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Section I: How to interpret our newsletters
A: The newsletter contains a list of potential stocks (accompanied by charts) that we feel are set to move. Watch these stocks carefully the next day and if the stock sets up at or near the alert price, and fulfills the intraday checklist, enter a position. Any stock in either trading list that carries an exact alert price in the list on top of the newsletter, will be automatically logged. There will be days when there are no stocks on the trading list -- if we find no set-ups, we will not place any stocks in that list. In difficult markets we can sometimes have no alerts for over a week. There are two lists in the nightly email:
1) Trading List -- Stocks that will be listed with exact numbers and charts. All trades from this list are logged according to our rules.2) Forming Bullish/ Forming Bearish and Areas of Interest: Stocks that are not quite ready to be placed on the trading lists but that we are watching, or stocks that fit under "target" trades. By having this additional list traders can become familiar with stocks before they set-up and are ready for trading. We feel that familiarity with a stock's behavior is an important component when it comes to recognizing whether a break-out will be successful or not. Sometimes we find stocks that do not have exact numbers but which look set to move. We also include these under this section.
B: The Alert price is the number that is most likely watched by the trader community. For example, HCPG at 50 has served as solid resistance for over a week, but we think the stock will break out of that number the next day. We list HCPG 50 on top of the newsletter in order for you to set an alert there, and to start stalking once you notice high volume on the stock.
C: Each potential trade is illustrated with a chart and the alert price. When we started this service in 2006, often the best strategy was to wait for the alert price to trigger before taking a position. However, we noticed in 2007 that many of our stocks were setting up very well below the number(read our base and break pattern primer). The stocks are still logged according to whether they trigger the alert price or not, but we recommend experienced traders to enter on wherever the break of the base occurs, be it at the daily number, or a point away. What traders should look for is a stock to set-up with above-average volume in a tight, calm range and then break that base with a high-volume bar. We would recommend that in this type of situation you enter on the break of the consolidation and do not wait for our entry price. This is called the "Base and Break" pattern which we discuss often in our newsletters.
D: We use a tight stop which usually works to be around 0.3 % ( the theory being that if they are going to work, they should work right away). Some traders like using a wider 1% stop. The former reduces risk but increases shake-outs while with the latter you do not get shaken out of moves as often, but you assume more risk. For the sake of logging trades for the web0site, 0.3% will be used. Target trades often need wider stops than base and break trades.
E: Do not enter gap ups above our confirmation prices UNLESS it is within 0.3% of a stock that is printing an all-time new high -- that is the only exception. We want our stocks to go through our numbers, not gap up above them. Gaps above (for longs) or below (for shorts) our confirmation points invalidate the trade.
F: Once a stock triggers, the stop is automatically maximum 0.3 % from the alert price listed in the previous night's newsletter. We write 0.3% maximum as a safety measure but the best place to put the stop depends of course on the intraday chart. Look for a flat base and put the stop just under that -- this usually works out to be around 0.2 -0.5 % away from your entry price.
Our policy states that if a stock yields 0.5% profit from the alert price, then stop is moved automatically to just under the alert price (we use 3 cents below for longs/3 cents above for shorts). Thus, if the stock reverses, position is closed for almost break even or very small loss. This means that once your risk/reward is in a 1:1 ratio, you move your stop up (risk is usually around 0.5% since you have to add slippage to the 0.3% stop) to protect yourself from a possible loss. Once the reward is at least 2 times the initial risk (1% profit) you start taking profits. However, please note that these are all guidelines and as traders become more experienced, then we expect them to start looking for areas of exit according to the intraday chart. We ourselves often like take profits in 1 point increments (especially in stocks in the $40-$80 range).
We have noticed that with our picks, most of them fall into the categories of either working right from the start and yielding several percent, or they fail and reverse back through the alert price. Therefore, it is best to stay in if they are working but not hang around for too long if things reverse, especially in the base and break pattern which characteristically either works right away, or fails. Remember that most of the selections will have the attention of momentum traders. Momentum traders love expanding volume and price, but get scared easily at possibilities of failed breakouts/breakdowns.
G: We recommend taking partial profits at 1% and at 2%, and possibly leaving a trailing stop or swinging the remainder of the position. Again, please remember that these are guide-lines and the best strategy via exit areas is to watch price-action and trade according to that and not pre-determined numbers.
H: These trades often work well for both longer daytrades (i.e., at least 1-3% profit) or the start of longer term swing trades.
I: Please be diligent and check the dates of earnings/announcements of any stock that you are planning to swing as we often do NOT list this information in the newsletter.
J: In difficult market environments we would strongly urge our readers to follow our own personal "two strikes and you're out" rule -- that is, if you see two of our selections trigger with very nice intraday set-ups, including above-average volume, and both fail -- then do not enter the third. Break-outs usually occur in clusters and if one after another is failing, then that's a sign to step-back and not enter any more long positions. Conversely, if you see one trade after another work, then be more aggressive and increase your size. Thus, if there are six selections in our newsletter, your maximum losses should be contained to 2 x 0.3% stop loss, even if all 6 selections fail, while your maximum wins could potentially be 6 x 1-3%.
* Profits and losses are calculated from the alert prices for logging purposes on the Historical Performance page. Calculate profit from the alert price and not from your entry price. Thus, if there is a reversal after a 0.5% profit from the alert price (and say only 0.4% from entry price), do not wait until it completely reverses and goes down to the 0.3% stop loss. Depending on the price-action, exit before, or latest at just under the alert price.
Section II: Non-Traditional Set-Ups:
A: As evident, our preferred method of trading is a clear base and break set-up under a daily number. However, these often occur in markets coming from bottoms or corrections. Overbought/extended markets often do not offer clear set-ups. Instead what one finds are strong charts with strong trends, but no clear intraday set-up or place of entry. What we do in these situations is to slightly adjust our method and buy fewer shares, with a wider stop, in the direction of the trend, often with a clear target number on the daily chart.
If you see a stock which you believe with conviction will break-out (or break-down) but find that it has no traditional set-up (grindy, too messy, too choppy) then buy fewer shares, with wider stop. If, for example, you risk $200 per trade with a 0.5% stop, then risk the same $200 with half the shares, and a 1% stop. This is very important for strong but extended markets in which many of the stocks we look at eventually work themselves up, but not from any clear set-up. Don't commit the expensive mistake of applying a tight stop with a full position on a mediocre set-up (but with good volume on a strong trend). If you do that all that will happen is that you will get stopped out and then helplessly watch as your stock moves in the exact direction you predicted.
Do not buy new highs (for longs) or short new lows (for shorts) in these types of trades -- most likely you will just get stopped out. Find a zone that gives you a stop within your risk parameters, and enter in that area (pullback for longs, bounce for shorts). Buying the break of the base (and often this is a new high/new low) in a base and break pattern is essential. However, this strategy does not work well in choppy, grindy intraday set-ups. Adjust accordingly.
To summarize: we would much prefer stocks set-up perfectly in a base and break fashion but that happens often when a market is coming from a correction (be it a long one or even a multi-day correction). When a market is extended then stocks often set-up in a more messy manner. If you wish you can wait it out until you see perfect base and break set-ups; however, if you have to pay the bills with this job, as we do, then the best thing is to adapt to the new market conditions. Therefore, if you see a valid base and break set-up, then great, business as usual. If you see one of our selections look strong, with excellent volume, but with no clear entry point, then pick a zone with a reasonable stop, buy fewer shares with wider stop (so that risk remains constant no matter what set-up you use).It is key that you are patient in these trades since your stop is wider, your profit target also needs to be larger. Furthermore, usually if the set-up is messier, the rise-up will be slower and choppier as well. However, we see this as a positive as one of the most important things to learn as a trader is to be patient in holding your trades. Also remember a minimum 2-1 risk/reward and preferably a 3-1 risk/reward target is necessary before you enter a trade. If you don't believe a stock will travel that far, then do not enter the trade.
Section III: Intraday conditions
A: The best way to take advantage of the risk/reward ratio in trading is to be patient. Being patient means stalking your stock, waiting to strike; it means not entering a position until all conditions are met. The absolute most consistent manner that we know of making profits is by waiting for the base and break pattern to form under the daily number.
B: If recently you have been finding it difficult to make profits, we recommend using our system as a form of trading rehab: only watch our stocks, wait for our confirmation prices, and obey our profit and risk management rules. The reason for this is that we are very much in tune with the market and we will consistently have the leader momentum stocks for you on your watch list -- thus, if the market makes any kind of real move, one of the stocks that we have given you almost always triggers since it is the stocks with the quality patterns that often lead the market. After you regain your confidence, then combine our approach to whatever system you were using before.
C: Traders need to take an active role in deciding whether to enter the position or not. As a stock is hitting our confirmation price you must decide whether these four conditions are met:
1) is the general trend of the sector on your side? Always know what sector your stock belongs to and watch for sector movement.
2) is the stock printing above average volume? Make sure you know how heavy the volume is compared to its 90d or 30d average. Trying to trade a stock without knowing exactly how heavy or light the volume is compared to its average volume, is akin to a general planning an offensive without knowing the size of his troops.
3) is the intraday pattern strong showing determined strength (or weakness, if it is a short position) in a tight and not volatile manner? Remember that the predetermined daily entry price has to coincide with some kind of intraday base. Do NOT buy on top of a vertical move.
4) Is the stock showing greater relative strength (or weakness if short selling) than the market? Make sure your stock isn't just mirroring the market.
D: In our experience disciplined traders who patiently wait for their selected stocks to set-up, and then confirm that all conditions are met before entering the position, enjoy the most consistent returns. Also, it is important to note that this method of trading may reduce the stress that some traders feel as you are only entering top quality patterns with defined stops.
Note: The most important pattern for actual execution within our system is the "base and break" pattern (previously called base and explode). All new subscribers automatically receive a detailed description of this pattern with a file with 15 different examples of actual triggers from our service that have set-up within this pattern.
Section IV: Volume and Tools of the Trade
Many of our readers have asked us how to gauge volume at the time of break-out.
The tool we use is called Volume Percent Change: Volume Percent measures the volume that a stock has traded at any given time compared to the 90 day (or 60 d, 30 d depending on from where you get your data feed) average. Therefore at the end of an "average" day most stocks end near 100% (and in the middle of the day at 50%, etc).
For example, stock HCPG hit our alert this morning and quickly confirmed. When HCPG broke out at 10:30AM she had only been trading for 1 hour, therefore 100% divided into 6.5 hrs = 15, so she should have been printing around 15% of her average total volume. However, she had already traded 30% of her entire volume in one hour-- that is how we knew that it was going to be a very heavy-volume break-out. She ended the day with a successful breakout and 130% of her 90d average volume.
However, you also have to take into account that the first hour and last hour have more volume than the rest of the day, so it's not a completely clean split. Therefore, what we do, as a rule of thumb, is to compare our stock's volume to the QQQQ and other stocks on our list at any given time. So, for example, at 11AM if the QQQQ is at 27% and our stock is at 8% and triggering -- we know we should pass. This doesn't always work with the QQQQ because of economic news, or Options Expiration, which result in more volume than usual, but it's a good rule of thumb.
Alternatively, you can easily figure this out yourself by having a calculator beside you. Just divide the current amount of shares by the average amount of shares and you get the % it has traded for the day. For example, it's 11:30 AM and your stock HCPG has traded 1 million shares already in the first two hours of trading and it's average volume is 1.3 million shares. Divide 1 000 000 / 1 300 000 = 77% After 2 hours it has traded almost 77% of its entire volume which is excellent. The reason we like having a volume indicator instead of doing it ourselves is because a) it's faster because it allows you to see the percentage at a glance and b) you can compare it instantly to many stocks.
The charting software for us is actually not that important since we use no indicators except for the 50dma and 200dma. The rest is just price and volume. We know the average volume, the previous day's volume, the % volume a stock has traded at any given time. That's it. The intraday chart of a focus stock is in 3 minute time-frame on one monitor which in turn is linked to 4 different charts on other monitors: 2 day, 10 minute; 3 day 30 minute; 10 day 60 minute, and Daily 6 months including 50 and 200 DMA (and sometimes a 20DMA). Like almost all traders' charting software, each time we type in a different ticker all 5 linked charts instantly change over to the new ticker (and an automatic order gets filled according to default specifications if you are trading through QuoteTracker). If you trade like us, then you do not need expensive charting (we recommend QuoteTracker, which is $60 for the whole year). All you need are 2-4 nice large monitors, a reliable data feed, a direct access broker, and a basic quote/chart software.Other charting software/brokers that we recommend is the combination of Interactive Brokers with QuoteTracker, Ensign, Amibroker, or Sierra Charts. We like Quote Tracker very much as charting software and it works well with feeds from IQ Feed or E-Signal. E-Signal itself is another good choice not only for its feed but also for charting. For brokers, as mentioned Interactive Brokers is quite popular among traders, as is CyberTrader and TradeStation. Another good combination is RML Trading with RealTick charting which is quite nice. All brokers mentioned are direct-access and the software for the most part is quite good. Choosing charting software is a bit of a subjective choice and we recommend that you download demos of some of the more reputable vendors and try them all out before subscribing. For more detailed information, see our article ToolTalk in the Best of our Blog section of the website.
We have written a short guide on how we configure and use QuoteTracker; if you are interested in receiving this, please contact us and ask for the QuoteTracker guide.