We wanted to write a post not on how we trade but rather focus on the process of how we prepare for the next trading day.
Simply put we do four types of trades: we buy support, we short resistance, we buy break-outs through resistance, we short break-downs through support. We trade off daily charts but always wait for intraday charts to set-up. This means we're less active than most traders but at same time most likely have higher win rates since we wait for more balls to line up before pulling the trigger (this possibly yields the same PnL but psychologically more satisfying to win more of the time).
Every night we go through a master list of stocks that we call our usual suspects. These are a mix of stocks we have traded for over a decade and new momentum stocks that catch our attention. We go through each list via sectors; our favorites are momentum tech, coal, oil and gas, steel and iron, gold, Ag-Chem, and financials. For various reasons we don't often trade biotech (too risky), utilities (too slow), REITS (do this through IYR, individual REITS often don't trade well), health care (too slow), pharma (too slow), etc. There is almost always enough opportunity within our favorite sectors and we don't like to cast the net too wide. We look for our favorite patterns and place alerts accordingly. Usually a theme becomes clear: a) break-outs are setting up and we're looking to go long next day buying breakouts on a trend day up; b) break-outs have been failing and internals weakening and we look to short resistance/break-downs c) market is strong but overbought and we're looking for a pull-back to buy support, etc. Preparing well for different situations for the trading day is already half the battle.
From our master list we usually find around 10-15 stocks that interest us around key numbers and form a small watch list for the next day. Small watch-list is key to how we trade – we don't like missing moves that we've been watching for days and having only a small number of stocks helps us stay on top of all our stocks. If we like a spot we watch it for as long as it takes to break-out – the most successful trades we have are often the stocks we've had on our list the longest. Why? Because we've watched them every day and know their behavior, price and volume action. When they break-out it is very rare for us to miss the move because we recognize the different price-action/volume that often precedes break-outs.
Another important aspect of our nightly preparation is to spot tells for the next day. These “tells” are imperative to how we trade. For example if the market is pulling back and we want to buy support and AAPL is sitting on important support, we make note of that to watch it the next day. We're not going to buy support if a leader stock like AAPL is cratering through support. We also always have an eye on what is leading the market: sometimes it's tech (usually AAPL), often financials (GS a favorite), sometimes crude is leading, other times gold, etc. One has to constantly watch the tape and become aware of what is leading and trade accordingly.
Once the trading day begins and alerts start to trigger, whether we trade them or not, we drag them to another portfolio to track. If alerts are failing we step back, re-assess, and adjust our strategy. If alerts are working, we become more aggressive. We can't emphasize the importance of this -- you need to know what stocks are doing at critical areas. Is support crumbling or are buyers stepping in with both hands bidding up stocks on support?
During the trading day we also look to how market/leader stocks react to events. Are they buying bad economic data/crude inventories? Is a hot momentum stock selling off after good news?
Lots of factors to keep in one's head and it's imperative for us to stay sharp throughout the day. This is the reason we step back from the market or at least trade lightly if we are ill, have not slept well, going through family issues, etc.
We hope you enjoyed this write-up; we'll be looking to do more of these educational posts with our partners at T3.