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lunedì 13 gennaio 2014

Swing trading using momentum burst

Swing trading using momentum burst is a short term trading method that tries to capture slice of a trend or a short term burst move.The marked boxes in ABTL indicate the kind of trade we are looking for . It is a 3 to 5 days move. It is of 8 to 40% duration. First day of the move is range expansion move. In this particular example the 4% b/o signals start of the move.c/c1>=1.04 and v>v1 and v>100000Is a simple scan I have used for over 14 years to find range expansion. The idea behind the scan came in around 1999-2000.During that period I worked with someone doing finance PhD to look at every 25% plus kind of move in a month or …

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Swing trading using momentum burst is a short term trading method that tries to capture slice of a trend or a short term burst move.

The marked boxes in ABTL indicate the kind of trade we are looking for . It is a 3 to 5 days move. It is of 8 to 40% duration. First day of the move is range expansion move. In this particular example the 4% b/o signals start of the move.

c/c1>=1.04 and v>v1 and v>100000

Is a simple scan I have used for over 14 years to find range expansion. The idea behind the scan came in around 1999-2000.

During that period I worked with someone doing finance PhD to look at every 25% plus kind of move in a month or quarter for 40 years of data using Compustat database.. We looked at what was common in that move. We found almost every one of those moves had one or series of 4% plus move and in majority of the cases those 25% moves started with a 4% range expansion move.

Let us look at the first box on above stock. Move started with 4% breakout. Volume was significantly higher than volume in preceding 8 to 10 days. Prior to breakout day there was a narrow range day.

One of the minor negative on this stock was that it did not close near high. But we have to weigh number of factors together to select a good setup. And also in this case we are looking at this in hindsight. On day of breakout we did not know whether it will work or not.

In this case the first marked box resulted in 31% move in 5 days from the gap open. The second box move was 26% and third box setup was 39%. That is the nature of momentum burst moves in stocks.

This phenomenon of burst moves is not something you will see only in 2013, it has been in existence since market started.

Swing trading methods have evolved to capture such moves. Swing traders use either anticipation or reaction method to get in to such moves. Some buy ahead of the breakout in anticipation while some by on breakout day.

Both approaches work. Only the process flow differs and the profit targets differ. Anticipation requires more work but you get rewarded for that extra effort.

ABTL is just one example of this kind of swing moves and it is one of the better examples, but these momentum burst moves are minor variation of this basic move.

These kind of momentum bursts are traded based on just setup quality and the trader does not get involved with other aspects of the company like profit, valuation, insider buying , or any other variable.

In a year you will find anywhere between 1000 to 5000 such setups in the market. Practical consideration like your capital and how much you are invested in existing swing trades determine your ability to take all setup. For example currently I am 87% invested that will limit taking a new setup ill one of the existing position gets closed. That might mean letting many good setup go.

What can make you good at trading this setup?

Understanding of the setup logic. Your own discovery mechanism which clearly shows that this kind of setup has historically worked . Your ability to spend hours studying the guidelines I have provided to identify it (or developing your own guidelines after studying over 5000 to 10000 such past setups.

And above all developing a trading fluency where you can find these setups on your own. You can short list them on your own. You can enter the trade confidently on your own. You can confidently manage the trade through both good and bad times. You can exit the trade on your own. When you reach that stage you would have developed high self efficacy beliefs about trading the setup. And as we know self efficacy beliefs drive our behavior.

Methods like these can help you make money with very small drawdowns and that is why they have existed for hundreds of years.

For more info: Swing trading using momentum burst

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Swing trading using momentum burst

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mercoledì 8 gennaio 2014

When momentum bursts fail

This is an example of a failed momentum burst setup which I traded recently. Setup failures like these are part and parcel of trading momentum burst setups.RGEN showed up on momentum burst scan as a good setup. It had everything I look for in a good swing setup. It had orderly consolidation prior to breakout. The volume was higher on breakout day than many preceding day. It was not up 3 days in a row pre entry. It had everything I look for and in 10 out of 10 times I would buy a setup like this.However next day it quickly sold of hitting the stop. Setup failures like this happen but they are not very common in momentum burst setup. I am happy with even 50% success …

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trading trades that on day setup failures setup rgen momentum burst hitting even at half trading

This is an example of a failed momentum burst setup which I traded recently. Setup failures like these are part and parcel of trading momentum burst setups.

RGEN showed up on momentum burst scan as a good setup. It had everything I look for in a good swing setup. It had orderly consolidation prior to breakout. The volume was higher on breakout day than many preceding day. It was not up 3 days in a row pre entry. It had everything I look for and in 10 out of 10 times I would buy a setup like this.

However next day it quickly sold of hitting the stop. Setup failures like this happen but they are not very common in momentum burst setup. I am happy with even 50% success rate as long as the returns on successful trades in aggregate is larger than failed trades.

Setup failures like this are the reason to manage your risk well in this kind of swing trading approach. You must use tight stops and even with tight stop you should get out of trade if it starts to sgow lack of momentum post entry. A stop even at half of the breakout day range can be considered to manage risk.

Not every setup works, and individual trade does not really matter in larger scheme of things in this method. This kind of swing trading method makes you money over large number of trades. The per trade risk is very small. So you have to do lot of trades to make money.

At other spectrum I trade a different earnings breakout based method where my objective is to have greater than 70% win rates and also to have very high return per trade. In that kind of setups I look for several multiples of my initial risk. Obviously you do not find many trades like that on day to day basis and you have to be extremely selective about the setup.

For more info: When momentum bursts fail

stockbee

When momentum bursts fail

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giovedì 2 gennaio 2014

Some Evidence It Is About Time For SPY To Pull Back

SPY has now gone 11 days without closing below its 5ma, and it closed Tuesday at another new high. The study below is one I’ve shown a few times over the years, most recently in October. It looks at other instances in which SPY has traded above the 5ma for at least 2 weeks and is now closing at a 10-day high. All results are updated. In the past this setup has commonly been followed by a short-term pullback. The downside edge doesn’t last long, though. It seems to pretty much play itself out over the first 2 days. It is not an overwhelming edge, but it is still worth noting that SPY has been short-term extended for a while and the normal course of action at this …

via Quantifiable Edges:

SPY has now gone 11 days without closing below its 5ma, and it closed Tuesday at another new high. The study below is one I’ve shown a few times over the years, most recently in October. It looks at other instances in which SPY has traded above the 5ma for at least 2 weeks and is now closing at a 10-day high. All results are updated.

tuesday at another study spy setup quantitative study normal most recently itself out over downside closed tuesday been short term trading

In the past this setup has commonly been followed by a short-term pullback. The downside edge doesn’t last long, though. It seems to pretty much play itself out over the first 2 days. It is not an overwhelming edge, but it is still worth noting that SPY has been short-term extended for a while and the normal course of action at this point is a little pullback.

For more info: Some Evidence It Is About Time For SPY To Pull Back

Quantifiable Edges

Some Evidence It Is About Time For SPY To Pull Back

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martedì 31 dicembre 2013

How to develop an enduring edge

If you want to be profitable trader you need to have a specific expertise on a setup or a bunch of setups. Expertise in skill like trading is developed through procedural memory development.To become consistent trader you need to understand key concepts of setups, expertise and procedural memory.Setup is a set of conditions used to find, enter and exit a trade. For example Momentum Burst is a setup with specific characteristics. It has specific criteria for entry, exit, risk, stops, profit target, and duration of trade. It is a structural setup in the sense this particular pattern repeats on stock after stock thousands of time in any given year.Similarly Stockbee Trend Intensity Breakouts (STIB), Episodic Pivots, Double Trouble, Stockbee Lemonade Strategy for 401 k are …

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If you want to be profitable trader you need to have a specific expertise on a setup or a bunch of setups. Expertise in skill like trading is developed through procedural memory development.

To become consistent trader you need to understand key concepts of setups, expertise and procedural memory.

Setup is a set of conditions used to find, enter and exit a trade. For example Momentum Burst is a setup with specific characteristics. It has specific criteria for entry, exit, risk, stops, profit target, and duration of trade. It is a structural setup in the sense this particular pattern repeats on stock after stock thousands of time in any given year.

Similarly Stockbee Trend Intensity Breakouts (STIB), Episodic Pivots, Double Trouble, Stockbee Lemonade Strategy for 401 k are examples of specific setups.

A setup encompasses a whole process of trading a specific trading method. If you know a traders setup you should be able to replicate his or her trade on your own. On this site the constant focus is on setups and procedural memory development.

Why is setup selection so important

If the setup you select is not based on structure of the market or is not based on observable phenomena it is extremely difficult to develop expertise on it. Setup selection allows you to narrow your focus down a specific and very narrowly focused process to be mastered. It allows you to concentrate your energy.

With proliferation of social media sites like Twitter, Facebook, Stocktwits and blogs there is constant sharing of trades. A trade is of no importance if you do not know the setup logic, scan and steps behind it. If you know the setup you know a replicable way to find that kind of trade on your own and also to trade it.

Many trading blogs or newsletter sites do not share their setups but only share their stock picks or scan results. Many traders believe if you share a setup idea and lot of people start trading it, it deteriorates. So they guard their secret sauce very tightly. Then they often claim setup is not important , but psychology is.

Once you understand the concept of setup and comprehend it you will look for setups rather than individual trades and tips. Individual trade or a stock tip might make you one time money but mastering a setup can make you money for 25 years or more.

Learning one good setup can make you thousands or millions of dollar. In order to master a setup you need to be willing to spend significant amount of effort one time till you can trade the setup consistently.

Setup selection is very important for new traders and those just starting out. In the beginning if you do not focus on setup, you will most likely blowup your account or have significant losses and never ever recover from them. Many new traders will end up giving up trading before they even find a good setup.

If you are just starting out in trading ,your task should be to hunt for a setup. Hunt for a setup used successfully by other traders. Understand it in depth. Break it down in terms of logic and process flow and then recreate it. Try it out for few months and then make changes to suit your personality. It will shorten your learning curve if you can work on existing setup than trying to find your own setup.

In the beginning of your trading career , if you are lucky enough to find a good setup it will save you 2 to 3 years of effort and frustration.

For a more experienced and successful trader, learning about new setups help you expand your repertoire of trading setups. It is easier for you to quickly learn new setup if you already trade other good setup. All successful traders trade a setup or a bunch of setups. They have skill specific to their setup. Successful traders have developed cumulative expertise on trading a very niche setup or basket of setups.

So if you are a trader looking to progress your trading further think setups and not individual trades.

Once you have a setup your problem of cognitive load will decrease because you will be doing a very narrowly focused task. Once you find your own setup you will be able to shut out environmental noise.

What is involved in developing expertise

Any expertise is task specific. So defining a specific task to become an expert at is very critical. The first step in becoming a good trader is to arrive at a tradable setup. And then become an expert in trading that particular setup. It is a very microscopic skill.

What is involved in developing expertise.

If certain task or skill is important to us we develop expertise in that specific task or skill area. These tasks can be as simple as driving a car, or cooking Italian food, or managing people, or more evolved like developing java apps, or performing brain brain surgery, or trading the markets. As adults we develop expertise in specific tasks related to our work, our hobbies, our interests, or human relationship.

Developing expertise allows you to earn money and have fulfilling life. Psychologists have studied this area extensively. Psychologists use the term expert to refer to an individual who is significantly more experienced than others in performing a particular task. A group of adults can have varying expertise on same task.

Expertise once developed allows you to do a task in less time and do it better. Expertise is developed through encapsulation. Encapsulation is a process whereby the adult learner’s cognitive energies and skills becomes focused on specific areas. Once an expertise is developed the expert does the task differently from a novice.

Novices rely on formal rules and procedures to guide them in doing a task. Experts on the other hand rely on accumulated experience. You will see this in trading.

Lot of time you will see novice trader trying to do trading in step by step manner, while an experienced trader will take and exit the trade differently because he processes information based on accumulated experience. You will see expert traders develop intuition about coming moves or danger and act quickly while novices get stuck.

Novices are also conscious of the task performance process. They are trying to do task by referring to manual or trying to remember steps. This creates distraction and creates load on cognitive process.

As expertise grows the performance of task becomes automatic. This cognitive phenomenon is called automaticity. It is developed through procedural memory. You will see this in trading. Novice traders are flustered by steps involved in trading , they fumble to find right stops or scans, or exit a trade, while expert do the same task effortlessly without much thinking or being aware of what they are doing.

As expertise is acquired the learners cognitive processes become more efficient and they can process more information quickly. They can see the whole picture. They can learn similar task quickly.

Once you develop expertise you also develop situational awareness. Studies who experts are more aware of the specific circumstances in which they are working. They can quickly change direction. You will see this in good trader. They can quickly adapt to changes in market environment. They are more aware than novice traders about the situation.

Studies of experts also show that they have highly developed self monitoring skills. They do not suffer from motivational high and low like amateurs do. They can quickly bounce back from setbacks. They have high self efficacy beliefs specific to their area of expertise.

Studies of experts show that they have larger number of strategies to do same task and they can do it more efficiently. Experts know how to get out of trouble because they have multiple strategies to deal with unexpected situations. Anyone who has traded for long period of time knows how important this skill is.

Expert traders are more flexible than novices. They rely on intuition in ways that novice find difficult to comprehend.

Let us take a task of say driving a car. Did you learn it in one day? Can you learn it by trying it for a week. Can you do it by reading a manual about it. Same way if you want to be good at trading you need to be willing to put in effort to master the task and develop expertise.

Only 5% of traders have that kind of time and attitude. Majority are just flirting from one thing to another and are just trying out bunch of things. That is why you will see high failure rate in trading.

For more info: How to develop an enduring edge

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How to develop an enduring edge

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martedì 24 dicembre 2013

As the year winds down…

Santa Clause rally is in full swing with a large number of stocks leading the advance. The strength should continue in the year end.The year has been largely dominated by don’t fight the Fed theme. Every time there was even a minor correction in the market the Fed aggressively intervened either through policy or verbal intervention. That put a floor under the market and made life difficult for the short sellers.As the year comes to end it is time to reflect on what really matters in the market. While Fed is important, at individual trader level it does not matter. What matters most is having a setup and well though out method and shutting out the macro noise like Fed and most of the BS …

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Santa Clause rally is in full swing with a large number of stocks leading the advance. The strength should continue in the year end.

The year has been largely dominated by don’t fight the Fed theme. Every time there was even a minor correction in the market the Fed aggressively intervened either through policy or verbal intervention. That put a floor under the market and made life difficult for the short sellers.

As the year comes to end it is time to reflect on what really matters in the market. While Fed is important, at individual trader level it does not matter. What matters most is having a setup and well though out method and shutting out the macro noise like Fed and most of the BS that is written about the economy.

What you make money out of is a setup idea with ability to give you positive return over large number of trades. If setup works you make money. There are many possible setups a trader can trade. The most important thing is is your setup profitable.

Let us look at two setups ideas I traded this year: one was based on earnings breakout and the other is a breakout setup. The earnings breakout setup looks for stocks with neglect that had surprisingly good earnings and buys on day of earnings. This is a setup I have extensively described on this site and has been trading for over 13 years. The breakout based setup is primarily a swing trading setup that looks for momentum bursts of 3 to 5 days and 8 to 20% magnitude. The average holding period in this setup is 3 days.

trading trades tool setups setup market finance count clause christmas average trading

The earnings related setup has in hypothetical 100k account has 8.45:1 ratio of profitability. Or in simpler term average profitable trade has been $3417 and losing trade has been $404. Largest loss on any trade was 600 dollar and the largest profit was 24500 dollar. 73% of the trades were profitable. Only 17 trades were taken under this setup in the year. This is a very infrequently traded setup and has currently has open trade in FB from a price of around 33.4 and XIV from around 24.5 price, so final profitability ratio might be much higher than 8.45:1. The setup by year end given current prices on open positions would give returns upwards of 40% with extremely conservative position sizing. Those who risked higher per trade have much higher returns for the same number of trades. This setup is primarily focused on Working People who do not have time to do active trading. Most positions are held for months or weeks.

This is a setup idea which does not depend on Fed action or any other macro variables. Every year you will find stocks with months or years of neglect that will suddenly surprise the market and go on to make big move. If you understand the setup and develop process flow for trading this you can find a profitable method that you can exploit for years. If you are serious about making money in 2014 and beyond then a setup like this can offer you life long profitable opportunities.

The swing trading related setup based on momentum bursts is a frequently traded setup and produces hundreds of trades in a year. By its very nature it is a short term setup so its profitability per trade or profitability ratio reflects that.

The ratio of Average Winner to /Average Loser in the setup was 2.26:1 for the year as of today no counting open trades. In dollar terms average winning trade produced profit of 818 dollars while losing trade produced loss of 362 dollars. Win/loss ratio was 50% (50% of trades were profitable). This kind of setup requires taking hundreds of trades. More trades you take in this kind of setups the better it is as that increases profitability through compounding.

None of these setups or many other setups used by profitable traders are like this. They produce profit over sample of trades , in this kind of trading approach individual trade does not matter as long as you keep following your setup. Profit happens because the setup works.

If you are new to trading or struggling, the most important thing that will make you profitable is to shut off all noise like CNBC, Stocktwits, Twitter , Yahoo Finance message board, or newsletters and so on and just focus on mastering one or two setups. If you focus on setups you will have profitable 2014 , but more than that you will have many profitable years. Setups once mastered become your tool to extract money from the market for rest of your life.

If you are serious about making money then don’t look for stocks picks and hot tips but look for profitable setup ideas. There are thousands of newsletters, gurus, blogs , and sites offering you hot stock tips, but what you need is a setup and not tips. Because once you learn setups you can generate your own hot picks.

Most important thing in trading is setup selection. ….

Have a Merry Christmas…..

For more info: As the year winds down…

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As the year winds down…

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