Trading FAQ

By popular demand, here are the questions I am asked most frequently regarding my trading. Check back often as I may add to and update this list.

Q) What type of scanner do you use? How do you get your daily "watch list"?
A) I have three tools that I use for my daily list:

(1) a real-time gap list on my trading software (RealTick).
(2) Briefing.com daily gap list.
(3) Prophet.net (most of my candidates come from here) - I use two scans, one for gaps above the previous day's high and one for gaps below the previous day's low.
I take the results and sort by volume, and focus on the top 20-30 (that ensures I am usually in the most liquid issues).

091206 edit - see this post for more information on sources to find gaps.

Q) What trading software do you use?
A) RealTick

Q) How many positions do you take per day?
A) It varies greatly, but anywhere from two to eight on average. If I get several profitable positions from "the go", I keep it on the low side so I can focus on and manage those open positions. Also, I might enter the same stock if it sets up on both the 15 and 30-minute chart.

Q) What are your "money management" rules?
A) I risk the same dollar amount on every trade, and adjust my position size based on the distance from my entry to my stop. This approach makes the most sense for me, as I always know my targets and stops when I enter a trade. So, I take the distance from my entry to my stop, and divide that into the dollar amount I risk on every trade - that determines the amount of shares I trade.
Here is a hypothetical example:
$0.40 - distance from entry to stop
$400 - hypothetical amount I risk on every trade
1,000 - number of shares for this hypothetical trade
I usually close 1/2 of my position after a $1 gain. I consider this a "windfall", and take partial profits. The actual targets I use are based on technical levels - see the charts on this blog for further information.

Q) Do you follow and try to trade in the direction of the overall market?
A) In the past, I tried to trade in the direction of the overall market. But, I found it is a lot of work for not a lot more edge. In general, I trade stocks that are "hot" or moving - usually in the form of gaps. These will generally defy the direction of the overall market - for example, if you get a big gap down with continuation it has a good chance of "free falling" even if the market is soaring (and vice versa)*. So, by staying with these "hot" stocks, it (usually) negates having to worry about the overall market direction.
*obviously if I traded a fixed basket of stocks I might pay more attention to the overall market, as it would exert more influence.

Q) How do you place your stops?
A) 95% of the time my stop is placed at the opposing high/low of the bar I entered. If there is an obvious zone of support/resistance away from that point, I may (on occasion) extend my stop to that point.

Q) Do you use volume in your analysis?
A) Only to sort my "watch list" candidates - not for actual entries or exits. As with my answer above (about trading in the general direction of the overall market), I have found it is a lot of work for not much more edge. I do not discourage it - if it works for you, by all means include it in your analysis.

Q) Do you trade more off 15 or 30-minute charts?
A) I have never actually measured it. If I had to guess, I would say 60% 15-minute charts and 40% 30-minute charts.

Q) What do you consider the opening range?
A) This has evolved over the years. In the past, I would plot the morning swing point. But over the years I found the first 15-minutes works best for how I trade - and it fits into my "keep it simple" rules*.
*more and more, I am using the high/low of the first 15-minutes as my opening range (OR). I find that this consistently gives me the set-ups I am looking for, and it simplifies the plotting of Fibonacci lines. So, the previous day's high/low and the opening range (OR) high/low as represented by the first 15-minutes. The only exception to this is that when I trade off a 30-minute chart, I sometimes use the high/low of the first 30-minutes - but, I also sometimes use the high/low of the first 15-minutes...it is more of an art than a science!

Q) Can you talk more about plotting Fibonacci lines?
A) I apply Fibonacci in a very simple manner - I use the previous day's high/low and the opening range low/high, and plot the 61.8, 50.0, and 38.2% retracements as well as the 38.2% extension above/below the high/low. These calculations are simple to do manually* - but, most software should automatically plot these levels based on the high and low you choose (RealTick does).
*see this post to request an Excel spreadsheet

Q) What is your win/loss percentage?
A) See this post for information.

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Tags:
Trader-X, Stocks, Fibonacci, Trading, Technical Analysis