November saw a trend change in the market and even though we had almost all short picks for the month, many still did not work (2 scratches, 1 x 4% win, and 4 x 0.3% losses). Many of the short picks first hit our tight stop, and then reversed back and went down a few points.
Excerpt from our newsletter this week:
There are basically three ways to trade our selections.
1) The most simple way is to wait for a base and break pattern near or just under one of alert numbers listed in the trading list. What we are looking for basically here are intraday and daily break-outs to coincide. This occurs often in benign markets, or markets coming off long basing patterns. This kind of trading, for us anyway, is the most profitable part of the trading cycle, and these markets we find to be very benign. If you look at our Historical Performance page starting from June 2006, you will notice many months with many alerts, and high win-rates. The market during those months was very friendly to this type of trading. In terms of trading skills, most likely this type of trading requires the least amount of skill within the three ways of trading our stocks.
2) The somewhat more complex way of trading, and one that we have found to be more common in more difficult markets is the buying of support and shorting at resistance. For example, a stock runs up to resistance in a sloppy pattern with mediocre volume -- you short either at resistance, or wait for a break-out failure. In a similar fashion, you buy support if a stock goes down to daily support with average volume.
3) The most difficult way of trading our numbers, and the environment we have been in for the last little while, is the most subtle -- it consists of finding an intraday trend and riding it up towards daily resistance (and occasionally above), or riding a trend down to daily support. This is the most difficult way of trading our system because it calls for more active work during the day and skillful interpretation of price-action. Often, these type of trades are also combined with daily charts that do not offer clean numbers, but show a clear trend in one direction. The most important thing to look for in this type of trade is relative action, that is, find a stock whose action sticks out -- for example, the chart of the QQQQ is flat, but you find a stock showing excellent relative strength and volume (if you are using QT, it is quite helpful to list your momentum favorites according to volume % -- thus in one glance you can spot stocks showing high volume) and close to a daily spot. These three elements are absolute key markers for finding intraday continuation patterns (relative strength, high volume, daily chart).
An additional note is that it is very rare to be able to use a 0.3% stop with these kind of trades -- they often require much more patience, and a wider stop (and thus fewer shares in order to adjust risk) and are much more "messier" than the type of trades we are usually involved with. We started covering these type of trades a while ago under "non-traditional set-ups" and will be posting more examples of these trades in the near future.
We believe we will be stuck in this last category of trading for a while and most likely the trading list will stay on the barren side for a while to come. The bad news is that this means that trading will be (and has been) more difficult, for example, in 2007 than it was in 2006. The good news is that this type of trading very much hones your skills-- if you can learn to make a good living in this type of environment, then you can trade any market. Being able to interpret price-action is key to making a living out of trading.
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