I'd like to start with assigning a definition to a term, if I may:
Trader Mentality (trād·ər-men·tal·əd·ē) - The mindset and/or ability to dissect price action of any goods, currency, or stock and make an unbiased short term trade with maximum return on investment as the primary goal.
With that being said...
Strategy
I've heard about strategy on both sides of the spectrum since my first day trading. Some say research is the key, and that the more research and "DD" that you conduct, the more in touch you will be with the market. Others insist that its all just a bunch of noise, that you shouldn't make it any more complicated, and that trading is simple without the research and all of the moving averages and momentum indicators hoopla. I don't really agree with either side.
I don't do research on stocks anymore. I do research on indicators and chart patterns. I don't use screeners or run scans anymore. I use technical indicators and read charts. I don't research fundamentals anymore, I'm a technical analyst.
Preparing
In short, I don't prepare much anymore. I used to be up around 4 or 5 a.m. scanning and planning for the trading day to come. Now, I sleep in every day. Often I'm awake earlier then I want to be (wife & kids). If I am, I'll check whats up with the market. If nothing is looking good at that time, I'll go back to bed. I'm not worried about catching the moves at the open or preparing for the day. The trades will come. I don't need to chase them.
I scanned every night and morning for years. I spent countless nights up countless hours researching to find my plays for the next day. The stocks I felt were my best options after all of it, I would highlight and add to my watchlist for the next day.
The morning would come, and I would make my play on whichever stock I had a plan for. Only, the trade wouldn't go the way I had envisioned. Most times it was either volume, patterns I didn't see, or range that was the problem. After years of trying it on my own, I decided to start using the masses to find my trades for me. After all, what's a good trade without other traders to trade with? Bottom line, someone has to buy your sell, and someone has to sell your cover. Without the volume, you may not get orders filled when trying to enter or exit at a specific price point.
Scans (or lack thereof)
So no more nightly scans. No watchlists either. Unorthodox? Perhaps. I play the market's reaction to the guys that trade their scans... or rather their watchlists derived from those scans. Chasers, subscribers to chatrooms, newsletters, promos, etc., news buffs, CNBC and even other technical analysts play significant parts in bringing attention to specific stocks, all of which will have a reaction to these effects. The reactions typically involve more than average range for the day. How you play that reaction and range can mean the difference (and size) of profits and losses.
Take $NFLX for instance. The stock gets plenty of media exposure on a daily basis. For that reason along with several others, daily volume for the stock is very healthy. I want that sort of volume on stocks that generally don't receive that sort of attention. This could be a $30 or $40 stock, or even better, a $10 stock. Lower price per share = more shares for your money = greater risk per price action = greater losses, but greater gains. However, if you can read the charts accurately, you can read the price action. You can jump in and claim a piece of the millions flowing in and out of the stock every few minutes for yourself.
So how do I find my stocks? I pay small attention to a few pumper newsletters, I also follow some of the well known (and followed) stock traders on twitter. There are plenty on twitdeck, stocktwits, facebook, instagram, whatever you're into. The more followers they have, the more influence they have. They're basically pumpers whether they realize it or not. Whatever stock they tweet or post about is going to receive a little more attention then it would any ordinary day.
While I'm certainly not influenced by the trades of others, I do have interest in a stock's price action that was just brought to the attention of 50,000+ traders that are influenced by their trades. I am also a member of a chat room where other pro traders are alerting to moves within the market. When you get a cross between two or more sources mentioning the same ticker, look into it. This clever means of finding the "hot stocks" for the day is essentially my screening system.
What Am I Looking For?
I might be a few minutes late to the party, but better late than never. On extraordinary volume the stock is highly liquid (meaning orders are filled quickly and frequently for the current time) as a result of this volume. This makes it easier for you to enter/exit the trade should things go against you, or taking profit at a specific price point if all goes your way.
Range is also an important factor. So "XXXX crazy run" or "XXXX massive pull" draw my attention quickly to that stock. The bigger the move, the bigger the retracement or extension. Catching the initial move is like capturing a unicorn. If you own it, let it run. While the initial move that (I've already missed) is not necessarily important to me, the reaction to that move certainly is.
If you are familiar with technical indicators, utilize them to assist you in determining current price action. I get asked a lot about time frames and if I prefer one over the other. To that I say "see the product from every angle before you buy it." I've referenced this quote to numerous traders regarding time frames. I would encourage you not to forget it. I use the 1,5,15,30,60,300, d, w, m charts to analyze a stock before I'm in. Typically the 1,5,15,30,60, and daily for a day trade. With swings and longer term trades, the daily, weekly and monthly are vital.
Is it putting in a high or a low? How far up/down is it on the day? Where is the MACD? RSI? Is the first move already in? If so, how far did/could it retrace? Which Fib level is it in? Second move possible? Is momentum going up/down/cresting? Is there a technical pattern forming?
These are questions I consider when analyzing each time frame before I'm in. The goal in mind is to get in and get out within the day. There are many times it turns to an overnight hold. With the right broker this isn't a problem, but some are known to charge for overnight short holds, while others may require you to cover your short before the end of the day. Make sure you know where you stand before entering. Nothing is worse than having to cover a losing short against your will, knowing what is coming.
If I don't like the trade, or I don't feel sure of which way the stock is moving, I might just leave the chart up and wait a few minutes for an entry. Meanwhile I'm still keeping my eyes open for any new plays. When watching the 1, 5 and 15 min charts, patterns tend to develop on a pretty frequent basis. Recognizing these patterns can help determine the ideal entry and exit points of the trade.
Conclusion
That in a nutshell, is my way of trading. Some would call me lazy. Let them. It's not like trading comes naturally to me, it doesn't. You can read my story here: Finding the Trader Mentality: The Story of a Trader. It took me years to find a strategy that worked consistently for me. Once I found it, I designed my life around it. Now I sleep well instead of hoping they publish that press release in the morning, or worried what the news will be. I have time for family in the evenings instead of being glued to CNBC and computer screens.
I don't expect you to adapt my way of trading, nor do I expect you to adapt anyone else's way. I expect you to take bits and pieces from everything you have learned, and will learn, and create a style that works for you. What works for one trader may not work for every trader.
Keep your ears and eyes open for the big plays of the day. Couple it with the ability to understanding the in's and out's of technical analysis and it just makes life easier. Plain and simple. Happy trading traders.
Labels: Trading Strategy
The morning would come, and I would make my play on whichever stock I had a plan for. Only, the trade wouldn't go the way I had envisioned. Most times it was either volume, patterns I didn't see, or range that was the problem. After years of trying it on my own, I decided to start using the masses to find my trades for me. After all, what's a good trade without other traders to trade with? Bottom line, someone has to buy your sell, and someone has to sell your cover. Without the volume, you may not get orders filled when trying to enter or exit at a specific price point.