I often find myself meeting and discussing with new traders how to be successful at this business. This week I sent an email to a friend that I thought I would share. As I mention in the beginning there are many ways to be successful at this business so pick your own style. This email was a high level introduction to my methodologies.
I will just ramble a little until we get familiar with each other and find what works for you. There are many ways to make money at this game and the trick is to find the one that fits your personal comfort level and style. In my mind the simpler the method is the better.
I have tried and done every trading syle known I think over the years. The one thing I can say is that you will never be successful following anyone else. You must develop your own repeatable style and methodology and do it every day. The key is filtering out all the noise that comes at you like newsletters, CNBC, Twitter, Blogs, Sites etc. I can say that the things I learned that make money came from other professional traders that were trading every day, not writing newsletters and blogs making believe they are actually trading. Even some of the well known gurus I have found are really deceiving us making money off their writing and not trading. They are very good at spinning it like they really are making trades and real dollars.
I often help other traders that are having a hard time and find that they are just letting too many outside influences into their head and its messing them up. It usually takes a while to convince a trader to stop reading all the newsletters and twitter feeds they were reading every day all day. Once you stop trying to chase others ideas and turn it all off you will start making money. One good friend who was in a slump and lost his confidence. He turned off his twitter feed and focused on his own work and after 2 months is finally back with his confidence. Hes a good trader who trades very much like I do. Another trader friend I have worked with took over 4 months to break the habit of outside influences and now that he has he is focused and making money from his personal business model.
OK, that was a long intro. Lets get to methods. Like I said I have tried everything. I traded the tape when you could actually see things on Level II, I chased news stories. I traded gap strategies etc etc. after many years I finally have a system that I do every day. I will admit I will trade the other styles now and then when the market is choppy but its only because i like to trade every day. Let me tell you what works for me from a high level.
I prefer to trade to the long side. I can short and used to short all the time but its stressful and unpredictable so I only do it when there is a very good setup and I dont have any longs. For instance today I shorted CREE at 33.45 and covered at 32,49. I trade technical chart patterns and all my patterns are based on the daily chart. I use very few “indicators” and can do my trades with just a chart of price bars and volume. There are a few other things I think are important that I will tell you about at a later time as we go through this.
If you look at the twitter stream it is full of guys posting chart setups that are technical patterns. For the most they are just looking through random lists of stocks lookiing for patterns. Not all patterns work as they are supposed to so if you just look through stock lists randomly you will find a lot of great setups that will fail. My edge is that I minimize my failure rate by making sure I am using the right list of stocks.
Since you have been doing this for a while I am sure you see that there are people looking for new highs or unusual volume or news stories to find their candidates to trade. Thats good but most of that is already priced in or you are too late. I use a specific list of stocks that I trade on a principle called PEAD = Post Earnings Announcement Drift. This is a list of stocks that beat their earnings estimates both revenue and earnings per share by a significant amount. These stocks usually pop initially but then continue to have an upwards bias for the next 3 months until the next earnings. Since earnings growth is the primary driver of stock price it only makes sense to focus on this as the “edge” in stock selection. All the other things like news or some volume or options activity is usually temporary. I minimize risk of pattern failure but choosing to trade stocks that have a reason to continue up.
In a trending market my trades are meant to be 1 to 3 days with 3 days being the planned on holding period. When a pattern breaks it usually is a 3 day move before the stock rests. If the market is good, the stock can continue for weeks but that only happens a couple of time windows during the year. By all means, when those time windows are in play, ride the stock for as long as you can. I usually have far more opportunities than I can handle and I have found my style to be best taking the 2 or 3 day move and going on to another setup.
There are a lot of ways to do the homework to find the stocks with earnings surprises and I used to spend a lot of time. Now I use a service that does all the work for me and I just download the list from the screener. The tools is called Bluefin and is available from The Patient Fisherman . Each night I go through the list and look for the proper setups. When I find them I set alerts in my charting package. Then, I just sit there during the trading day and wait for the alerts to go off. I look at the stock quickly to see if the volume supports the move and buy if I think the market will also support the move. The list of possible candidates is usually over 200 stocks and personally I dont look at those under $10 a share but I looked today and saw there were many even down at the $1 to $5 range. This means you will be able to use the low end of my list for your candidates if you want to try my methods.
I am going to stop here. We can next get into two other topics. One is the patterns and what to look for and the other is how to know the direction of the market winds. I am a firm believer that most stocks move with the market and I do a lot to trade when I have the wind at my back. For instance, I saw a lot of people buying the close today. My wind vane is flashing a warning signal here and I would not hold a long overnight. It may not happen tomorrow but we are due for a quick pullback in the next couple of days.
I just wanted to start getting you oriented and we will go at this slowly so you can develop your own repeatable style. Let me know if you have any questions. More to come.