Tools of the ‘Trade’ — How I Work (2011 Version)

This is an update to the post I made back in 2006. What I do hasn’t changed much but some of the tools have changed over the years. In short, the changes are:

  • I’ve changed brokers/trading platforms — a couple of times. Schwab shut down Cybertrader and sent me scrambling to find a new place to trade. I was with TerraNova (recently acquired by Lightspeed) for a little over a year but then they also shut down the platform I was using. Now I’m with MB Trading, where I’ve been for about a year. (I suggest using StockBrokers.com to compare the best day trading brokers)
  • I switched my charting package from eSignal to QuoteTracker with data from IQFeed.
  • Upgraded both computers.
  • Stopped using Briefing.com — This was a tough thing for me to do mentally. I had made so much money from Briefing’s “In Play” service back in the day… but that game hasn’t worked for a long time. I still liked to use Briefing to search for stock specific info and for earnings dates but I can get that stuff elsewhere (for free). Once I discovered Trade-Ideas my usage of Briefing dropped drastically to the point that it just didn’t make sense for me to keep subscribing to it.
  • A little less noise — When I switched from eSignal I never took the time to figure out how to recreate all those alerts. I still watch TICK pretty closely and I get the new high/low alerts via Trade-Ideas.
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 may have seen in my trading results post, 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 2.8 GHz AMD Athlon 64 X2 Dual Core 5600+ Processor. It has 2 GB of RAM, a 500 GB hard drive, etc… Those specs are unimportant these days as any modern computer should be able to handle trading software. For me 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 2007 MacBook Pro with a 2.2 GHz Intel Core 2 Duo and 2 GB of RAM. It has a 15″ 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 guess there’s no need to even mention that anymore as every laptop/notebook has wifi these days)

Both computers are (still!) running Windows XP. (I had no desire to move to Vista and I hear it’s a pain to move from XP to Windows 7.) Unfortunately most trading software is still Windows based so I run Windows on the Mac via Apple’s Boot Camp.

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. I haven’t had to do it but if I needed to I could log in to my account on my iPhone and manage my positions.

Software

QuoteTracker

QuoteTracker is my primary window into the markets. I run it on the desktop computer and usually have 17 charts up — 5 or 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 QuoteTracker. 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-screen.

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 trade. (You can download my spreadsheet if you wish.)

Trading Software

My trading package, MBT Desktop Pro, runs on the notebook computer. In addition to managing the actual trades it is also connected to Trade-Ideas so that when I double click on a stock that’s popped up on Trade-Ideas both its daily and intraday charts will get loaded in the trading platform. This allows me to quickly run through the charts of the stocks that Trade-Ideas picks up.

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.

Here is more on how I set up my filters and alerts in Trade-Ideas.

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.

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 (or 10:30 if there are econ reports due at 10:30). 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 or 30 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 an 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, setting up a nice short selling entry.

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 have been many days 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. I watch the NYSE and Nasdaq A/D numbers in my trading platform.

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 my trading system 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 typically come from one of two sources — that morning’s gappers or stocks that appear on Trade-Ideas.

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:

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

Once I see a setup developing I simply enter an order and wait for it to trigger. Typically I’ll enter a buy stop for longs and a sell stop for shorts (I want to buy once the stock has cleared some resistance level, which is usually the previous or current candlestick on a 15 or 30 minute chart. I want to sell below support for shorts). For less liquid stocks and/or those with wide wide spreads I’ll use limit orders but over 90% of my orders are market orders. That’s because I mainly trade very liquid stocks and I want to get in quickly instead of haggling over pennies and risking missing a move.


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.