The Day Trading Process
Stockscores.com Perspectives for the week ending April 26, 2008
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Live Trading Events
Vancouver Stockscores DisnatDirect Live Trading Events
Tuesday April 29th and Wednesday April 30th
11:00 AM and 7:00 PM
Watch Stockscores founder Tyler Bollhorn as he goes through the process to identify and execute day, swing and position trading opportunities using the Stockscores Approach and the DisnatDirect trading platform. Real market conditions, real trades, a real educational experience! Seats are limited, you must register to attend this free event. Click Here to register
Calgary and Toronto event dates are now posted on the Upcoming Events page on Stockscores.com, Calgary May 6 and 7 and Toronto May 14 and 15.
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In this week's issue:
Over the next three weeks I will be doing some special events for day, swing and position traders. Rather than talk about the process that I go through to find trading opportunities in the stock market, I am going to actually show the process step by step. Attendees will not only get to see how I trade the market, they will also learn why I do each thing that I do.
These events will happen in Vancouver, Calgary and Toronto, two days in each city with an early afternoon session during market hours and an evening session beginning at 7:00. The day time session will focus on day trading the market and I hope to be able to find and execute real trades, so long as the market gives me the opportunity. In the evening, I will focus on the kind of trading opportunities that don't require as much time and effort to implement, swing and position trading.
These events are sponsored by the DisnatDirect, the brokerage recently named the number one broker for traders in Canada. They are putting a big investment in to educating their clients and offering the best tools for traders. Best of all, it means these events will be free to attend! However, you must register, you can get the location, time and registration details by clicking here. Some of the events are filling up so please don't wait till the last minute to register.
For this week's newsletter, I thought I would describe the day trading process that I will demonstrate at the live trading event. Next week, I will do the same for swing and position trading.
The Day Trading Process
I live in the West so, for me, the markets open at 6:30 am. That might make you think that I am up at 5 am getting ready for the open of trading. However, to the contrary, I am in no rush to trade that first hour of the day. I have found it is difficult to predict and a little too much like work.
Instead, I get up at 6 and get out on my bike, take my kayak out on the lake or go to my gym. Emotion is the most difficult thing for any trader to overcome and I find that getting the heart rate up before I start trading allows me to make more rational, calm decisions. With morning fitness, I am better prepared for the trading day.
It is not until around 8 that I actually sit down in front of my computers and start to look for opportunities. By that time, the market has gone through amateur hour and is settling in to its trading direction.
Going to Stockscores and running my day trading strategy Market Scans is my first step. I have a Market Scan saved called Daytrader that seeks out stocks that are trading on statistically significant abnormal volume with an expected number of trades of at least 7500 for the day. These are stocks that are trading on some significant fundamental change and will have the best potential for volatility and follow through on an entry signal.
The Market Scan typically reveals 20 - 100 stocks that fit the basic criteria. My next step is to fine tune this watch list and put the stocks in to two groups, those that are strong and those that are weak. To do that, I take a quick look at their daily charts to see if they are up or down for the day and to be sure that they are not stuck in a trading range on the daily chart.
So, now I have two watch lists, one called Strong and one called Weak that I monitor using the DisnatDirect trading platform, DDPlus. At this point, trading gets pretty simple and mundane. I go through the list of stocks every couple of minutes looking for one that meets the criteria of my strategy. In a typical day, I will find between 2 and 10 stocks that give me a valid entry signal.
When I find one that is doing what I look for, I immediately begin to calculate the risk of the trade by considering the difference between the entry price and the stop loss price. This will determine my position size as I divide this difference in to my risk tolerance amount to calculate the number of shares I will take for the position. I am looking for both buying and short selling opportunities and I have no care as to which type of trade I will take. As long as it meets the requirements of the rules, I enter.
The process gets a bit more hectic as I add positions. The market tends to show trading opportunities in clusters, I will often do nothing for an hour and then enter three or four stocks in 2 minutes. There is a lot more to monitor once I have positions open; not only am I still looking for opportunities but I must now monitor my holdings for an exit signal.
Exiting a stock at a loss is simple, if the stock hits the stop loss point and closes below it on a two minute candle, I exit. Exiting at a profit is more difficult and there is a natural tendency in most of us to not hold a winner long enough. I don't even consider exiting a trade until it has at least doubled my risk amount. Once it has, I begin to apply my exit rules with the aim of maximizing the risk reward ratio for each trade.
The profit is in the patience.
I have no expectation that every trade will be a winner. I treat the market like a game where I expect to lose some of the time and win some of the time. But, the focus is on maximizing gains when I am right and minimizing losses when I am wrong. Not exiting a stock when the market tells me I am wrong usually leads to big losses so I work very hard on the discipline to sell the losers fast. And, I don't try to rationalize what my winners are doing; it is easy to want to exit a stock because it has shown a nice profit and "it can't possibly keep on going" is a thought that often creeps in to the decision making process. However, I have seen stocks return 20 times the risk of the trade so I am always trying to ride a trade for as long as the market seems to favor it. One big winner can pay for a lot of small losers.
This process will make a lot more sense if you can see me go through it so I hope that many of you will be able to make it out to one of the presentations held over the next few weeks. For those not interested in day trading, check out next week's newsletter when I describe the swing and position trading process.
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A stock reversing its long term downward trend typically does three things. First, it breaks the downward trend line. Second, it will trade sideways for a while, building a base that is higher than the low it hit in the downtrend. Finally, it will break to the upside from that base and start in to its upward trend, building momentum slowly at first.
I call this a Bottom Fishing pattern and it is the basis of one of the preset Market Scans found on Stockscores.com for Advanced and higher members. I ran this strategy on Friday to find some stocks that may benefit from a turnaround in the market.
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1. SWHC
The chart of SWHC looks like someone took it out back and shot it, but after four months of basing it appears that the stock may start to turn around. Support at $5.70 with good potential to move to $10 in the next few months.
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2. ALU
The Sentiment Stockscore on ALU just crossed above the important 60 level this week and the stock broke through some short term resistance on Friday. A short term pull back is quite possible before it works in to the trend, but so long as support at $5.70 is not broken, I like it.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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