As traders, we talk a lot about trading strategies and various setups. As helpful as that can be, I recognize that what is often lost is how traders we developed our respective trading strategies.
If you are a new trader you are probably thinking of where, or how do I begin? I've been there too. Before making the mistake of jumping to setup to setup, strategy to strategy, guru to guru, here's where I would recommend beginning.
Observe the Best Performing Stocks
"A lot of people miss opportunity because it is dressed in overalls and looks like work."--Thomas Edison
Putting the work in is the only way to have enough confidence to trade your strategy. Start studying Studying the stocks that make 8%-10% gains in a week, 20% moves in a month and 50% in a year. Finviz makes it easy to do --- For free:
Now, look at the stocks that meet these criteria on multiple time frames. What do they look like on a monthly, weekly, daily, hourly? Where do they pull back. What is the RSI (or other indicators) at the time of the breakout on the m/w/d/h charts? What about the pull backs? Take notes , draw trend lines. Start thinking how and where would I get in to this stock? Also think about how you would scan for your particular entry?
I can say that I worked backwords to come up with my trading methodology. looked at those 50% gainers and tried to figure out how I could get in them, stay in them long enough, and get out safely. After looking at the thousands of these types of moves, you will start to see things that can be used to put together your trading strategy. You should have a pretty good Idea of where you want to get in those stocks. There is no right answer. There are numerous uptrend strategies that work. For example:
- Range expansion
- pull back to support or MA
- Breakouts
- Backtests of B.o.
CREATE SCANS TO FIND THE STOCKS THAT MEET YOUR CRITERA
Now that you have an idea of what you want to trade, you will then want start thinking about how you will find those stocks. If you are relying on others for your ideas you are not a trader. Let that sink in.
To become a trader you must be able to articulate your set-up criteria and know how to find it. It is easy to find a scans in various forums, but that really is not helpful until you know why you want to scan for a certain condition.
I personally found that taking the time to think about what I am scanning for and how I will do it is extremely helpful in defining the setup as you are forced to write out your rules.
For example, consider a goal of "I want to be in strong stocks that are breaking out"
How will you define a "strong" stock?
There are many ways to define a strong stock. You could consider how strong the trend is? A particular RSI level, etc... Whether it has "good" fundamentals (which would also have to be defined), is it an IBD 50 stock? The point is that there a multitude of ways to quantify strength. Just do it consistently and then you can create scans for those criteria.
What is a breakout?
A breakout should be defined by a time frame. Some traders use only closing prices some use the daily high. You would need to decide how you would define it, scan for it, and then trade it.
MANAGE THE TRADE
After you are in a trade, there are numerous considerations.
- How much risk am I taking (you should know this before you take the trade)
- Where do I get out if I'm wrong
- How do I take profits?
- Partial
- Do I take a binary risk? (i.e. a trade into earnings)
These questions and considerations need to be thought out as you are doing your research for entry strategy.
WORK TOWARDS PERFECTION
One of the things I enjoy about trading is that it is a constant work in progress. No one is perfect. Tinker, add new setups. Have fun.
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