Navigating Financial Markets

Strategy

My core method in the markets is all technical.  I use weekly charts to find a swing trading timeframe entry, with a position trading sizing.

How do you find the swing trading entry?  One example is I look for re-solidifying support and or resistance levels.

A great example of this is (SOL) in December 2015.  After a false break of major support in late summer, support firmed in early winter.  This gave us an easy, low risk level to trade against and a simple target of recent peaks in the 1.90s

sol

When the stock broke it’s 2 month range, it quickly proceeded to the price target.  With the position trading sizing, you can evaluate the group and the market to see if you want to take either a partial gain and leave some risk on OR take the full position off.

The important thing is to know what you want to see AHEAD of time.  As a general rule of thumb, the faster the rip, the faster and heavier I want to sell it at my price target.

 

Technicals

  • Price patterns, momentum, shares in the float and volume help decide what stocks to buy.
    • These simple factors work incredibly well; don’t let anybody tell you differently.
  • Measured moves, moving averages, fibonacci levels and price pivot levels determine exit areas.
  • Reward / Risk:  3:1 is the popular minimum requirement.  I guess it works for some people, but you can do much better than that.  I require 5:1+.
    • also see: The Third Dimension
  • Protective Stops:  Like in SOL, stops below base levels are excellent protective stop levels.  Otherwise, I like to place stops a safe distance away from event lows, key reversal day lows + prior swing lows.
    • A safe distance means there is no doubt your invalidation area has been violated.  I find that easier to avoid fooling myself.
  • Trailing stops:  Since I mostly sell on the way up, I use discretion with key intraday and daily moving averages such as the 5,10 and 20 day.  This all depends on the time frame of the rally
  • Opportunity Cost: the biggest weakness to this method is sometimes you can enter a position and have to sit in it for days or weeks before it moves.  The best way to reduce opportunity cost is to understand when a base is faltering or the stock tells you it needs more time and cut your time loss.

I have a few different methods for short term (both day and swing trade timeframs) that I use very selectively.

  • Gap ups.  Specifically, breakaway or measuring gaps.
    • Trade opening range breaks/after hours range breaks.
  • Buy/sell on key reversal candles at trending moving averages.
    • This works well in most markets.
  • Price patterns on daily and weekly charts
    • Attempt to catch the meat of a move anticipating a pattern breakout.

Fundamentals: In a bull market, you can consider a few fundamentals as well to refine stock selection.  These are the main things I consider:  accelerating of revenue growth and earnings, operating cash flow and direction of margins.  Finding catalysts within a stock’s story helps you reduce opportunity cost as well.

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