2011 Update: Here’s an updated version of this post.
I’ve had several people ask me for more details about my trading process and the software that I use. Hopefully this post will answer those questions. Please leave any other questions in the comments section. I’m going to run through the hardware and software that I use as well as how I manage the actual trades.
As you know on any given day there’s a ton of market data to process. I try to get the computers to do as much of that work as possible. My focus is first on identifying the ‘tone’ or direction of the day — bullish (up) or bearish (down). Once I’ve done that the computers help me to find the best setups for the market conditions.
I hope its clear to everybody that my goal is to find as many low risk, high reward trades as possible. I generally won’t enter a trade if I don’t think it has the potential to return 3 times my risk. So in R-multiple terms, I’m looking for trades that I think will be at least 3R. As you saw in my trading results post a few weeks back, the high R-multiple trades make the difference between breaking even and making money over time. The tighter the stop, the easier it is to make a high R-multiple return — a 10 cent stop only requires a 30 cent move for a 3R gain. However, those really tight stops also make it easier to get stopped out.
I use two PCs, a desktop and a notebook. The desktop has a 2.2 GHz AMD Athlon 64 3500+ Processor. It has 1.5 GB of RAM, a 200 GB hard drive, blah, blah, blah… The video card is one of the more important parts — I installed a Matrox G450 MMS video card which can run up to 4 monitors. I have 3 17 inch LCD monitors connected to that card.
The notebook is a 1.6 GHz Pentium 4 with 512 MB of RAM. It has a 16.1″ UXGA screen and another 17 inch LCD monitor is connected to the notebook. The notebook is WiFi enabled so I can move around the house (usually only for lunch) and still monitor my open positions.
I use a cable modem which provides more than enough speed. It’s usually stable & reliable but every once & a while — usually at the worst possible time — it decides to have connection issues. (Usually due to Comacst doing something to the lines in my neighborhood.) When that happens I’m able to use my Verizon Palm Treo 700P as a backup modem.
eSignal is my primary window into the markets. I run it on the desktop computer and usually have 18 charts up — 6 per monitor (see image above). In the pre-market I’ll go through all the gappers and pull up the best looking ones in eSignal. During the day I’ll swap out the charts that appear to have less potential for better looking ones that may pop up on one of my scans. I always try to keep the best looking charts on display in eSignal.
In addition to viewing charts I also monitor certain events in eSignal via alerts. One nice feature is alerts that automatically reset. I take advantage of those to track stocks that are hitting intraday highs and lows. The alerts reset and will re-trigger upon a 1% extension of a move to new highs or lows. Besides popping up an alert window it plays a specific sound for new highs and a different sound for new lows. (As you’ll see I use a lot of different sounds to help me keep track of things.) Those alerts only fire for stocks that I’ve entered into eSignal during that session. (They don’t scan the universe of stocks.)
I also track the Tick Index ($TICK) via alerts.
During the first five minutes of the day my office sounds like a video game as new high & low alerts go off like crazy. It’s actually quite annoying but once things settle down the audio alerts are a huge help. Just by listening I can tell if the market is strong or weak by how many of each alert fires. I especially like the TICK sound because I can be anywhere in the house and know the TICK has moved through one of those important levels.
The desktop PC also runs my position sizing spreadsheet. Once I identify a trade I enter the ticker and the number of cents between my entry point and my initial stop loss. Based on the stop, my equity and the percentage of my equity I want to risk per trade (R), the spreadsheet tells me how many shares to buy. (You can download my spreadsheet if you wish.)
***2011 Update: I now use MB Trading as my preferred broker of choice. My trading package, CyberTrader Pro, runs on the notebook computer. CyberTrader really does the heavy lifting. In addition to managing the actual trades it usually has two real-time scanners (CyberQuant) going and I use it to track about 20 indices and many stocks via its Watch List functionality.
There are usually three different Trade-Ideas scans running on the notebook. One window, ‘Market Watch Bull’, tracks all my alerts of interest for stocks moving higher (potential longs). The ‘Market Watch Bear’ window does just the opposite — it’s scanning for potential shorts.
The other scan, which I’ll just call ‘Stocks of Note’ tracks both bullish and bearish events on a select group of stocks. One of the nice features of Trade-Ideas is the capability to track events on a specific group of stocks via user-defined symbol lists. I have one symbol list comprised of the better looking swing setups that I find as well as any stocks that I just constantly want to keep an eye on, like GOOG and AAPL. I got the idea for the other list, ‘Top Alpha’ from UglyChart. It consists of the high volume stocks from BarChart’s Top Weighted Alpha stocks list. The ‘Stocks of Note’ alert window tracks both of those symbol lists.
As I’ve discussed before, I mainly use TeleChart after the market has closed for my swing trade scans. However, I also use it during the day to check out longer term charts for support/resistance, etc.
This isn’t really software but I have Briefing.com’s ‘In Play’ page running in a browser on the notebook. Briefing automatically refreshes and plays a sound when they post a new item. I also use Briefing’s archive to search for news, earnings dates and/or analyst commentary about certain stocks.
Reading the Market
As I think you all know, I typically don’t trade until after 10:15. I wait until then to allow the 10:00 reversal to pass as well as to give me a chance to determine the day’s trend. I use the NDX / QQQQ as my primary trend indicator. All of my charts are 15 minute candlesticks with 5 and 10 period exponential moving averages on them. The way I tell the trend is simply to look at price and the moving averages. For me to be in ‘buy’ mode I need the faster moving average (the 5 period MA) to be above the slower (10 period) moving average. Price should also be above the 10 period MA.
For example, here’s today’s NDX chart which shows the moving averages doing a bearish cross just after 10:00. The NDX tried to break above the 10 period MA around 11:00 but it failed and the rest is history.
Another reason I wait until after 10:00 is to monitor price in relation to the opening 30 minute range. I (usually) don’t want to be entering longs if the market is heading for the lows of the day. Reverse all of the above for ‘bear mode’ (a down day when I’d be looking for shorting opportunities).
The Advance/Decline line also comes in handy when I’m trying to figure out the ‘tone’ of the market. When I’m in bull mode I want there to be more advancers than decliners. There’s been many a day when the market was showing all indications of wanting to head higher but the A/D line was negative. That’s often a good warning sign of an imminent reversal. Once I’ve got my read on the market’s direction I focus on the appropriate scans.
There are basically two categories of stocks that I track, stocks that have presented swing trade setups and stocks that are making strong moves on above normal volume. Although I no longer swing trade I still run my scans each night to see if there are any really good setups (potential for a large R-multiple move). I’ll set alerts in Cybertrader for those as well as enter them into my Trade-Ideas ‘Stocks of Note’ symbol list. If they trigger I’ll trade them as day trades if I can find an entry that I like.
The bulk of my trades are from stocks that are moving on above average volume. These stocks come from a variety of sources — the morning gappers that I get from Briefing.com, stocks that appear on either of my real-time scanners and once in a while I’ll trade a stock that Briefing mentions during the day.
Trade-Ideas provides a constant stream of interesting stocks throughout the day. I have it set trigger certain alerts for stocks which are on pace to trade at least twice their average volume. Some alerts that I find most useful are 15 minute highs/lows, 30 minute highs/lows, ’30 minute opening range breakout/breakdown’ and ’60 minute opening range breakout/breakdown’, ’15 minute hammer’ and NR7. Here’s a portion of one of my Trade-Ideas windows:
The primary scans that I run in Cybertrader are ‘Top % Gainers’, ‘Bottom % Losers’, ‘Nasdaq Gainers’ and ‘Nasdaq Losers’. The top (bottom) % gainers scan simply lists the 25 biggest percentage gainers (losers) for the day which have traded at least 200,000 shares and have a 5-day average volume greater than 500,000 shares. The Nasdaq gainers (losers) scan only looks at Nasdaq stocks which are up (down) on the day and have traded more than their 20-day average volume on the day. The stocks are ranked by percent change.
Each scan refreshes every 5 minutes and new stocks on the list are highlighted in red. I can easily find stocks that are on the move by looking for the red stocks every 5 minutes or so. Both Trade-Ideas and the internal CyberTrader scans allow me to simply double-click on a ticker to display the stock’s chart in CyberTrader. So I can quickly get to the chart of a potential candidate to see if that stock merits further tracking. If so, I’ll add it to the watch list in Cybertrader and/or bring up the chart in eSignal.
Probably the most popular question I get is what kind of setups I’m looking for. I’m simply trying to identify stocks that are trending with the market and then find a low risk spot to jump on the trend. For longs (reverse for shorts) I want the stock to be above its 10 period MA and to present a consolidation and/or narrow-range bar (NRB) to execute against. Those NRBs and consolidations are what allow me to get tight stops and, thus, opportunities for large R-multiple winners. There are several examples in the ‘Trade Examples’ category. (MaoXian has about 100 examples of the types of things I’m looking for.)
I enter an alert into CyberTrader for each setup that I want to trade. Once a stock reaches my entry price the alert will trigger, playing a specific sound. If the market conditions are still decent I’ll look at the chart of the stock to make sure that what I entered in my position sizing spreadsheet is still correct. If not, I’ll adjust the stop amount, get the correct position size and enter my order. As soon as my order is filled I enter my stop loss order. I like to be in my positions by noon but once in a while I’ll take entries after lunch.
All of the alerts and stops I enter in CyberTrader are done via alert templates. The templates make it extremely quick & easy to enter alerts. Instead of going through a bunch of dialog boxes and doing a lot of typing I can simply right-click and select the template I want to use. Then all I have to do is enter one price or other piece of data.
For example, I have a template for a stop loss on a long. That template creates an alert that closes the position and plays a certain sound once the bid drops to a certain price. All I have to do to set that alert is enter the stop price into the template.
Once I’m actually in positions I start to focus on my profit-taking exits. My initial goal is to reduce my risk to zero as soon as possible — but not too soon! As I wrote a while back I discovered that it’s usually best for me to wait an hour before touching my stops. So after an hour passes I’ll move my stop to break-even once I have a gain equal to my initial risk (1R). When and if the stock reaches 2R or 3R I’ll consider taking a partial profit. Ideally I would wait for a bigger gain before taking some off the table but it just depends on how the stock and the market are acting. If the stock spikes in my favor I’ll be quicker to take the partial vs. a stock that is moving in a more orderly fashion.
While a stock moves in my favor I’ll use a trailing stop to lock in my profits. After I’ve moved my stop to break-even what I generally do is lock in about a third of my gains. As it gets closer to the end of the day I’ll make the stop much tighter. By 3:45 I’ll have the stops so tight that they may be locking in 90% of my profits. At that point I’m still trying to hold for a last minute surge but I definitely don’t want the stock to reverse too much on me.