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New Traders Should Add This Workflow to Their “Toolbox” to Become More Consistent Winners.
In this article, we will focus on your workflow, and add some finesse to your trader’s toolbox. We discuss your goals as a new trader. And, we’ll talk about confirmation triggers and the improvements you can make right now to become more adept and consistent at trading stocks.
Most new traders enter the markets with a sum of money and visions of wealth. Expectations are almost always unrealistic. To make matters worse, the majority of aspiring traders have no game plan.
They start by reading everything on the subject, in addition to watching countless YouTube videos. They see other successful traders beat the markets and assume that trading is easy. They’ve studied hard, so now they figure they’re ready to put their money to work and emulate those successful traders! Just open an account and start trading, right?
If this sounds like you rest assured you’ve come to the right place. Just take a step back and look at the big picture.
A plan is absolutely essential to becoming consistent. An example plan follows this article.
Traders Toolbox: Trading Plan
First, ask yourself a few questions and write down the answers.
- What are your goals?
- Are you a day trader, swing trader or an investor?
- What is your time horizon? Are you 20? Or, are you retired trading for income?
- What are your entry and exit strategies?
- What will you use for confirmation?
- How much are you willing to lose on each trade?
Always start with a plan; your trading plan to be specific. Be prepared when you are ready to enter a position. Understand why now is the time to enter and ask yourself before you put that hard-earned cash to work, “what am I willing to lose?”
We use a 5% maximum loss. The reasoning is simple. It is easier to make up a 5% loss than a 50% loss.
If you’re constantly taking small gains while suffering large losses the math will work against you. You’ll never win if you cannot get past this one error in your trading. Taking multiple 5% gains feels good but it will not make up for that 10% loss, or worse if you hang on too long.
Do not let the emotion of hope enter into your psyche.
The best traders consistently sell a position when the stock is not doing what they originally expected. Take that small loss.
Let your winners run for those big gains. Take a partial profit around (+20%).
Traders Toolbox: Price is King
Second, what are price and volume saying? We see this every day during our LIVE broadcast. Traders let their opinion dictate their trading instead of price and volume.
All of your indicators, moving averages, and signals in your toolbox are based on price and volume. Institutions run the markets with their sheer size, therefore focusing on their footprints, price, and volume allows us to interpret what they are doing during the trading day.
When you’re about to enter or exit a position, ask yourself “is my opinion determining my actions or does price and volume dictate my decision?”
Price goes through phases of accumulation, trending, and distribution. Understanding what phase a stock is in will help you consistently find the best candidates. Buy them when they are in an accumulation or trending phase and sell them when institutions are in an obvious distribution phase. Find out more about phases here.
Traders Toolbox: Relative Strength
Next, we want to find the best way to determine what institutions are doing after analyzing price and volume. We can achieve this through a stocks relative strength compared to the broad market, the S&P 500. If the stock is outperforming the S&P, we can assume the expensive research departments at large institutions have concluded our stock is a winner.
Relative Strength (RS) line will signal their interest by rising or falling as their interest ebbs and flows.
Relative strength in a stock indicates institutions are building positions. Investors and traders can monitor this for free through all Investors Business Daily products. In addition, the Composite Rating highlighted in each IBD/MarketSmith chart tells an investor or trader whether the stock is the strongest stock in its group, outperforming its competition or the weakest. Sales, earnings and profit margins, in addition to how the company performs relative to its peer group are reflected in this number.
In November, just before taking a position in IIPR, we saw the Relative Strength (RS line) rising to 99. This told the observant trader this candidate is outperforming the broad market. Price and volume confirmed as the stock breaks out of a cup and handle continuation pattern. Volume is strong, indicating institutions have been accumulating shares.
Here is the same chart for IIPR three (3) months later.
- The RS line is still climbing.
- The Composite Rating remains elevated at 99.
- Volume is above average.
- The industry group is strong: cannabis-related stocks.
- IIPR dipped in the market sell-off, but it is now at fresh 52-week highs and outperforming the S&P 500.
XLNX: Another Example of Relative Strength
We wrote about XLNX in early November 2018, as the stock began to break out of a weekly flat base. Since writing that article, the stock has gained more than 35%. Again, we used the same strategies presented herein:
- Price and volume indicated institutions were accumulating shares
- Relative Strength line was climbing
- Composite Rating above 80
- Markets and sectors were trending
- Market internals, bullish
Traders Toolbox: A Top-Down Approach to Trading
Finally, we need to determine if the markets and sectors are trending bullish, trending bearish or whether they are consolidating in a range or sideways pattern.
If the broad market is trending and your stock is showing relative strength, confirmed with RS line rising, your probabilities of a successful trade are elevated. If the markets, sectors, and industry groups are all moving together and trending, it stands to reason that you’ll be more a consistent winner if you are trading with the trend.
Start with the indices, then sectors, industry groups and individual stocks to find the next winners.
All of the questions herein are important as we scan for winners.
- Are the markets moving higher, consolidating in a range, or are they moving lower?
- Are the sectors and industry groups following the trend, and exhibiting relative strength?
- Does our stock have superior Relative Strength and a high Composite Rating?
Finally, we look for confirmation.
During the trading day, we often cite RSI, TICK cumulative and up/down volume. If these indicators are rising and bullish respectively, we can confirm our entry, set our stops and let the trade work.
TICK and up/down volume are market internals. You can learn more about them by joining us during our daily LIVESTREAM broadcast. Become a member.
Winning Stock Picks from the Watch List Using This Workflow
Out of 27 watchlist stocks listed in the table below, 25 were winners over the past few weeks. All of them followed the criteria outlined above.
- Price and volume indicated institutions were accumulating shares
- Relative Strength line was climbing
- Composite Rating above 80
- Markets and sectors were trending
- Market internals, bullish
XLNX in the above example gained (+29.54%), followed by CDXS (+28.02%), BA (+19.50%) and ROKU (+18.08%).
TSLA is one the exception followed by PLNT which tapered off recently, trading range bound for the past 4 weeks. Planet Fitness RS Line is still in the mid-90s. The rest of the candidates have performed exceptionally well.
Trading Plan – Example
Why am I trading and what will be my approach?
- Long-term growth and short-term income trades
- I will use a strategy based, data-driven, decision process with no opinions
What are my Goals?
* Monthly – beat SPX +5%
* Yearly – beat SPX +10%
◇ Which markets will I trade?
- International and US markets.
◇ What timeframes will I trade?
- Short and intermediate times frames for day trades and swings respectively.
◇ What setups will I trade?
- ToD and ABCD patterns for entry and exit 80% – volume and most actives 10% – day trades 10%
◇ Entry rules:
◇ Where will I place my stops?
◇ Profit (and/or) trail-stop rules:
- Exit partial position at 15% – 20% gains.
◇ Risk management rules:
- 5% loss (8%) maximum
◇ Pre-market activities or routine:
- Watch SPY NDX QQQ IWM block levels and futures; USD and Bonds
- Plan daily trades – plot pivots (AOI, PDC, PHOD, PLOD)
- Area of interest, previous daily close, previous high of the day, previous low of the day.
◇ Post-market activities or routine:
- Account for NDX QQQ SPY BLOCKS at Close and AH
- Analyze each new position for performance, inflection zones and how price behaved at:
- AOI, PLOD, PHOD, PDC.
◇ What tools will I use or need for my trading business?
- Research and scans: MarketSmith by IBD, Investors Business Daily, Leaderboard by IBD
- Trading platforms: Think or Swim (TOS), Schwab ‘StreetSmartEdge”
In summary, practice the above strategies. Confirm you are using price and volume, relative strength, market, sector trends, and market internals before taking any trades. Use sound money management, employ a risk/reward system and obey their signals. If you’re wrong, exit before a loss becomes too great (5% maximum).
And, above all, have fun!
Happy Trading,
Vinny
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Disclaimer: Do your Own Research
Our content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional investment advisor in connection with, or independently research and verify, any information that you find on our Website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. Trades and or positions listed and taken from the watchlist are my own and should not be considered “advise” to enter any particular position or asset.
Investment Warnings
We would like to draw your attention to the following important investment warnings. The value of shares and investments and the income derived from them can go down as well as up; Investors may not get back the amount they invested – losing one’s shirt is a real risk; past performance is not a guide to future performance.
Live Sessions
Live broadcasts are educational in their content. Proper risk management is considered on every trade or asset mentioned.
*** Stocks highlighted are for information purposes only and should not be considered as advice to purchase or to sell mentioned securities.
As always, the use of technical and fundamental analysis is encouraged in order to fine tune entry and exit points to average seasonal trends.
These mentions are stocks that we may or may not decide to trade as outlined in the watchlist. Always use a stop.