IBD MEETUP/NORTHRIDGE LET’S MEETUP TO DISCUSS A TRADING PLAN FOR 2015, SUPPORT AND RESISTANCE AND REVIEW OUR MARKETWATCH GAME 02/14/2015
DISCLAIMER • During the course of this meeting we will review stocks that should be considered as additions to your watch list. • These are not trade recommendations. These are candidate trades. Do your own research, keep position sizes modest, and stay diversified. • Also past performance is no indication of future stock trends. • We will also discuss Trading Strategies we believe to be effective; however keep in mind that nothing works100% of the time sothere is no guarantee these strategies will work for you.
AGENDA • Where is the Market today? – Group Discussion • How to write a Trading Plan • How to trade Support and Resistance levels • Building Watch Lists • Using different time frames to set up trades • Keeping your charts simple • A review of the MarketWatch Game – Please join now!
TEST YOUR CHART READING SKILLS • At the recent IBD Trading Summit, Scott had all attendees analyze a chart then discuss it with a neighbor; then he analyzed the same chart. • I learned a lot from that! • I’d like each of you to take a pen/pencil, a sheet of paper and analyze the chart I will show you next. • You will have 3 minutes to do so. • Afterwards we will analyze the chart as a group pointing out the various sections that caught our eye. • To the left of the chart are some fundamentals. Note on your paper those fundamentals that you considered important. • And the chart is……………………
A SIMPLE TRADING PLAN • Here is a trading plan example to give you a better idea of how to create your own plan. • When you create this document it will serve as your business plan for trading. • It is very important that you write this plan out, so you can reference it from time to time. • You will find as you start to paper trade your plan some things will work and others will not. • So you will have to continue to adjust the plan. • I recommend paper trading to back testing because it gives you the ability to look for and take trades. • Back testing can be helpful to test certain parts of the system but paper trading really gives you a better feel for how you and the system work together. • This trading plan example details a short to intermediate reversal system.
MOTIVATION PART • This is the motivational part. You will find that if you have objectives other than making money you will be more likely to achieve your objectives. • Objectives detailed in this trading plan example are: • Average X%+ a year trading stocks • Replace my income, so I can spend more quality time ________________. By replacing my income it would allow me to not work and still have the money to ____________________________________. • Spend about 10 to 15 hours a week trading. Develop a system that only takes about this much time to run and still be able to make the type of returns that I want to achieve. • I would like to have achieved my objectives in two years. I am going to achieve this by putting all of my earnings back into my trading account. Once I reach my goal of $___________ in the trading account then I will start taking out Y% of my earnings to live on.
Trading Setup • I am going to trade large and small stocks that are either domestic or international. • I will follow the SPDR S&P 500 ETF symbol (SPY) as my market barometer to let me know where in the market I need to focus. • Then I will use the corresponding sector ETF for the sector I am looking to trade. There are so many that I will list them at the end of my trading plan. • I will use the 20 day SMA and 50 day SMA on these ETFs. If the 20 day SMA is above the 50 day SMA, I’ll look for long positions. If the 50 day SMA is above the 20 day SMA, I’ll look for short positions.
TRADING SCREEN: LONG • For long positions: • I will look for the sectors within each of the markets to find the highest Relative Strength using a 30 day and 120 day RSI calculation sheet that I will update weekly. • Also, I will use Investor’s Business Daily (IBD) to give me there strongest Sectors. • I will use IBD screens to look for stocks that have a relative strength rating of greater than 85 on their total score. • These stocks can come from any research or reading and score and 85 to make it on my trading list. • I will be looking mainly for those stocks that screen well in the strongest sectors.
TRADING SCREEN: SHORT • For short positions: • This will be almost the opposite of the long position screen. • I will look for sectors that have the lowest Relative Strength using both any proprietary screen and IBD. • Then use IBD to run the analysis on the stocks in the weak Sectors looking for a relative strength score of less than 45 total score. • Even if I get some potential short trades, I will ultimately be trading long if the broad markets are have the 20 day SMA above the 50 day SMA. • The same goes for the long positions. • Approximately 85% of the stocks movement can be attributed to the movement of the broader market. • This will give me my starting point to build my trading list. For this trading plan I will keep Four Watch Lists.
FIRST WATCH LIST • The first list will be my largest list of stocks that could be potential trades. • This list will be split for holdings that could be long positions and holdings that could be short positions. • I will continue to add stocks that fit my screen and technical indicators to this list. • If a stock gets bought out or if they merge I will take it off of my list. • Also, I want to keep this list to 100 potential stocks. It is too hard to keep up with many more than 100 stocks.
SECOND WATCH LIST • The second list will be a list of stocks that are close to a buy or sell short point. • These are stocks that have already made it through the screen and could be a potential trade at any time. • This list will also be split up for both long and short positions
THIRD WATCH LIST • Third list will be my holdings. • This will be a relatively short list, because it will only have the stocks that I currently own. • Since there are a lot of trades throughout the year, I need this list to keep my current holdings in front of me. • I will be tracking closing price of my holdings so I can update my stops.
FOURTH WATCH LIST • The fourth list is my idea list. • These are positions I may have read about; • Or saw on a Financial Channel and thought it might be interesting but did not have time to run my screen to see if it fits, • Or heard about from family, friends, etc. • So I will put it on the “Idea List” to make sure that at some point I get to run it through my screen to see if it fits.
ENTRY SIGNALS • I am going to trade based on a pivot point signal along with support, resistance and volume for both long and short signals. • A pivot point is when a stock has pulled back and stopped with the next day creating a higher high and higher low. • Depending on the level of support at the point that the stock made the pivot I may require an additional day or two of consistent higher high and higher lows (for long signals) to make the trade. • If the previous day’s low is at major support and there was not 25% higher average volume on the down day then I will execute the trade as soon as it trades higher than the previous day’s high (for long signals). • The same will go for short trades. The difference is instead of looking for higher highs, I will be looking for lower lows. All of the other criteria will stay the same.
EXIT SIGNALS • The exit signal will be a trailing stop. • I will figure this stop price based on the Average True Range (ATR) of the stock or the lowest (long trades) or highest (short trades) point of the pivot point. • The stop price will be the greater of 1.5X the ATR or the highest or lowest point of the pivot minus $0.10 just in case it tests the low again. • For example, the current price is $45.68 minus (1.5X ATR = 2.24) = $43.44 and the lowest point of the pivot is $42.98 minus $0.10 = $42.88. • The stop will be $42.88. That is $2.80 difference between the current price and the stop. • That is how much you will trail the price as it moves up. I will enter the stop order in the market every day.
POSITION SIZING • In my position sizing algorithm I will risk 1% of my principal and 5% of market money [Trading Profits]. • The 1% risk will take into account how many positions that I have on at any one time and reduce my principal by the amount I currently have risked. • The market money, as stated, is the profits that I have generated prior to putting on a new position. • I will reset my principal to capture my gains on a quarterly basis.
WRITING A TRADING PLAN • Writing a trading plan means defining every part so that someone else other than you could understand how to trade it. • In order to do this you will have to have a better understanding of all parts of your system. • This trading plan example is written in the first person on purpose. This is your personal plan and should be written that way. • This trading plan example is for illustrative purposes only. Every trading plan is personal by design. You need to make sure that you are designing your plan to meet your own objectives. • Ultimately you must design a plan that fits your trading psychology and objectives if you want to be able to consistently trade your system.
TRADING SUPPORT AND RESISTANCE • We all know the definition of Support and Resistance • it defines the levels at which buyers and sellers step into a market or where the law of supply and demand come into play. Imbalances in supply and demand create support and resistance levels. • Simply put, Support is where there are more Buyers than Sellers and Resistance is where there are more Sellers than Buyers. • This looks great on paper but is highly subjective and not necessarily consistent. • It can be simplified by Selling at Support and Buying at Resistance. • Sell at Support when it fails and the stock breaks below. • Buy at Resistance when it fails and the stock breaks above. • Monitor the 50-day sma. • Only buy when the stock is above the 50-day sma. • Only sell when the stock is below the 50-day sma. • Use a Weekly Chart and look for area of three bars [candles] to time ENTRIES. • A Low followed by a Lower Low followed by a Higher Low; or • A High followed by a Higher High followed by a Lower High. • Stick to an established Trending Market, not a Ranging Market [harder to trade.]
SETTING UP WATCHLISTS • You must first decide if you are an investor or a trader? And what kind of trader? For example I am a swing trader. • Stock scans are easy to write and absolutely essential to swing trading. You need to be able to find stocks with the exact setup that you are looking for. For day trading and swing trading both, you have to be able to run scans! • TradeMiner-TradeMiner is a software program that you install on your computer (PC, Mac, or Linux). Click a button and it tells you what stocks have historically been winning trades during the current month. It also tells you exactly what day to buy and what day to sell to make a profit.. • MarketClub-This scanning and charting solution is unique from anything else on the net. You don't actually write scans. Instead, it scans the market for you based on their "Trade Triangle and Smart Scan" technology. It then identifies on a chart when to go long or short. • StockCharts-StockCharts.com definitely has the best looking charts on the net. No doubt about it. They also have a fast and powerful scanning engine. You can use their pre-defined scans or create your own from scratch. • StockFetcher-StockFetcher has released it's 2.0 version of its standard screening and charting interface. It sports a nice clean charting platform with scanning capabilities. No software to download. • Worden TC2000-This is a popular technical analysis software program among traders. It has so many features that it would take forever to list. You can create your own scans, watch lists, get access to proprietary technical indicators, and view streaming real time charts. • Amibroker-AmiBroker is a comprehensive technical analysis software program, allowing you for a 1-time fee to study and predict trends in the market and to maintain a portfolio of shares. It incorporates a powerful set of technical analysis tools,. • Trade Ideas-Trade Ideas is a real time streaming stock alerts and scanner. With this service, you will get real time streaming alerts on a tick by tick basis to find intra day trading opportunities. • FInViz- Financial Visualizations, or Finviz, is a website with a mission: "to provide leading financial research, analysis and visualization." The site aims to make market information accessible and provides a lot of information in visual snapshots, allowing traders and investors to quickly find the stock, future or forex pair they are looking for. The site provides advanced screeners, market maps, analysis, comparative tools and charts.
USING DIFFERENT TIME FRAMES TO SET UP TRADES • In order to consistently make money in the markets, traders need to learn how to identify an underlying trend and trade around it accordingly. • Trends can be classified as primary, intermediate and short term. However, markets exist in several time frames simultaneously. As such, there can be conflicting trends within a particular stock depending on the time frame being considered. It is not out of the ordinary for a stock to be in a primary uptrend while being mired in intermediate and short-term downtrends. • What time frames should you be tracking?A general rule is that the longer the time frame, the more reliable the signals being given. As you drill down in time frames, the charts become more polluted with false moves and noise. Ideally, traders should use a longer time frame to define the primary trend of whatever they are trading. • Once the underlying trend is defined, traders can use their preferred time frame to define the intermediate trend and a faster time frame to define the short-term trend. Some examples of putting multiple time frames into use would be: • A swing trader, who focuses on daily charts for his or her decisions, could use weekly charts to define the primary trend and 60-minute charts to define the short-term trend. • A day trader could trade off of 15-minute charts, use 60-minute charts to define the primary trend and a five-minute chart (or even a tick chart) to define the short-term trend. • A long-term position trader could focus on weekly charts while using monthly charts to define the primary trend and daily charts to refine entries and exits.
KEEPING YOUR CHARTS SIMPLE • Have a chart, i.e. Weekly SPDR/SPY, to determine the major trend. • Confirm this by using the Weekly ETF/Sector chart for the stock to be traded. • These charts should have the 20-50-200 days smas plotted on price action. These are the indicators used by major financial institutions. The chart could also have 14-day RSI plotted below price action. • Use a daily chart of the stock to identify its Primary Trend. Again use the 3 smas on price action; the 14-day RSI, an oscillator, MACD and Volume plotted below price action. • Use a Long-Term chart, i.e. Weekly+, to confirm the Big Picture of Support and Resistance. Plot the 30-day sma against price action and the MACD and Volume below. • To select entry points, use an hourly- chart with 8 or 10 sma and 18 or 20 sma plotted on price action and volume plotted below.
A REVIEW OF THE MARKETWATCH GAME • Log onto http://www.marketwatch.com/game/northridge-meetup • Click on Join Now • At Log In you have to register first by entering an email address and a password. Then log in using the items just entered. • Click on Trade Now. Enter a symbol and when it finds that symbol click on Trade on the symbol to move it to the right. Do this five times then click on distribute equally to the right and trade and you are in the game. • If this doesn’t work for you call me at 818-929-9861 and we will go through it online. • The current leaders are