Have Vision

As we have written in the past, our preferred time-frame is the 3 minute chart. We like using the 3 minute time-frame because we feel that it’s easier to spot volume spikes and base and break patterns than in longer time-frames. However, what is sometimes quite difficult, even after you have traded for years, is to see beyond the next tick, and having such a fast time-frame can sometimes make one too focussed on the immediate future. This is the reason we like having the 10day / 30 minute chart and a 3 month daily chart synched with the main 3 minute chart. Therefore, every time we switch the 3 minute chart to another stock, all charts change over. Nothing beats the 3 min chart for entry, but having the daily chart beside you reminds you of the bigger picture.

Sometimes, for specific reasons, you believe a stock will go in a certain direction. However, you can find no decent entry point (i.e. there is no base or any familiar pattern). What do you do? Have vision. Find a spot, enter fewer shares (due to wider stop), set a reasonable stop, and just leave the trade alone. More often than not, these are the most successful, most satisfying trades of them all. First, it’s a very good feeling having a plan and seeing it through. And second, it keeps you from overtrading.

One of the most important stages of the evolution of the trader is from the gung-ho newbie who just shoots and blasts away constantly during the day, and the more contemplative experienced trader who sits on the trade and lets the trade unfold towards the target.

Go beyond the next tick.

Spreading the Love

Aside from the usual suspects (Ugly, MtM, Jamie, etc) here are seven sites that have our attention:

Downtown Trader, as always, offers good chart commentary on a nightly basis. We like going through his charts because he has a somewhat different style than we do -- and we find the exposure to his method educational.

A lot of stocks we like to trade are actually IBD stocks (explosive earnings growth + sector leadership = momentum). Check out StockBee's site; he often has insightful articles about the IBD method, including this one.

Keep an eye on KnightTrader during the day; they have a great eye for what's moving and when new issues pop-up on the radar, they often appear on the site.

The new Timothy Sykes site has an excellent list of blogs worth exploring.

22dollars often has smart commentary/insight. We're hoping the author will update the site more frequently (but who are we to say that as we have been quite lazy with updating our own blog for a long time now).

Two excellent swing-trade sites are The Market Speculator and Chris Perruna; both traders use daily charts and are often involved in the same stocks we are, but with longer time-frames.

R's and $

Thanks to the ongoing debate in the trading blogworld on how to track performance, be it R or $, we've received inquiries over the last year about what we use. When we first started trading, and for at least several years afterward (especially after any significant tweak to the system) we would log basically everything (how much we risked per trade relative to the profit made; absolute win/loss ratio, profit/loss, and intraday and daily charts of every trade). Now that we have just shy of a decade of trading experience under our belt, we just track monthly performance in terms of profit/loss, and numbers of trades.

We find the R/$ debate irrelevant -- both are important and new traders should log everything (and experienced traders should go back to logging everything when they make changes to their trading methodology). Who said you need to choose one over the other?

As an aside, we are going slightly stir-crazy with the lack of volume/set-ups in the market ... if any of you are feeling similar emotions, just know that we're in the same boat. Let's hope that with the FOMC meeting out of the way within 24hrs, trading will become more interesting.

Market Talk

It has been years since we saw such indiscriminate selling. These are the charts of 5 of the most important momentum leaders of this year (AAPL BIDU FSLR FWLT RIMM):

A couple of things to notice:

1. Even with all this selling, look how much they are up for the year!

2. It is going to take a long, long time to undo the damage of just these last 3 weeks of selling.

3. No real prediction other than when we see this kind of panic selling, usually it means we are at least close to a short term bottom. All we would be looking for at this point is a dead-cat bounce.

4. If you're a long-term investor just itching to pick up some beaten up names, our advice would be to start picking out some spots, but to not use much ammunition. These kind of down moves rarely end so quickly and we could be in for much more pain before this is over.

To all those starting out

We’ve written about this subject before but we get asked about this topic so often that we thought we’d broach it again.

There are days we can’t find absolutely anything to trade. No set-ups, no opportunities, just nothing. Other traders like us (break-out traders) usually find themselves in a similar situation. But then on that same day there are thousands of traders who find lots of opportunities, many who have great days and even some who have their best day ever. We’ve always said – there are literally thousands of different ways to make money in the stock market, pick one, and respect others. We love break-out trading; for us, it’s perfect, stress level is low (since the numbers come from the night before there’s no real-time pressure to find candidates), there are strict rules to function within (thus less emotional and small draw-downs) and circumscribed risk parameters (to avoid blow-ups). However, we know that some people find it too boring and prefer to find dozens or hundreds of intraday opportunities (scalpers) and who make a very good living from it. Others make their living swing-trading. Others swear by futures. In the end all that counts is whether you can earn a living from trading, that is, whether you can make consistent money from trading.

So how do you find a system that will make you consistent money? The only real answer is trial and error. Start small (give yourself a lot of room for error) and ask yourself what attracts you. Do you prefer to trade actively and make consistent scalps, taking fast money? (And yes, scalpers can make a hell of a lot of money: like anything else, profits add up very fast if you’re a good). If so, then just start reading about the subject, go to blogs where successful scalpers share their techniques: Richard and his host of writers have excellent information and videos at Move the Market.

Do you prefer to do your homework from the night (via daily charts) before or at least combine that with intraday scans? Then go read about how Jamie, Ugly, Tyro, TraderMike, Dave at StockTickr, and Bubs trade.

Do you prefer swing-trading? Spend some time with Chris Perruna, Kirk Report, Market Speculator, Taz Trader, Knight Trader, DownTown Trader, Stock Bee, Pinoy Trader, and Bull Trader.

Most likely none of these sites will give you exactly what you are looking for but they will give you different ideas about the different kinds of trading systems out there. See what attracts you (for example, you might love to add a bunch of technical indicators to your charts, or you might love to trade with paint bars) and then research it some more via books and forums. Should you join a service or subscribe to a newsletter? Possibly, as long as it is inexpensive, it might be a good way to expose you to different systems (for example if you want to do futures, then signing up for a service for a few months to learn from the moderators wouldn’t be a bad idea, as long as they charge a reasonable fee, which to us is anything under $100 a month). But do not sign up for the $5000 options course, or pay $800 a month for a service, or $2000 for a set of CDs. That money could be much better spent learning in the market itself.

Then slowly get your feet wet by starting with very small positions while at the same time keeping meticulous notes on your trades (StockTickr would come in very handy at this point). You will start to learn very fast at this point, (while still possibly losing money – that’s normal. Very few people start making money right from the start). You’ll learn what you can handle, and most importantly, what you can’t. From there it’s a slow learning curve ahead and with the right amount of discipline and work, in our opinion, trading is just like any other job, and most people can make a living out of it if they put in the hours, the sweat, and the blood (with the exception of people who just don’t have the temperament for it, be it lack of discipline, or no control over their emotions, even though we would argue that even these people could change if they wanted to enough).

You might blow through your initial account but slowly your consistency will improve and maybe a year after that you'll start eeking out some profits and be on your way to becoming a professional trader (and if you don't want to call yourself a trader, just call yourself a market liquidity provider). Within the first years there will be times when you feel depressed, unlucky, when you will question yourself, that's all normal and part of the process. Stay grounded, man up, and good luck.

Excerpt from today's newsletter

Brutal sell-off in the market today but interestingly enough, there were some excellent opportunities; From the Forming List, on the long side we had CROX GRMN, and on the short side on HANS GES TSL CBEY. CRDN unfortunately didn't wait and was a mess through 74. Overall though, this is a tough market which is melting down to a much greater degree than most expected. Dip-buyers have been roasted for the most part in the last few days and there is full-fledged panic in the air.

Having said that, there was some good action on earnings/news on leader stocks such as AAPL BIDU RVBD CMI. In our own personal trading we are taking profits fast, especially on the long side (a bit too fast as we left almost a point in CROX on the table!) and if something goes against us, we get out a.s.a.p. A gap-down opening and some more panic selling could be a short-term capitulation move that could possibly last for at least a few days.

This market is ripe for a bounce, but that being said: Don't anticipate, don't think, don't analyze, don't try to predict. Have your set-ups ready from the night before, set your alerts, and when you see a base and break under the number, or at the number, and volume is heavy, pull the trigger with a stop under the base (and always always obey your stop). Other than that, just sit on the side-line and wait for your number. It's fun to talk about what the market might or might not do, but let it be just that, fun talk. That's it. Predict all you want, but when it comes to trading, leave all the predictions to the side, and just obey your set-ups. We had expected some sort of bounce coming in today (oh so so wrong), but with the exception of CROX, all our trades were on the dark side.

Sounds simple, but we guarantee you that if more traders would follow the advice of just following their set-ups from the night before instead of jumping from one emotional intraday scalp to another, there would be a drastic reduction in burn-out and blow-out rates.

Link

Listen to the interview by one of our favorite blog writers, Knighttrader, who has probably the most important blog in break-out trading on the net.

Click on this link to go to the interview on Wall St Radio

Link

Listen to the interview by one of our favorite blog writers, Knighttrader, who has probably the most important blog in break-out trading on the net.

Click on this link to go to the interview on Wall St Radio

Excerpt from today's newsletter

We had one trigger on Friday and one loss as CMG just triggered the stop before reversing and running for the rest of the day.

CMG was a bit of a heartbreaker. She had been on our radar for days but when it was time to trigger, she had very little volume. This was for us what we call a "conviction trade" in that once she broke the base, even though volume was very light, we "knew" she would go. However, the volume was so light that the risk was quite high in case she reversed. How did we deal with the trade? We took a small position with fills around 83-83.1, with stop at ANY reversal back towards the base (82.7-82.8). If you think that a stock will go and the pattern is very good but you think that the volume might come in after the actual break (which unfortunately is relatively common) then maintain the same risk by lowering your position size, but give it a shot. Even a 1/3 or 1/4 position can give you profits and more importantly, it will give you practice and experience in the base and break pattern.

Should you have entered at 83.5? No -- the base was 82.8 and she was almost 1% away by that time. The only place to have bought the stock was on the breaking bar with fills around 83 (and thus 30 cent stop). Remember, it's not the alert price that's important, it's the break of the base UNDER the alert price that one has to buy (unless the set-up actually is AT the alert price and not under). The breaking bar of the base is the most important part of our system.

There are multiple advantages to buying the break of the base instead of waiting for the actual alert price, an important one being that your stop is naturally lower. Thus, even though the stock fumbles around the number (which CMG, for example, did, and which technically triggered our 0.3% stop) you still can stay in and wait for the stock to consolidate without going negative (even though we always recommend selling at least a partial into the break-out). In good markets it often is advisable (as we write in the How to Use our Services) to sell 1/3 at 1%, 1/3 at 2% and either sellf rest into 3%, end of day, or make it a partial swing position by holding overnight (of course always know the earnings dates of your stock).

Remember, you don't always have to buy 2000 + shares of a stock to make money. Let's say you bought as we did at 83 (point A), with a stop on any reversal, but since the base was 82.7, that was the number that you believed would be your first fill, even if you tried to exit when the stock was at 82.9. At this stage of your trading career, you are only risking $200 per trade (something we recommend to new traders). Thus, you would have, for example 30-40 cent risk, which means you could buy around 600 shares in a gorgeous set-up but with miserable volume (if the volume had been higher, you could assume a tighter stop with less slippage). Thankfully she doesn't reverse and you sell first 1/3 of your position at 83.7 ($140 profit minus commission) at point B. You sell this first 1/3 to lock in some profits; we always sell partial into the break-out point if the stock is vertical by the time she hits it (and she was) and if we are wary (and we were because of the lack of volume).

Now you move your stop up to break-even and well above the base at 83 (point A) for the remaining 2/3 of the position (400 shares). The stock consolidates but you weather the storm easily since she doesn't come back to your stop (and you knew she would mess around the number since she's a NYSE stock with still mediocre volume). The stock breaks out into its second phase and you sell 1/3 at 85 ($400 profit minus commissions) at point C. You move up your stop for the last 1/3 of the position to 84.4 which represents the secondary base at point D. You can sell your last third at point E or hold overnight. Let's say you decided to liquidate the rest of the position because she still did not have great volume and you don't feel comfortable holding overnight. You sell your last 200 shares at 86 for another $600 profit. Therefore, you only bought 600 shares, with an initial risk of $200. Your profit, even considering how early you sold the first 1/3 of the position, was $1140 minus commissions: that's just under 6 times your initial risk.

Of course they don't always work out this well, but if you love the pattern, and if you have conviction but the ducks just haven't lined up (for example, missing volume) then take a shot, but a reduced shot. We're always telling you not to be trigger-happy, but sometimes it's probably just as important to remind you not to be trigger-shy, especially on "conviction trades".

Base and Break Pattern Illustrated

We wrote about the Base and Break pattern -- the key intraday set-up to our system-- in our last blog post. Today we wanted to illustrated it from an example from today's trading.

We listed CROX at 54 this weekend on our Forming List (this means that it had a potential trading spot at 54 on the daily chart).

Today it set-up in a very nice base and break pattern 10 cents below the pivot point of 54. We always tell our members that one of the absolute most important elements to becoming a successful trader is to keep your losses small. The base and break pattern by definition has very tight stops. In the following example, one would buy on the break of 53.9 (and the accompanying volume expansion -- remember you want overall high volume PLUS volume expansion at the key breaking point) with a stop at any reversal back into the base -- basically 53.85. This means that most likely you would have filled at 53.92-53.95 and would have had a stop under 10 cents. The target was a 1+% quick trade, meaning that your reward (50 cents +) greatly outweighs your risk (10 cents).

Base and Break Pattern

We received several e-mails asking us about the Base and Break Pattern that we mentioned in the March Review. We've mentioned this pattern numerous times in our blog (and in our website) and it is an integral part of our trading. In fact, all members automatically receive a comprehensive summary with 15 charts illustrating how this pattern works -- we don't want anyone trading our selections until they have been introduced to our terminology and our system.

The basic point of the pattern is this: most traders trade either off the daily chart, 2-10 day chart, or from intraday patterns. What we realized some years ago was that we could increase our win rate by combining the daily and the intraday chart: this means that we trade the daily numbers, but only if the intraday also sets-up in a recognizable pattern. The base and break pattern is simply a type of consolidation-break pattern (with a number of key nuances in regards to for example how a stock approaches the top of the base before break-out) that we spotted some years ago and which we have been working on especially in the last few years .

We realized that it has a very high win rate when combined with a daily pivot and volume and have been attempting to perfect it ever since. A good number of traders use some form of consolidation break pattern for trading, and some traders use similar patterns simply on an intraday level with no regard to the daily chart -- we don't really recommend this but once in a while, especially in gap-up situations, the set-up and volume are so overwhelming, that it's worth a try -- however, for us, these are rare cases (probably once a month).

As always, there are literally thousands of ways to make money in the market and we have respect for all of them. As a new trader what you have to do is to find a system with which you have found success and which seems to fit your personality and then start the process of making the system yours. This is exactly what we did with break-out trading -- a system that has been around as long as the market has-- we started working with it, adapting it, and slowly changing it until we molded it into something that we felt was ours.

Theory versus Execution

One of our members, N.S., wrote to us today; he's a young guy we like very much. He's relatively new to trading, but he has an incredible dedication to learning and evolving, and he's smart, picking up things very fast. We have a lot of faith in him and believe that in a couple years he will make a very good professional trader.

He wrote to us today about a trade he took. He was very upset because he didn't follow the rules he knew so well and froze when the stock hit his mental stop and kept diving and diving. Finally, he couldn't stand it anymore and sold near the low of the day, just before the stock bounced again. How many of us have done that early in our career? We'd venture to say all of us.

His entry was excellent -- it was off a stock with a good daily chart, from a solid pattern, and the stock was printing decent volume at the time. However, and this has been happening often in this market, the volume on the break of the intraday consolidation did not come through, as the buyers were just not interested. His original stop was around a dime, and the stock went up a dime before it reversed -- at that time his stop should have been moved up (and he knows that) for a loss of probably a nickel -- very small to say the least. His exit though -- now that's the problem. Have you ever noticed that often the times that you blow your stop are on trades that immediately reverse? It seems to be much easier to obey a stop on a stock has been above the number for a few hours or even 30 minutes, but when a stock reverses on one immediately-- that's the most dangerous time and new traders can often find themselves just watching the stock go through the stop and not pushing the sell button. There's something about losing money instantly that is especially irritating, like you didn't even get your money's worth out of the trade, not even any entertainment value! Awareness is everything and if you are aware that your weakness is not obeying your stops on trades that immediately reverse, you can tell yourself that before every trade -- OK, sometimes I freeze on immediate reversals, I know this, and I'm going to make sure it doesn't happen. This, in our opinion, is the best solution for this problem. Awareness of the problem, and recognition of this before entry of every trade (especially in markets like this which are not particularly favorable to momentum trading).

This kid, N.S., knows the theory very well -- and he has soaked up everything we have taught him. But the execution takes a long time to master -- the reason we have faith in him is that he learns from every mistake. We told him today that once you enter a position, then stop thinking. You know where the potential profit exit and the stop are before you enter, you know what to look for, and you know what to do. From here on, you're a machine. It's not easy, but we are firm believers that anyone who is willing to learn, and has true discipline and dedication, can become a good, consistent, professional trader.

Four Categories of Trading

There are literally thousands of ways to make money in the market and in this post, we will be covering only four methods. However, that being said, these four methods do count for a good percentage of trading methodologies currently in practice. Our apologies in advance if we have mis-labeled a blogger or if we have made an error of omission.

We personally partake in #1 and once in a while in #2. We do not trade in methods #3 or #4.

1. Scan charts at night looking for bullish/bearish patterns on the daily chart. Make a list, set your alerts, and the next day enter according to these alerts. This is simple break-out trading and this is what we do day in and day out. To summarize this in one line: trading based on support and resistance on the daily chart. The nuanced part comes in whether you take the trade or pass—and this is based on the intraday pattern, volume, market mood, et cetera. As far as we know, we practice this method, as well as Wall St. Warrior, Richard, DownTown Trader, Ugly, PinoyTrader, Tyro, Phileo, Bubs, Market Speculator, KnightTrader, and many others.

2. Repeat step #1 but also have a list of momentum stocks that are close to important spots, or which are trending in a clear direction. Use longer intraday time-frame for entry (for example, we use 10 day, 30 min or 10 day, 60 min while others prefer 5 day, 30 minute, et cetera). In terms of blog participants, basically same list as in #1.

3. Use a scanner to look for gap-ups/gap-downs with high volume and trade these stocks based purely on intraday patterns. This can be a successful method if one can come up with a sophisticated system for entry spots. In our opinion, this is the most difficult method to master as the decision process is more subtle, with more nuances and subjectivity than method #1 and #2. Candle-stick knowledge is a plus. Some successful participants of this method are Maoxian, Trader-X, Trader Mike, Estocastica, Trader Gav, Zoomie, Prospectus , Dave, and the promiscuous Ugly and Wall St Warrior who seem to partake in all three methods.

4. The last trading approximation really isn’t a method but it’s worth mentioning since probably most new traders enter trading via this methodology. No usage of daily charts, no usage of scanners, no real system: these traders often have a list of volatile stocks and look for intraday patterns to trade. These traders often hang out in large chat rooms, with hundreds of traders making different calls on anything that moves. They often buy/sell for very small moves, with a 1-1 risk/reward ratio. This isn’t really a system and this kind of scalping, in our opinion, has the lowest-win rate, and the highest burn-out rate. We know of no bloggers who would belong to this section.

We should actually include a miscellaneous section for Prop Firm traders who make money by trading literally thousands and thousands of shares every day. We do not know enough about their methodology to be able to summarize their way of trading -- however, we can say -- NYSE Trader does a great job consistently pulling in the money. (sorry dude if we have just mushed you -- don't worry, it shouldn't last for more than a few days).

Conclusion? As said, there are literally thousands of ways to make money in the market and what each individual has to do is to find their edge. However, in order to achieve the latter, one will require a disciplined system that can only come after a lot of pure, hard work. If you're lazy by nature, then trading might not be for you, and it might be best if you looked for a profession in the civil service (yes, yes, we're kidding, please no hate mail).

Volume Trumps Aesthetics

Here is a concise summary of how we trade:

Wait for solid patterns to develop on the daily chart and then add an alert in your platform. Next day, watch the stock for a good intraday pattern (very similar to the type of pattern one would look for on a daily chart, just on the intraday level) and high volume. If both conditions are met, then pull the trigger. If neither condition is met, pass.

But what if only one condition is met? Probably the biggest mistake we make as a group (and some of us are more guilty than others, but all three have to work on this) is that we simply pass on trades too often. We always want our stock to set-up in some good-looking pattern, be it a consolidation pattern, a semi-circle, always a pattern with some kind of symmetry. At least a few times a week one of our stocks hits our number with no real pattern, BUT with strong volume. More often than not we pass on the trade and the stock ultimately moves in the intended direction. This seems to be a constant source of loss of opportunity.

Volume trumps Aesthetics. This means that if your stock hits your number with high-volume, but has no clear intraday pattern, it probably is still best to trust the number, and give it a shot (caveat -- we are NOT talking about buying on top of a vertical spike, that will always be a No-No). We know this but for some reason we're very slow to act accordingly -- probably not because it's a habit that results in losses, but rather something that holds us back from greater profits, and since we do well enough with the current way of trading, we just can't get motivated enough to change this bias.

The inverse, by the way, meaning a pretty set-up but with low volume, is still an avoid with the only possible exception being the thin stock whose volume comes in after the actual break...but that's still a roll of the dice.

As a first step to modify our bad habit we have printed a sign for the office:

High Volume + Daily Number = Profits

Let's see if it works.

TGIF

(since so many blogs now are offering hot chick pxs to get reader's attention, we thought we'd go out on a limb too and offer some risqué content)

It's been a bit of a crazy week full of head-fakes and false break-outs. Between the three of us, we've traded only 6 times, average, this whole week but it feels like 600 (we don't know how scalpers do it day in, day out). If you want some examples of break-out failures this week check out charts of the Nasdaq, S&P, Homies (HGX), GS, and dozens more. With this kind of whip-sawing around, we're only day-trading these days with an empty swing account.

We made one trade today and spend the rest of the day catching up on our Blog reading. We're behind on our schedule so most of the following will be old news for faithful blog readers, but if you haven't already, check out

a post of collective wisdom on trading via Charles
Trin Talk from Richard
The always interesting StockTickr interviews, this one with DownTown Trader
If you're in or interested in entering a Prop Firm, you should read Ugly's post, as well as the relevant links

and an interesting site that's new to us called StockPickr

plus of course other posts coming from our colleagues listed in the Blogroll.

Blogs of interest

We have mentioned a number of blogs that we read in our previous posts and in our StockTickr interview . Aside from the usual suspects, here are some other ones definitely worth checking out -- most of you know them already -- but we've never actually acknowledged the following in any of our posts.

StockBee -- A smart guy who is very much on top of the IBD scene

StockTrading101-- Good overall summary of the day and some great technical analysis on charts

Chris Perruna -- Very good technical and fundamental analysis on some of our favorite momentum stocks

Wallstreetfighter -- when you need a break and a laugh, it's a great place to go. We should probably add some kind of semi-R rating for this site. Well, not really, but it's not exactly your usual stock trading fare....

Visual Trader -- this is the sister site to KnightTrader, one of our favorite sites. This one is geared towards lower-priced stocks.

IceColdStocks -- a very popular site featuring stock commentary on podcasts

TazTrader -- Good over-all commentary; geared more for swing-traders and valuable information for those of you interested in candlestick patterns.

Recent Issues

On our day off today we have been going through our master list of stocks; this is the list that we flip through each night, looking for possibly daily set-ups. This master list is dynamic and often has deletions and additions. Here are some new issues that we have added to our list over the last 6 months. Active traders will know most of these stocks. However, just in case you're missing a few....

DIVX EDU EFUT FFHL HLYS HMIN IPGP JCG MPEL NMX OMTR OPTM OSIR PNSN PWE RVBD SNCR VSE


Aside from the rather large Master List we have a mini-List which holds, in our opinion, the stocks that we need to pay attention to the most during the day. Our mini-list right now consists of:

Most important of all: NYX ICE MA BIDU GOOG RIMM AAPL AKAM HANS

ACOR AMAG ATHR ATI BRCM BSTE CAAS CAL CCOI CENX CEO CHAP CHDX CHL CME CNS CRDN CRM CROX CTRP CTSH DAKT DLB EDU EFUT FFHL FMCN FORM FSYS FWLT GES GFIG GHDX GLDN GMKT GRMN GROW GS GYMB HLYS HMIN ILMN INFY IPGP IPSU ISE ISRG JOYG JSDA JST LFC LIFC LRCX MBT MEND MFW MNST MPEL MR MSTR NCTY NDAQ NFLX NHWK NIHD NMX NRPH NTES NTGR NTRI NUE NVDA NVEC OEH OMCL OMG PCU PNSN PNTR POT PSUN RMBS RS RTI RVBD SHLD SNCR SNDK SPWR STLD STP SVVS SWN TEX TGEN TIE TS UA UAPH VIP VLO VOL WFR WYNN X ZOLL

Some good reading

Some good reading and reminders from seasoned trader Charles Kirk (we're not calling you old Charles, just experienced....)

My New Year's Resolutions

Trading Resolutions: Part II

What are some HCPG resolutions? We're not really into resolutions but if we had any, they probably would be best summed up by --- more exercise, less pizza.

Ten Lessons on Life that Apply to Trading:

1. Know Thyself (and as Polonius put it, to thine own self be true): None of us here at HCPG could ever be position traders, we don’t have the patience for it. We like daytrading and swingtrading for possibly 2-5 days, and that’s it. Know your own personality: your strengths and most importantly, your weaknesses.


2. Have perspective: Always keep the risk-reward in the back of your head before entering. If your stop is 50 cents, and your goal is 50 cents most likely all you’ll ever do is churn your account. Try not to enter until your reward outweighs your risk by a minimum margin of 2. It is very important in this career to be able to step-back and take things in with a bit of distance.

3. Don’t be stingy: sacrifice the dime for the point. If resistance is 50 on a great break-out with a beautiful daily chart, and heavy volume, don’t take profits at 50.11 to lock in the dime, wait at least for a point (if you're a daytrader that is). Risk the dime for the point.

4. Accept the consequences of your actions: don’t blame anyone else but yourself for your mistakes, not the market-makers, not the specialists, not the plunge protection team, not your mother, just the person who actually pulled the trigger.

5. Be the Turtle and not the Hare: find a system that works (of course this is easier said that done), and then be patient and wait for your pitch. Don’t hop around from one methodology to another trying to make money every single day. Sometimes you just have to sit aside and let others have their turn.

6. Don’t be judgmental: there are literally thousands of ways to make money in the market. Choose yours, and respect others.

7. Don’t be greedy: one of the most common mistakes of newbies is buying the vertical spike up – they watch a stock move up a point in seconds, and they join the momentum so that they, too, can get an easy point in seconds. Most of the time, the only easy thing is the immediate reversal as experienced traders sell into the spike.







8. Focus on your goal and work hard: Try not to get distracted by chatrooms, noise, phone calls, and CNBC (not to mention all the traders we know who have porn on in the background). During the trading hours, focus on the objective and nothing else.

9. Don’t be an idiot: as we have often said in our newsletter; losing is an integral part of this business, but if you’re going to lose money, then at least lose it on a great set-up that just didn’t work out instead of some lame trade that you normally would have never pulled the trigger on. Let’s say stock HCPG breaks-out on the daily charts at 50 with excellent volume and a great intraday set-up. You take a position at 50.06 and later on in the day are stopped out at 49.8. Now that’s a normal loss and one is that completely part of the business and in the long run, unavoidable. However, buying a penny-stock because of something you read/overheard in a message board/blog/party is a stupid loss and something that is completely avoidable. Remember how easy it is to lose, and how hard it is to consistently win.




10. Be Good: events are more interconnected than you think. Have some karmic fear: Try not to live a life which will lead you to be reborn into a toad. Be kind, work hard, help others, be smart, and eventually, everything else will fall into place.

Happy Holidays to our readers from all of us at HCPG. We won't be posting until next week as we are going to take some days off to relax and unwind (even though after spending a few days at family reunions, sitting in front of 4 monitors, trading, will seem pretty relaxing in comparison).

If you're going to be trading throughout the week, use extra caution since the volume should slow down to a crawl as we approach the holidays. Stay well, and be smart.

Time frames

We use several time-frames: 1 minute, 3 minutes, 10 minutes, and--usually after market close--30 minutes, 60 minutes, and daily and weekly. The longer time-frames are used to identify candidates to trade on the following next day. Once the market opens we usually stick to the 3-minute time-frame. In all our years of trading, we had not met -- until very recently-- people who daytrade from a 30-minute chart. Hats off to all you traders who use the 30 min timeframe for day-trading: It is an incredible feat.

We probably would miss out on at least 90% of our selections if we used anything longer than a 5-minute time-frame. Take a look at the following two charts. The first, a 3 minute showing a "base and explode" pattern, is our bread and butter set-up. The second chart, using a 30 min time frame, gives us no information.







It's true that 30-minute frames cut out a lot of noise, but they also delete critical data (for our kind of trading). Let's use an analogy:

3-minute time-frame: Two lovers talking on the phone with, naturally, a lot of phatic communication and meaningless information including sighs, giggles, pauses, baby sounds, more adult signals, and so on. Think of how much information is conveyed when the man asks, "so how is out working out with that new guy at the office," and there is a slight pause, just an instant too long or too short, before the woman responds, in a slightly too hurried voice, "good, good, and how was your day ". So much can be read into that pause, and so much of our understanding of what someone is trying to communicate comes from the "noise" or what is not said in between the words.

30-minute time-frame: Two lovers communicating by telegraph. One writes, "How is new guy at office," and the other responds "Good". The message is received and the noise is filtered out, but along with that, so is a ton of data.

We're not writing this to change anyone's style from longer time-frames to shorter time-frames, not at all: Each style of trading requires its own means and methodology, and judging by what we have seen these last six months in various blogs, there are many traders who day-trade from a 30-minute chart, and do so successfully. We respect these traders very much and are always amazed at how many ways there are to make a living from mother market.

For our style of momentum-trading however, we have yet to come across anybody that has used a 30-minute chart. Ugly is doing something very unique, and so far quite successful, by combining daily charts with 30-minute time-frames. It's something that intrigues us very much. We have faith he will develop his system enough that it will work consistenly over time (and if not, the ATS will take over).


So, to conclude, hats off to you 30-min traders! This is a difficult business and anyone who can come up with a system to consistently pay the bills has our respect.

A word about Blogs and Ads

We’re actually very new to the world of blogs. Call us lazy or ignorant, but we only started reading blogs about 6 months ago. OK, you can stop laughing now. Up until now we've kept to ourselves and the topics covered in our blog thus far have been focussed exclusively on our trading: stocks, our system, our methodology, all mostly isolated and not really related to the material written in other blogs. As said, we've kept out of it and stayed in our own corner. This post will be slightly different as there are a couple issues which lately we have found annoying and worth addressing, and with this post we dip our virgin pen into the ink of blog politics.

However, let's start with the positive. Over this period of time we’ve been very impressed by the breadth of knowledge of many blogwriters, but even more so by the camaraderie and generosity shown by our colleagues. Let us give you an example. We started up this little business 6 months ago called Highchartpatterns.com. Now as you also very likely know, there’s a lot of competition out there in the newsletter business, and for the most part the commercial sector of advisory services, such as the one we partake in, is not one in which people try to help each other; in fact, one of the main goals is to take customers away from each other in order to achieve supremacy. Anyway, this weekend we received an email from a very cool fellow called Declan Fallon who runs Fallond Picks, a swing-trade service. Declan wrote to us about how he visited our website and how he had a few recommendations (for example, he said that we might think about changing the font/color of our text as it blended in too much with the background – something we changed the day after thanks to his advice). He basically introduced himself and wished us the best and great success. Now to repeat, this guy is our competition! Where in the world do you find such class and genorisity in the corporate world? We highly respect this; we are not only superstitious (like many traders) but we are also believers of karma -- and to the best of our admitted limited capacity, we also try to emulate these noble traits. The blogosphere seems to exhibit many positive features, and appears to be still more grass-roots oriented. To a certain extent it still shuns that world that most likely will ultimately envelop it, as the cannibalization of capitalism leaves few stones unturned.

This brings us to the subject of ads. Recently we have read in several sites people commenting in a negative way on blogs that have ads with the implication that if these blog-writers were "better traders" then they would not need revenue from ads. To us, this is completely ridiculous. Why in the world would people expect something for free? One can only guess at the amount of hours Charles Kirk dedicates to his website (even though he doesn’t have ads, he asks for donations in order to enter his Member area), or the time and labor necessary to provide the incredible education you can find on TraderMike’s blog. The amount of work that Mike has put into his blog over the years is unbelievable, and yet we read a derogatory comment a few weeks ago on the ads on his site. Come on. Did Mike go through some religious experience at a young age in which he promised his God that he would serve the people with hours of his time for absolutely no reward?

Richard has come up with his own unique scan formula that spits out great trading candidates every day; and now he even generously allows others to post on his site, would you begrudge him the bit of lunch money that he makes through his ads? Why can’t he get himself a nice steak dinner from his AdSense money, or even better, get himself a couple massages once in a while? Doesn’t he deserve it?

Our friend at Knight Trader, who has a style of trading very similar to ours, offers a great blog (and we have no idea how he has the time for it during the trading day) in which he lists, in real-time, stocks that are showing momentum. His blog has ads. Good for you, and we hope you make a mint. Ugly’s blog improves on a daily basis – the humor and education one finds in his blog makes it addictive. We can’t go a day without reading Ugly. He’s innovative and smart and obviously spends a lot of time making his blog one of the best out there. And we hope your ads buy you many many boxes of wine, buddy.

Dave at StockTickr offers a fantastic service, mostly for free, and if you want the full features, you sign-up for the Pro version for a nominal fee. Shame on you, Dave, for wanting to charge $10 a month per subscriber for the hundreds of hours you put into your business every month! Yes, of course, we’re kidding and we think his business plan is great. While we’re on that note, of course, Trade Ideas should be free too…

If you choose not to place ads on your site, great. We ourselves don’t have any ads, but we have absolutely no ethical issue against it, the only reason we don’t is, well, we can’t really be bothered, and two, we don’t have the traffic to really pull in any decent money (remember everything is divided into three here at HCPG HQ). But if we had the traffic that would pull in a couple G each every month, for doing no extra work, would we? Of course! Why in the world would we give that up? That money could go towards the future education of our children, it could go to our favorite charities, or it could go towards a vacation – what is the moral issue against not being paid for your work? Is there an unwritten rule that one should not be compensated for one’s work on the Internet?

The same applies to membership fees. We charge $37.50 a month for our newsletter that comes out five times a week. Undoubtedly, this means that all three of us are close to blowing our accounts, being lousy traders who can’t make a decent living off our collective two decades of professional trading and thus have been reduced to selling newsletters. Of course the same logic would apply to Steven Cohen, who runs one of the best hedge funds of our time and who also incidentally charges one of the highest fees of all hedge funds. He should really do it for free. Come on Stevie.

Again we digress. Where were we? Oh yes, charging membership fees appears to signify lousy non-profitable trading over the years on our part. Or maybe, it could mean that we wanted to start up something that would inspire us to become better and at the same time would help others evolve into more profitable traders. Why not do it for free? Why in the world would we do it for free? What is free in life? After you finish work do you go vacuum your neighbor’s house? Our time is precious and we spend an inordinate amount of it trying to make our newsletter the best newsletter possible. Why shouldn’t we be compensated for this? The modern world thrives on division of labor. The amount of time we save our subscribers in terms of scanning for stock picks makes it their worthwhile to pay the $1.87 each weekday. Let's say we save them 45 minutes each day. How much are those 45 minutes worth? Besides, if we did do it for free (we could imagine doing the blog for free, without the newsletter), we would never feel the same motivation and responsibility in regard to the quality of our work. For all those blogs providing content ad-free, fantastic, and thank you. And for all those blogs providing content with ads, fantastic, and thank you.

Eternal topics

There are some topics that are omnipresent in our business. Poker and Trading, Chess and Trading, Gambling versus Trading, Day Trading versus Swing Trading, .....

Here is a great post by Downtown Trader called Who is the House?. Enjoy.

Correlation between indices and break-out trading

One of the most interesting aspects of writing our newsletter is that we now notice connections, or a lack thereof, that we had never caught sight of before. Because we now keep meticulous statistics on all of our picks, we discern patterns that are new to us. For example, in our case anyway, the correlation between the indices and break-out trading is much more random than we had previously thought. June and October were our best months: yet in June the market did very little whereas it rallied in October. However, we are having a difficult time finding interesting new break-outs in November; in fact this month we have had the least amount of selections that we have ever had -- all the while the Nasdaq has rallied strongly into new highs. So far in November we have had 8 selections trigger -- at this time in October that number was 30. Is it us? We doubt it -- we are pretty automatic in our chart selections with very little subjectivity: we go through hundreds of charts independently every night and almost always come up with the exact same picks. The set-ups are either there or they are not there. And right now, the charts that we seek are simply not there.

The only explanation we can come up with is that when the market becomes this overbought, the best moves are continuation moves (like in RIMM which just keeps going up) instead of actual new break-outs. What is the best time for us? A market coming off the bottom or a market that has consolidated for several weeks. This market refuses to consolidate and keeps going up every day. All good things will end, of course, and nothing would please us more than a couple nice big juicy red days. Why? Because ironically, that would set-up many more patterns than the current environment. Until then though, we will keep our cool, surf the net, watch Ugly's kung-fu videos, and wait for our turn.

The five horsemen of 2006

In the last few weeks the bears have had every opportunity to press down the market and each time the market held its own, showing superb resilience. We're still range-bound but we have a feeling that that will change soon enough. As always, it's a wise idea to take a look at what the leaders are doing. Who are the leaders of this market? Well, to start out with, the five horse-men of 2006: RIMM GOOG BIDU AAPL AKAM






RIMM is without a doubt the leader of the momentum group and could not act any better. 115 was the recent breakout and look how well she held that number, even through recent market weakness.



BIDU has recovered nicely and can potentially set-up very well for a swing-trade if she can consolidate a bit more under this 100 area.




GOOG is looking good and looks set to break into new highs.



Look how well AKAM resurrected herself. Only last week she looked uber-bearish, hugging the bottom of her pennant and closing under her 50dma. However, she never broke down and bounced off her support like a champ.

This next little while should take us out of this recent range and hopefully set-up some great chart patterns. And one more thing to add: as bullish as these charts look, we're also aware that often these kind of posts from traders showing the "great leader action" can also mark the absolute top of a market. Let's see which one it turns out to be: as always, we'll react and not anticipate.

Consistency? Whose consistency?

Our style of trading is called break-out trading. Another label we have attached to ourselves is "discretionary" traders, though we at the same time approximate mechanical trading more than most break-out traders. How so? We have a pre-defined list from which we trade. Our stops usually fall between .2-1%, and our profits usually are taken within 1-5%. If a stock sets off the alert, it has to fulfill certain intraday conditions before we enter. If these are not fulfilled, we do not trade. This can go on for days, but we stick to it until things become easier. We never double-down, never trade through earnings, and rarely do anything fancy.

We are also very consistent when it comes to the kind of charts we seek -- this does not change month over month. The only variable is how benevolent the market feels, i.e., how many charts fulfill our conditions and whether the break-out works or fails. We have kept public records of all our selections now for 5 months. Our best months, in terms of win-loss, have been June and October, and our weakest were August and September. Now did we pat ourselves in the back at the end of October, and kick ourselves at the end of August? No. Just as we felt we did nothing special to have a good October, we felt that we did nothing wrong to have a less-than stellar August.

This is something that traders have to become accustomed to -- your trading technique, whatever it may be, will rarely achive the same level of success every month. The market will favor your methodology on one occasion, and then leave you behind in the dust on another. The key is to add size when the market is treating you well, and conversely, protect your capital and try to grind together a small amount of profit when the going gets tough. That is not the time to be aggressive; rather, use smaller size and stay patient until it's your turn again. Theoretically, it may be possible to constantly adapt one's style of trading to ensure that it is always favored by the market; however, we are neither that ambitious nor that smart (nor do we know of anyone who can do that successfully).

We know we are consistent. But we also know that the market is not. Remember that for your own trading, and it will be a source of strength to draw upon, in good times and in bad. When the going gets rough, stay calm and collected, and above all, do not lose your control and discipline. In our career, losing one's discipline even for a day can make or break one's whole quarter. And just as importantly, when things are good, be aggressive, and strike with that hot iron in order to save up for when the draught begins. But do know that the good times also will end. And thus continues the cycle.

A message to our newbie traders

In our Web site we have a section called "Target Customers". In this we discuss the three groups that can benefit from our services:

A: Novice Traders who need to learn a system of how to trade, and more specifically, how to spot and interpret daily and intraday patterns.

B: Intermediate Traders who need a refresher course or want a confirmation of their own readings on the market.

C: Advanced Traders who want another pair of eyes looking for possible set-ups.


Today, we'd like to expand on this by concentrating on the beginners. For newbie traders, our system--like any other closed system that provides background, analysis, and advice for a specific area--holds a certain fascination. We tell them what stocks to watch, when to enter, when to take profits, and when to cut your losses. If you're new you can learn a lot from this: you can familiarize yourself with a successful system, you can recognize what kind of charts work, and what kind of charts do not, you can learn how professional traders interpret patterns.

However, there comes a time when you must start applying our teachings to your own data. We recommend that after several months of successful trading you start running your own scans or looking through your own list of stocks.

Set alerts on charts that you like -- if they coincide with ours, great, if not, trade them anyway.

Why do we say this? We're 3 traders who send you a newsletter for basically the price of a buck a day. All we should do for you if you are new is to teach you what kind of charts to look at, and to understand what kind of intraday conditions are of importance when you plan to enter a position. After a while, you will enter the ranks of the majority of our subscribers who use us to supplement their own readings and watch-lists. Ultimately, this is where we want you to go. Why do we say this? Well, for one, you should never rely on anyone but yourself. What if we decide to close our doors, retire young, or run into unforeseen circumstances? (We're only saying this rhetorically, of course -- we'd like to be around for a long time since writing this newsletter has been one of the best decisions we have ever made). Second, you will never be able to gain the required confidence if you do not at some time stand on your own and trade your own selections. And without confidence, you will never be able to evolve into a strong enough swimmer to tackle the shark-infested, murky waters of the world of finance.

When your System Fails You

What do you do when your system fails you? The question is an important one for traders and is one that most likely we all have asked ourselves at some point in our trading careers. This question demands another question, and that is, for how long has your system failed you and for how long was it successful before that? For one day, one week, for six months? Today was the worst day our service has encountered thus far in its short existence of five months. We had three stocks trigger today and all three failed. Now as much as we hate getting spanked by the mother market, and even worse, causing losses for our readers, we are not worried nor depressed.

No trading system functions every day, in every type of market. We are break-out, momentum traders who use a system with a very tight stop (1%): in choppy markets we will get hit. This has always been the case and always will be. Today was the first day within our service that we had 3 triggers and 3 losses but it will most likely not be the last. All 3 stocks triggered, all reversed with the market to hit the stop loss, and then all 3 reversed yet again and at one time or another went above our alert prices. It's a perfect example of what happens in a choppy market.

What do we do? We pull back, regroup, become more cautious, and ultimately sit things out until things improve.

Now, if our trading system were brand-new to us then we might be concerned, but the years of successful experience that we carry with us give us confidence, faith, and vision. The current trading environment (which alternatively might be great for other types of traders) that is very challenging for us, will also pass. One thing we have learnt over the years is to always have perspective and take the bad, and the good, in stride.

The Fine Line

We mentioned in our last blog that we felt that we made a mistake this month in being too conservative. Unfortunately, this is a consequence of choppy markets. On one hand, you should become more selective since the failure rate in such market environments are higher than usual. However, one has to walk a fine line between being smart and selective, and not becoming too scared and gun-shy, since in the long-run becoming too fearful of the markets can be just as damaging as being overly aggressive. We've often said that there's nothing easy in this profession, and finding this fine line of being selective and yet involved, is something that can be difficult to capture.

This is how we do it: as our readers know, we only trade from a predefined list from the night before. Therefore, when a stock hits our alert, we already know that it has a solid daily. In benign markets we sometimes take a trade with a solid daily but a questionable intraday pattern, or with mediocre volume. In these types of markets we don't do that -- we wait for the ducks to line up. The daily we already know is solid, now we wait for the intraday and the volume to confirm. If there is any element lacking -- i.e. the volume is mediocre, or the intraday is too much of a chase, then we pass.

This means we sometimes miss good moves, but it also means that we stay away from a signficant amount of failures. This is not only good for one's account, but very important for one's confidence. Stay involved, don't get scared, take your cue from the market and when things just aren't working, then know it's ok to pass. But jump back in the game the next day and start fresh. And whatever you do, don't freeze like a scared monkey.

What does your trading look like?

Here is an excerpt of our newsletter for Monday:


As soon as we saw the market gap-up Friday morning, we were relieved that we did not have any stocks on any of our trading lists for our subscribers. Why? Because this exhausted market needed a gap-up as much as Larry King needs new suspenders. A gap-up in an extended market near resistance almost always only invites selling. It's a perfect scenario if you are already in positions and want an exit, but very much a must-avoid situation if you are a break-out trader looking for new positions. Not all gap-ups are negative though: for example, a gap-up in a market that has recently bottomed can become a very powerful trend day.

What this market now desperately needs is a shallow pull-back or some horizontal basing. As we mentioned last week, the more extended the market, the higher the chance of break-outs failing.

When novice traders talk about trading they talk about the excitement and thrill of the job. However they soon realize that the professional traders who are consistently profitable year over year are not thrill-seekers, but disciplined traders who have conquered the desire to always be in a trade. The reality of trading is that it requires an inordinate amount of discipline and patience. A lot of what we do is simply just sitting and waiting (which actually is one of the reasons we started this service-- it gave us something constructive to do while we were sitting around!)

There are times in the market when the best thing is to just sit aside. Then there are other times when you are so busy that you realize by the closing bell that your stomach feels hollow as you haven't eaten anything all day, that your eyes are burning from staring at your screens all day, and that your back is killing you from sitting tensely in one position all day. Take your cue from the market. Do not force trades -- if the set-ups emerge, take them as they come -- be that 10 trades in one day. If they do not emerge, then sit back and just watch --be that 1 trade in ten days. This is the exact same reason why some days we have 10 stocks on our lists and other times we have none. You cannot conjure up set-ups-- the opportunity has to arise or else you will do nothing but chop up your account.

Print out this sign and put it on your wall: Every Trade is a Business Transaction. What does that mean? It means that there should be a reason for every single trade -- why you enter and why you exit. Every single trade is an important business transaction that has to be thought out and given great importance. The hungry beast that devours accounts of new traders, without a doubt, is the demon called over-trading. When your trading resembles less a person playing a video game and more a person playing chess, is when you will start to be on your way to becoming a profitable professional trader.

Where are the Leaders?

Part of the problem of the market right now is that it has no real leadership to speak of. Where are the leaders and what are they doing?

In the NYSE the commodities had held the throne for most of the year, especially the energy and metal sectors. Both are currently languishing, with most of the related stocks even below their 50dma. In the Nasdaq, we started out the year with leaders such as GOOG HANS GRMN AAPL SNDK BIDU NTRI AAPL SHLD RIMM. More than half of the latter now are below the 50dma (and many of these are on our short list). An acephalous market cannot make any kind of meaningful long-term move; what is necessary is that either a new crop of leaders emerges or that there is a sector rotation, something that we still have not seen this year (and no, NVEC does not count as a new leader :-)

Four Steps in the Quest to Become a Professional Trader

Let's take it as a given that you have researched the easy stuff -- brokerages, charting software, required hardware, et cetera. Now what?

1) First you need exposure to determine what kind of trading interests you. As you will soon find out, there are many ways to earn a living in the market. Do you want to trade hundreds of times a day, exchanging thousands of shares, chasing pennies? Or would you prefer to become a swing or position trader based on daily and weekly chart patterns? Maybe possibly just a day trader looking for intraday gap break-outs? Or somewhere in between, like us, trading off of daily but mostly for day holds, on average trading 1-3 times a day. How do you get this exposure? Read different books, check out websites and blogs of active traders.

2) Find a system that you feel suits your personality. For example, we are methodological traders who like the calmness of trading from a pre-defined list every day. On average there might be only 10 stocks on our Main list to trade from, and those only at exact prices. If these prices are not reached, then no trade. Other traders, for example, live for the chase and the thrill and may only trade stocks which have released news or earnings.

3) Alright now you have honed in on an area of trading that interests you. For the sake of argument, you, like us, prefer to trade only a few times a day, based on daily charts. So now what? Now you read some books related to this type of trading, find specific websites that practice the type of trading you are interested in, and if possible, come into contact with actual traders who practice the type of trading that interests you. What books did we read and do we recommend? Well, they're a mixed bunch but we think that all of them should be read:


How to Make Money in Stocks by William O'Neill

How I made $2,000,000 in the Stock Market by Nicolas Darvas

High Probability Trading by Marcel Link

Encyclopedia of Chart Patterns by Thomas Bulkowski

4) Now you need to get your feet wet. You can start out by paper-trading but probably the best way to really gain experience is to actually jump into the market with real money. However, start small. For example, you have decided to become a break-out trader and have noticed that stock HCPG is close to breaking the downtrend line at 50. The next day HCPG breaks through 50 and you buy it. Start with 100 share trades but treat it as if it were a 1000 share lot. Now write down, be it in a written journal, or an Excel Program, every possible relevant factor. For example some categories are:

Ideal entry price, real entry price, ideal stop, where you actually were filled at for the stop, what your exit strategy is in terms of profit-taking, how far the stock pulled back before returning to the trend (great way to find out if your stop is too tight), what the maximum potential profit of the trade would have been, what time did you enter, what time did you exit, the average volume (use 30 day or 90 day), the relative volume at the time your stock triggered your buy price, et cetera.

Next either with your charting software or simply your OS, take snapshots of the following:

a) the daily chart
b) the intraday chart at time of entry
c) the intraday chart at time of exit -- be it stop or profit
d) the intraday chart at the end of the day
e) the intraday chart at the end of the day in one different time frame (for example if you use 3 minute, take a snapshot of the intraday at 5 minute also)
f) the intraday chart at the end of the day of the market in which the stock trades (so for us, it would be taking a snapshot of the intraday moves of the Nasdaq).

This last part is very important and something that a lot of traders do not do. As the cliche runs, a picture is worth a thousand words, and this could not be more true when it comes to trading. After as few as a dozen trades you will see patterns emerge. For example, you will see that you are correct in finding the trend of a stock but keep getting shaken out because your stops are too tight. Maybe you will realize that the stocks you want to trade have the same intraday pattern as the greater general market, and you realize that it would be more profitable to find a pattern with greater relative strength (or weakness if short) than the general pattern. Most likely you will realize that in the long run it would be more profitable if you were more patient. The review of actual snapshots of your trades coupled with written statistics of the trades offer endless lessons.

Most likely at this point you will feel that the kind of trading that you have chosen might not be the best one for you and you want to experiment with other systems. Repeat steps 1-4.

Don't try to reinvent the wheel. Step on the shoulders of the giants, but do find your own system. Learn from the professionals, tweak their systems, let it evolve, until you find your own way. If you work hard enough, study your mistakes, are constantly self-reflexive and in pursuit of evolving, you too will be able to become a successful, professional trader.

How opening up our business has helped us become better traders

What has pleased us immensely since we started up our service is the realization that more often than not, when our stock picks are going to go in the opposite direction than the one we hope for, they usually do so BEFORE confirming our picks. For example, we liked WIRE 36.8/37 and AKAM 40.4 from last night-- today they went down several percent, but they behaved well in that they did not first trigger our pick and then go down (therefore of course we did not enter the trades since they did not trigger our prices). We had not realized how "well-behaved" most stocks are until we started keeping statistics for our newsletters.

Opening up this newsletter has helped us also to become better traders. For example, we used to set alerts on many different stocks, including minor buy points and somewhat questionable set-ups. However, once we started writing the newsletter we decided to include only the cleanest, best selections for our readers. We realized after a month or so that our own performance improved by focussing on those same stocks and disregarding the "minor" buy/sell points which were distracting us from the best moves of the day.

Another way the newsletter has helped us is that we now only trade from the lists provided to our subscribers. Most days there will be at least a few good opportunities in the provided selections. The advantage is that you are prepared for the day and you are familiar with the stock, as compared to scanning intraday for a possible set-up and often taking third-rate set-ups just because you were rushed to make a decision. We don't like feeling rushed into entering a position, so trading only from a pre-defined list from the night before is very appealing.

The only stocks we look at during the day are the stocks mentioned in the lists given to our subscribers every night. This might seem "limiting" to some of you but upon closer introspection the numbers will surprise you. For example, if you had ONLY watched our stocks this week (last 4 trading days) and entered a position in each stock that triggered from the trading lists and the watch-list, without regard to volume, intraday set-up, market conditions, et cetera, these would be your day-trade results:


Flat :

ILMN short, PWEI, TRMB


Losses maximum 1%:

GILD, ERTS


Profits minimum 1% to maximum 8%:

GPRO short , CRDN short, RIMM, OXPS,
DIGE, DRIV, FWLT, GROW, PWEI, TZOO

The results are 10 wins ranging from minimum 1% to 8% maximum daytrade profit (depending on where you took profits) versus 2 losses of 1% maximum. We're happy with these results and feel that if you are patient enough to wait for quality set-ups (which means that some days you only trade once or none at all), you can achieve a very respectful win-loss ratio. The more experienced we become in this career (and in life), the more we realize how critical controlling greed and fear is to becoming successful.

How ugly can you get?

We usually do not discuss indices on our site since as short-term traders we prefer to look at individual set-ups, especially leader stocks whose moves usually precede those of the indices. However, it's difficult to ignore the ugliness of the bearish wedge pattern on the Nasdaq.

What is the most likely scenario? A continuation move to the downside towards the symbolic 2000 number for starters. What would negate this pattern? A move over the 50dma and over 2120 would be a great step in the right direction. But as we have always said, opinions, beliefs, and prophecies should all be left at the doorstep before you enter your office every morning. Within the realm of trading, hope indeed never escaped from Pandora's box. As always, trade the set-ups, and trade with the trend.

Vertical Spikes and Basing

We had placed NIHD short alert at 50 in our weekend newsletter last night along with the following chart indicating to enter a short position on the break of 50 support.



Today, NIHD opened green and proceeded to rally somewhat before reversing hard on heavy volume. She came rushing down from over 51 to hit our alert at 50 and confirm the trade at 49.88. However, this was not the easiest trade to take since, as we have written here numerous times, chasing vertical moves is not a great trading strategy. Let's take a look at the actual trade:

Here comes the vertical move with very heavy volume.



Vertical spikes are rarely worth chasing. If the volume is heavy and the pivot point on the daily very attractive, then watch for a base right above (or below if short) the pivot point. This way you do not have to chase, and you are supplied with a nice entry with a risk defined natural stop.

NIHD is a perfect example of this as she bases right under the pivot point of 50. From there you could easily put on a position short at 49.8 with a 20-25 cent stop (right above 50).



As you see she based there only for a little while before dropping exactly one point for a nice and quick 1 point target daytrade.





At which time you bow your head, say thank you, and take at least a good portion of the daytrade profit. Of course you could argue -- well I chased it short at 50, got in at a better entry than you, and profited just the same, so what is the advantage of letting it base? Remember, trading is a number's game and we have too often seen vertical spikes quickly reverse for a large loss, to ever be interested in chasing a trade. It might work for you once in a while, but in the long run, it pays off to be patient, and wait for the intraday base to give you a defined stop. Wait for the set-up = waiting for the trade to come to you.