Tools of the ‘Trade’ — How I Work

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.

What I’m Trying to Accomplish

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.

Hardware

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.

Internet Connetction

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.

Software

eSignal

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.

Position Sizing Spreadsheet

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.)

Trading Software

***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.

Trade-Ideas Scanner

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.

TeleChart (aka TC2000)

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.

Briefing.com

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.

How I Actually Use All This Stuff

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.

Finding Candidates

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.)

Entering Trades

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.


Managing the Stops

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.

Comments

  1. Posted by Ugly on June 6, 2006 at 10:50 pm

    Thanks for the ideas. I just made myself a position sizing spreadsheet – it always seems like I waste too much time trying to figure out how many shares to get by doing all the calculations in my head.

  2. Posted by ken on June 6, 2006 at 11:51 pm

    Thanks a lot for generously sharing your ideas and setups.

  3. Posted by Glenn on June 7, 2006 at 1:13 am

    Thanks for sharing Mike!

  4. Posted by SD Trader on June 7, 2006 at 3:36 am

    TM,

    I appreciate the overview of your daily trading. It appears you have quite the set up over there. How long did it take you to start trading succesfully (and consistently)? I have tried to look this one up in the archives but it appears once you left your old job you have just always been great, even though you are still getting better. I wish you continued success and I am trying to learn from you as I have been reading for several months now.

    I have a problem though and it is killing me. I have had several nice gains but I am not good at loosing. I tend to move my stops and hold onto falling stops. For some odd reason the further down it goes after this mistake the longer I hold…you can see the cycle here. It is a painful lesson to learn as just two of those losses put me back to break even after a long decent trading run.

    Do you have any advice on how I can kick my addiction to falling stocks?

    Thanks again for the posts.

  5. Posted by Dave on June 7, 2006 at 8:34 am

    Awesome post, Mike. Hey, I thought you were sick and tired of Cybertrader? What changed your mind?

    Dave

  6. Posted by Scott_H on June 7, 2006 at 9:24 am

    Hey, comments are back! Now, I don’t have to bug you on IM just to comment about a post. Excellent post, btw.

  7. Posted by Trader Marco on June 7, 2006 at 9:43 am

    Thanks Mike for your very comprehensive post!

    The notebook is WiFi enabled so I can move around the house (usually only for lunch) and still monitor my open positions.

    This is something I have too! But sometimes I find it works against me as I find myself getting too excited about the trade by simply watching the numbers and then making a few trading mistakes because of it.

    So I’ve limited myself to leaving the laptop in the office and to trust my trading system :)

  8. Posted by Dan on June 7, 2006 at 10:12 am

    Awesome post.

    Quick question, do you ever get the feeling day traders are playing the same stocks as eachother?

    It seems to me that most day traders are trading on the same signals, looking for the same in/out opportunities? What I mean to say is, do you think it’s possible that all of the day traders are actually causing these situations, and all you are doing is paying eachother back and forth?

    Perhaps I underestimate the size of the market.

  9. Posted by downtowntrader on June 7, 2006 at 11:08 am

    Mike,
    This is an excellent post. Great job summarizing your general trading process.

    DT

  10. Posted by Derek Hogerheide on June 7, 2006 at 12:03 pm

    Wow! thats alot to digest. Thank You.

  11. Posted by k_smpth on June 7, 2006 at 1:15 pm

    Hi Mike;
    Very interesting and informative. Thanks for sharing all the info of your trading methodology.

    I have been trying to send chart request, but unable to send it as I do not have your email address.How do I get to send the request?

  12. Posted by Michael on June 7, 2006 at 1:21 pm

    k_smpth,

    You can get my email address (Michael-at-TraderMike.net) by clicking on the email icon in the “about me” section in the left column. You can also get it my clicking the “Request a Stock Chart Analysis” link that’s just below the “about me” section in the “Get Your Chart Read” section.

  13. Posted by Vinny on June 7, 2006 at 1:31 pm

    Thanks Mike for a insghtful post. Keep up the good work.

  14. Posted by Jenny on June 7, 2006 at 8:10 pm

    Thanks for the great article.

    For those interested, you can obtain a free little position size calculator from the following site (www.stator-afm.com).

  15. Posted by Michael on June 7, 2006 at 8:52 pm

    Ugly: Even with the spreadsheet I manage to mess up once in a while but it’s still invaluable to me.

    SD: Here’s my response to your comment. Keep those losses small!

    Dave: I wrote about why I decided to stay with CyberTrader here.

    Marco: I feel ya. Micro-managing can become an issue. Luckily I’ve been through so much that I don’t get very excited over trades any more.
    Dan: Yeah, many of us are playing the same stocks. But individual daytraders like myself aren’t the problem — it’s the (daytrading/fast money) hedge funds. I think that there are so few daytraders that we don’t have much effect. We’re usually trying to ride the coattails of the big funds.

    By the way, what are “these situations”? Are you talking about the current market slide? Funny how people don’t complain about the fast money when stocks are going up…

    To everybody who said ‘thanks’, you’re welcome!

  16. Posted by Marco on June 7, 2006 at 10:54 pm

    Hi Michael: “Micro-managing can become an issue. Luckily I’ve been through so much that I don’t get very excited over trades any more.”

    So when you take your laptop around with you… what’s going through your head as you watch prices tick up and tick down? What are you watching for? Just trigger prices for you to exit and enter? Have you already set an entry/exit price… and you are just waiting for it to happen?

  17. Posted by Michael on June 7, 2006 at 11:01 pm

    Marco,

    I’m mostly just keeping an eye on the Nasdaq and checking any Briefing.com alerts that go off. 95% of the time I don’t do a thing during lunch. I generally don’t enter trades between 12 and 2 PM… in fact, I rarely enter trades after 2. If my stocks move significantly during lunch I’ll adjust my trailing stops and/or take partial profits.

  18. Posted by Dan on June 8, 2006 at 10:30 am

    Mike,

    By “these situations”, I mean to say situations where day traders usually buy and usually sell. Such as a spike in volume, causes interest, which causes a pull back and all along the way day traders are jumping in and out causing the swings that other day traders are trying to ride.

    I have a request, How about a post about how you handle taxes. I seem to recall the IRS had a special case for full time day traders, just wondering how you people can keep track of all the paper work, as I imagine your tax documents from the broker must be pretty thick.
    Or even if you have a good source which touches on this subject.

    Thanks.

  19. Posted by Michael on June 8, 2006 at 10:48 am

    Dan,

    I think there are so many different players involved that it’s tough to ever know what the “day traders” are responsible for. Do you count the NYSE floor traders & specialists as day traders? The Nasdaq Market Makers? Those movements you talk about trigger stops, which causes even more activity from non-daytraders. That may cause other activity by other folks, etc. I think it’s safest to just blame everything on the hedge funds! 😉

    Good idea about a taxes post. I’ll do one in the coming days.

  20. Posted by Marcos Santos - trader10 on June 9, 2006 at 6:04 am

    Mike,

    Great information you’ve got here. I bet you’ve got your software signals soaring atm on shorting gold stocks….

    Can you please tell me a website that I can download a “position sizing spreadsheet”.

    Regards,

    Trader10

  21. Posted by Yaser on June 12, 2006 at 5:43 pm

    Nice article Mike.

    I wanted to ask you, do you ever trade on gut feeling? or what % of your trades, if any, are based on gut feeling.

    Yaser Anwar
    http://equityinvestmentideas.blogspot.com

  22. Posted by Michael on June 12, 2006 at 5:51 pm

    Yaser,

    Very seldom. Well under 1% of my trades are based off of gut feel. The QQQQ buy last week would go into that category.

  23. Posted by Clark on July 29, 2006 at 11:21 pm

    Awesome information here Mike. Very informative.

    Regarding your Trade-Ideas scans; do you have your ‘Market Bull Watcher’ and ‘Market Bear Watcher’ set to scan only your predefined stocks or the entire market? I have found it helpful to have the two scan the entire market and have each alert window set to a sound of my liking. Of course, this does produce a lot of alerts but that’s exactly what I want. Not necessarily to find stocks to trade (I have those in another predefined window) but to “listen” to the bulls and bears “fighting” it out. Is this similar to what you do?

  24. Posted by Michael on July 30, 2006 at 12:05 am

    Clark,

    They scan the entire market but they do have some filters for minimum volume, volume surge, minimum spread, etc.

  25. Posted by Clark on August 1, 2006 at 9:15 pm

    Thanks. But how do you not get overwhelmed by all the stocks it constantly spits out? Do you also load up your personal daily watchlist in a new alert window? And if so, what parameters do you use for it?

    Thankyou

  26. Posted by Michael on August 1, 2006 at 9:59 pm

    I adjust the filters so that the number of alerts is manageable.

    No, I don’t load my daily watchlist into trade-ideas but the stocks that I’m watching are usually popping up in Trade-Ideas anyways b/c they’re the ones that are “in play” for the day.

  27. Posted by Clark on August 5, 2006 at 12:26 am

    Then why do you load the chosen stocks from CyberTraders scan into your ‘stocks of note’ list? How do you have this list configured within trade-ideas?
    Thank You

  28. Posted by Michael on August 5, 2006 at 10:34 am

    There are a few stocks that I sometimes load into a separate alerts window. That window tracks stocks that I might want to know about if they do something interesting. I don’t load new stocks into that window every day, just once in a while, when I see something interesting that I want to track. The vast majority of my trades are from the gappers and/or top percentage movers for a given day. So much so that I often don’t even look at that other alert window.

    That other window is configured for both the bullish and bearish alerts that I have set in my two main alert windows.

  29. Posted by Vince on August 7, 2006 at 8:30 am

    Michael:
    You told me that you didn’t trade on Thursday before the employment data and now you are taking today and Tuesday off – I know one of your rules is to trade big movers with good volume – do you purposely lay off the days before important announcements due to the probability that they tend to be quite type days and therefore possible losing or fake out days.
    thx
    Vince

  30. Posted by Michael on August 7, 2006 at 8:44 am

    Did I tell you that? It just so happened that I didn’t see anything I wanted to trade on Thursday b/c of the way action unfolded that day. I don’t skip the day before jobs data as a rule.

    As for Fed days, I can’t stand them b/c they typically just drift until the decision, then they go haywire. So I choose to skip them. I’ll often take the day before off just to give myself a long weekend. I can’t say for sure if there’s a typical action for pre-Fed days but I think they are pretty subdued. Although once in a while you’ll get a big move as people try to anticipate what the Fed’s gonna do.

    Fed decision days and expiration days are the only days that I take off as a rule.

  31. Posted by Vince on August 7, 2006 at 9:55 am

    Thx for responding – getting back to your change to the 30 min charts – do you still use the same parameters ie the 5 and 10 moving averages for trend identification – it must be hard to now sit there and wait twice as long for a trade to develop.
    I also trade 30 min but tend to watch the 15 min for early alerts. I don’t know if you are familiar with Stotlemeyer’s market profile – it is more popular in the bond futures – it also is broken into 30 minute periods and he calls the first and second 30 minute periods the intial balance of the day, that the action after this period is suppose to be the time to trade ie when the mkts finally settle in and get serious about what it wants to do. Do you know how the other traders came up with the 30 minute breakdown or are there books out there on openrange trading? thx

  32. Posted by Michael on August 7, 2006 at 5:30 pm

    Vince,

    Yes, I still use 5 and 10 period EMAs. Actually, it’s not difficult at all. The wait is usually only about 15 minutes longer than if I was using 15 minutes candles. Sometimes the entries are exactly the same.

    No, I’m not familiar with Stotlemeyer.

    I can’t think of any books off the top of my head

  33. Posted by boots on September 5, 2006 at 8:10 pm

    Have you ever looked at TradeStation. I read all you are doing and a great deal of it could easily be automated in TradeStation. The position sizing, the indicators, the alarms, the market scanning.

    I do something similair to you when an alarm goes off. The difference is a box comes up and tells me the trade, I look to see if I still like the trade based on the current market (as you said you do) but then all I have to do is hit a single button. The trade has already been sized for me based on the current chart and is now entered automatically. I can then have the stop automated atleast to the point that I can leave for short periods and know thatl a basic stop folowing function is being handled.

    You might want to take a look

  34. Posted by LP on September 5, 2006 at 9:46 pm

    Great stuff. Why all the different types of scanners? What scanner do you find to be the most powerful? And finally how come you don’t use the eSignal Market or AvancedGet Scanner?

    Great blog, thanks for teaching all of us a little something

  35. Posted by Michael on September 6, 2006 at 6:17 am

    LP, there are just 2 scanners. As you can see they do very different things. If I had to choose 1, I’d just use Trade-Ideas.

    I’ve never tried either of the scanners that you mentioned. Until I started day trading last year I’d never looked into real-time scanners. Once I did start day trading I just used what was built in to CyberTrader until I discovered Trade-Ideas and add it to the toolbox. Do you use eSignal Market or Advanced Get?

  36. Posted by Michael on September 6, 2006 at 6:22 am

    Boots,

    I’ve never taken a good look at TradeStation. I considered switching brokers a few months back but the lack of server-held stops is a deal breaker for me. TradeStation does sound impressive though. Maybe I’ll take another look.

  37. Posted by boots on September 6, 2006 at 10:41 am

    TradeStation has added server stops. I do not do exactly as you do but the process is very similiar. It is great to have all the grunt work automated. I don’t have to figure position sizing, enter orders, move stops and the scanning is all done in the radar screen and so when one alarms you just click on the symbol and all the charts you have tied to it switch over to that stock. Makes things much easier and allows you to concentrate on the big picture (or if you want, take a break and not concentrate…hehe).

    Be glad to help with any questions you might have about it.

    boots

  38. Posted by LP on September 9, 2006 at 3:17 pm

    I saw a presentation of the advancedGet scanner and it seemed pretty nice but $3K is way too much for software. Seemed more useful for Swing or Position trading.

    However, a friend of mine uses the esgignal Market Scanner and he is able to pull off at least 1 stock every day with very good potential. Usually comes up with 4 – 8 good candidates. But I plan on trying both out soon. You also seem to be doing well with Trade-Ideas so just stick with the KISS rule.

    I wonder what MaoXian though of RealTicks?