How I scan - as of August 2011

timo4sho asked in the comments of the prior post:

I'm quite interested in how you find those candidates at the time of the setup .. as I am having difficulties finding them at the time.

I'd have to admit that I have no real easy and magical answer, like a scanner that only outputs stocks that are setting up perfectly (let me know if you find one!). I'm still trying to fine tune the process, and it's still quite a manual process. I'm just getting used to the fact that you have to keep flipping through the charts, and accepting the fact that you'll end up missing many great setups on certain days. Just need to catch a few good setups to make your day!

HERE'S WHAT I DO:

I gather my gap lists from TradeStation's scanner, combine them together, and then sort by volume. Nothing special or secret. Pretty much what Trader-X has described countless times regarding how he does it.  But I've made it into something I'm comfortable with doing.

I have other "special" scans, but in the end, they pretty much output the stocks similar to the regular gap scans. I ended up realizing that there's nothing special about those special scans, but at least I can say I've been there, done that.  However, I'm finding that they might be somewhat helpful for mid-day or late-day type scans.

After getting the scan results which run every 10 minutes, I'll go through each of the stocks starting with the highest volume first, taking a look at the charts to see if there are any interesting candidates. If so, I'll type the stock manually into a separate watch list window.  One review I've started to do is to take a closer look at the daily charts -- if it's forming a breakout on a bullish looking pattern, I'll keep a look.  Chances are, those are the ones they'll be talking about on Twitter/Stocktwits.

At key times during the opening, I'll start flipping through the charts. Right around 9:33 to start looking for the 5 min "quick hit" setups that might trigger at 9:40, and especially just prior to 10:00 to start looking for the 15 min quick hits as well as the classic pullback to the retracement zone setups.

AN EXERCISE TO CONSIDER:

Now the real trick, as you asked, is how to spot the entries.  Here's a tip, collect all the "textbook" setups you have, and start studying how they look 1, 2, maybe even 3 bars prior to the perfect setup.  Adjust your charts to see the stock prior to the setup, and do a screen capture.

Start reviewing what they look like a few bars (or even just a bar) prior to setup so that you can anticipate a potential setup. Then you'll have a better idea on what to put on your watch list.

BUT BEWARE...

Note that many times, a potential setup will turn out to be a failed setup, so beware of getting suckered into getting on board early -- wait for the actual trigger to take place before getting into the trade!  There have been many times when I've said, "Wow, this is going to be a great setup, I'm getting in now!" only to see it get stopped out without ever getting a proper signal to enter.

ANOTHER GOOD EXERCISE:

I collect all the charts with a perfect setup right at the time of setup, and will review them to help remind my brain what a good setup looks like.  I put them all into a folder, and then quickly scan through them.  I'm trying my best to brainwash my mind to only see and take the good setups, and pass on the bad.


Hope that helps, but realize that I'm still trying to find my way.  So it'll be interesting to see what I'm doing a year from now.  Maybe I'll have discovered the magic holy grail scanner by then that only gives me perfect setups, or else tells me to go away and play golf the rest of the day...but I'm not holding my breath!

Shooting fish in a barrel

With the markets down big today (8/4), it moved in such a way that created many setups left and right.  So yes, it was like shooting fish in a barrel, but unfortunately, I was busy doing research and wasn't trading.  Although I admit, with this slow and steady train wreck taking place, I couldn't help but glance at the markets often.

There were many trades mentioned by Trader-X on his blog as well as in the comments, and most were the usual "Pullback to the Retracement Zone" type setups.

However, here are a few setups inspired by Trader X's "push through" type setups that he discussed on his blog several years ago.  They are essentially 3 bar setups where they run up against some sort of held bid or offer -- another way of saying a big buyer or seller is defending a price level, and you enter once the level is broken.

Each succeeding bar generally compresses and starts to narrow in range, thereby usually creating an ascending or descending triangle type pattern.  And once the big buyer/seller runs out of ammunition, the price breaks sharply.  The only concern is a potential fake out breakout -- so you just need to watch the price action closely and be ready to exit quickly if the volume and follow through is not there.

BZ had a couple interesting setups, the first was pretty close to a "push through" setup, although the lows were not aligned at the same level.  A break below the 3rd bar was the trigger.  And the 2nd trade was more of a consolidation caused by a held bid.  The break below the 7th bar was the trigger.  Both resulted in a sharp break, helped in part by the overall bearish nature of the markets.

BZ - 5min

CTB also had a buyer supporting the $12.50 level who ran out of ammunition after the 6th 5min bar.  The break was sharp and the FE was reached in 15 minutes.

CTB - 5min

WNR was also yet another similar setup to those above, and once again, when it broke down after the 6th 5 min bar, the FE was not far.

WNR - 5min

Example: $VALE - consolidation and break below whole number

$VALE had an interesting setup this morning.  Love these setups where the price gaps down, has a sharp move down, and then consolidates and goes sideways into a tight channel, just above a whole number.

In this particular example, the 5ema and vwap were also declining sharply to join the party. A break of the 6th red bar was the setup bar with a stop above $31.13.

VALE - 5min

Since everyone is looking for the break of the whole number just before shorting or exiting their long positions, getting in just prior to the break is usually preferred, although there's additional risk that it will never break.

As expected, there was a fade on the breakdown, likely from those buy the new low algos, but it didn't work very well for them this time.  And once they realized $31 became resistance, perhaps their exits also helped the stock move down even faster.

VALE - 5min partial day

Currently (10:35 AM ET), there has been a pretty nice move, and I would have likely exited 1/2 the trade at the $30.50 level.  Time will tell whether this ends up being a runner.

Example: NVS - vwap line bounce setup (VLB)

Here's a nice example of the VLB (VWAP line bounce) setup on NVS from yesterday.  I did not take this trade, since I wasn't monitoring the markets very carefully.  But NVS was on my list from earlier in the morning, so it stood out when I took a glance at my charts.

Here's what it looked like at the time of setup on the 2 min charts:

NVS - 2min

If you look closely, there was a setup triggered several bars earlier, and I generally put my stop about $.05 or so above the VWAP, which would have kept me in the trade. But I'm going to be conservative and assume I missed it, or got stopped out, and look this setup from the 2nd attempt.

NVS - 2min - post setup entry

This setup ended up doing quite well, hitting the FE and even going down to the FE20 level.  I don't want to disappoint myself by calculating the reward/risk ratio and what I could have made, but this wasn't too bad for a "scalp" type trading setup!

Make it your own

As I start my way this week of performing a trade review over the past several months worth of data, I can't help but keep in mind the quote of "make it your own."  Trader-X has mentioned this many times on his blog that you can't just take what he does and necessarily expect it to work for you.  You should use what he does as a starting point, and that you eventually have to come up with a trading strategy that works for you.

In Dr. Brett's "Enhancing Trader Performance" book, there are some quotes in the first couple chapters of the book that really hit home for me: 

"The greats do not become great by working hard; they work hard because they find a great niche: a field that captures their talents, interests, and imagination."

This rings true for me, especially given the amount of time I can spend trading and researching without any effort.  If it weren't for other obligations, I'd easily spend 12-14+ hours a day (as I did many many years ago).  And when I'm not actively involved with the markets, my mind is usually not very far away.

"It's not whether you can be a good trader; it's whether you can find the trading [style] that's good for you."

My hope is that after reviewing the trades from the past few months in greater detail, I will be able to identify the type of trades that work best for me.  I already have a pretty good idea, but I need to have quantifiable evidence.

"When you have found your niche, you don't need discipline to do the right things; you won't want to do anything else." 

This would be one holy grail for me, the ability to feel at one with my trading strategy so that I don't care to deviate or go rogue -- I would just execute it properly without much thought or effort.  I can do this now, but not consistently, so I'm not far.  This does not mean that I will stop researching and evaluating new setups. It does mean I would have a solid foundation (confidence as a trader) upon which to build.

"You will always gravitate to your natural style of processing information, and you will always gravitate to what you find most gratifying."

Some enjoy swing trading, some like to scalp.  Some like a lot of trading activity, others like to have minimal transactions.  Some like to hear the news, others don't.  Some like thin crust pizza, others like deep dish.  There's no right or wrong.  I'm still discovering what works best for me, and I'm getting closer to settling down every day.

There's always a chance I'll discover that I'm still not at the point of knowing my trading niche, but that's why I need to spend a significant amount of time looking at the evidence.  It will be interesting to see what I uncover...hopefully not too many skeletons in the closet!