the DOW pulls back in uptrend. Some of my stocks stay strong or just consolidate sideways. They are strong. If the DOW is moving up quickly,and one of your stocks is just drifting down,sideways then it is relatively weak. Readers will probably know other methods of judging this > for example coding relative strength into charts, having a table of stocks which automatically update compared to index (so strong stocks at top, weak at bottom etc). By all means post comments.

Hope this post provided something for you to mull over. It was just to get you thinking about really. Don't take my word for it, please. Look at it for yourself > Check out your stock charts and compare them to DOW/Index etc. Is there an obvious relative strength of the stock compared to Index ? Can you spot where the Index turned and trended and how did the stock behave on any pullbacks etc etc. Where could you have entered a trade ?


Anonymous said...

Hey TraderAM,

Good comments on relative strength.

OONR7 said...

I'd say those were great profits for an hour's work. The principles are absolutely sounds... I'm interested to find out the frequency of these kinds of trades.

Thomas said...

Great post Traderam.

Those profits are great, atleast for me.

StockHunter said...

I like your trading principles, very nice.