Part 1 of 2
All successful day traders have a method or methods to reduce risk and net quick gains. The idea is to make quick yet small gains over and over to build wealth over time. Sometimes those gains are significant but many times they are a small percentage which is just as important if you can do this many times a week. There are numerous methods to the same outcome, making money, so do not let someone try to tell you there way is the only way to do so. As all traders/investors, I have gained my experience by being thrown into the fire. Due to this, I have created rules for myself. The most important rule here is I never use more than 20% of my portfolio for day trading purposes. The rest I keep in various types of longer-term investments, whether they are just a few weeks or over a year. Trying to categorize someone as if they must be only an investor or a trader, not both, is just plain silly and shows inexperience / brainwashed thinking. It is wise to take the best of each and mold it with your own creative touch to what works best for you. I will touch upon that in a later article. During this article, I will use some examples of recent successful trades to help illustrate what I am viewing when I trade. Due to the size of the article, I will break it into two parts. Now let us dig into the details of one of my favorite trading methods.
The following strategy utilizes various indicators but predominately the Chaikin Money Flow, and Accumulation Depreciation Line. You will need a margin account with at least $25k to follow this fully but even if you don’t have that, you can still learn a great deal and modify it to fit your needs. First and foremost, we have to find high volume stocks that are on pace to break their typical daily volume average. This strategy will not work with low volume stocks. Of course, these stocks have to be green on the day as a red stock is already under heavy selling pressure. I hunt on my trading platform’s stock screener in search for these stocks. A higher than normal volume is a critical component to success for this particular method. I prefer to start looking in small cap stocks listed on major exchanges as they tend to be fairly explosive when combined with high volume. Usually, I will have many stocks to choose from on any given day but most are tossed aside after further investigation. So, the first lesson is how to quickly filter through all these high volume stocks.
Filtering to choose the right stock is very important and may take some time to learn, don’t be discouraged. After finding a list of high volume stocks, I plug all these symbols individually into my trading platform to view the chart with my chosen indicators. Odds are I will find one stock I like for every fifteen charts I view because I am patient and not trying to force action in the wrong stock at the wrong time. Remember that, I am not trying to force action in the wrong stock. During slow weeks, traders tend to justify trading a bad stock when the indicators are not exactly what we desire. Keep in mind that some charts may not be favorable in the morning but over the day, it grows stronger. Over the years, I have become even more selective, and more successful, as a problem of mine to which I am fully aware of is my desire for excitement. Some days the market just will not give good setups in charts and those days can be boring. Forcing action can find you on the losing end fairly frequently. Learn to be self-aware as it will help you in all aspects of life, not just the stock market.
Next, I want to view the intraday chart at one-minute intervals, than the two-day chart to see. If it is early morning, you will be forced to use the two-day chart. I will view the CMF in periods of 15 (on the chart below, this is the first CMF). Per the chart below, I came across symbol CHCI around 11:30am Eastern Time. I quickly noticed that the CMF was mainly positive on the day, my first good sign. Next on the list was the A/D line. I noticed it was strong accumulation near 500,000 and increasing from the open. That is positive sign number two. From there, I quickly look at the ADX line because I prefer to be in a stronger trend above 25. Sign number three is positive but not always necessary. The OBV is the next indicator I briefly look at to make sure the line is trending north but I do not care about what number it is at unlike the A/D line. I also look for any type of divergences that could indicate what might come next. If the OBV was trending south yet the PPS was trending north, that is typically a bearish sign of things to come. In this case with CHCI, the OBV is trending north with the PPS confirming each move. The RSI is next on my list which helps me conclude when to buy or sell. An RSI over 70 is near the overbought range. This does not mean that it will not go up further from there though so it is only a guideline and I combine it with Bollinger Bands. If the stock prices jumps outside the bands, that is an indicator it is overbought (above the top band) or oversold (below the bottom band). Back to the RSI, below 30 is typically in the oversold range but again, does not mean the PPS will not trend further south. Typically, I will wait for the A/D line to look strong yet the RSI is trending down near 50 or hopefully lower before I consider buying. Last but certainly not any less important is the MACD. I want to see where the current trend is looking and prefer to see it level off a bit before I feel comfortable that I am not chasing a stock price up trying to get an order filled or trying to catch a falling knife when the money is leaving the stock.
Click to Enlarge
If the chart passes all these tests, now I move onto the Level 2 quotes as well as watching real-time trades to see the speed of the transactions, price, and size of the trades. I will analyze the chart within seconds and bounce between intervals of 1,5,10, and 15 minutes to get a wider perspective before moving to the L2 and real-time trades. Most trading platforms, through your broker, will supply both of these and they are essential to doing any type of short-term trading. Unfortunately, I do not have a print screen view of these for you so I will have to explain what I saw without a visual aid. With the CMF turning negative, I pulled up the L2 in CHCI. I viewed the price areas, if any, of large bids and asks. When a stock increases intraday, you have to be wary of when profit takers with large positions will try to sell a significant block that can turn into a major resistance level and prohibit more short-term gains. However, with heavy accumulation (A/D line) and a positive CMF combined with the already established high volume, we can break resistance levels much easier. Comparing the size of the transactions to the resistance levels on the L2 is a good indicator if resistance can be broken easily. Now after determining where support may be in the L2 and what barriers we may face, I check the real-time trades to see the how fast the transactions are taking place. Sometimes high volume could be just a few major buys so we need to make sure that is not the case and the high volume will continue throughout the trade. The L2 needs to be monitored closely as many times support or resistance levels will change in the blink of an eye without the orders being filled.
Based on all the information, I put in my first price point for CHCI just after 12:30pm Eastern time at $1.88 when the RSI trended south towards 40. I tend to have a total of three price points as many times you will see a decrease from your first point so I come to expect it. Attempting to call a bottom frequently will not be successful in the long run no matter how lucky you actually are or think you are. I try to average in my cost over three points, if I have enough time to fill all three. The RSI trending towards 40 and lower is typically where I try to buy. When the RSI trends over 60/70, it indicates we are in overbought territory and I prefer to sell in that area. In this case, shortly after putting in my bid, it was filled. I scanned the chart and L2 to see where it might dip from there but before I could input a new price point, the stock had a serious breakout.
I took some off the table near the first resistance level around $2.20 as the L2 showed some significant sells. I wanted to make sure that if that wall did not fall, I was able to lock in some decent gains. Not only did the wall fall but the breakout continued all the way up to about $2.60 before it came crashing down. Upon seeing the chart fall, I was able to lock in the other half of my sell just over $2.40.
Unfortunately, I was only able to fill the one price point due to the quickness of the breakout so I had just under half of what an entire trade position of mine would typically be. I will not chase a stock moving this fast though as many times, that will be a recipe for failure. Instead, I accepted my rule based trading style and took my gains from my trade without remorse. After I sold, the chart deteriorated as accumulation fell significantly and the CMF trended negative. When that happened, I moved onto greener pastures. Many times people fall in love with a stock that worked once for them, do not be a victim of that rookie mistake. I will keep an eye on the chart to see if it improves but will not force action if it does not.
This seems like a good spot to end the first part. Please comment with any questions if I’m not available in the chatroom to help answer at the moment. Good luck out there.
Mike
At the time of publication, Kudrna had no positions in the stocks mentioned
