Finding the right set-up(s)

So, how do you pick the winning set-up(s) from all the stocks on your watchlist? How do you "weed" through all of the charts and focus on the few that will make you money?

As much as I have tried, I cannot just jot down a few paragraphs and answer those questions. It comes from studying 10's of 1,000's of charts and getting a feel for what works - more specifically, what has a high probability of working vs. what works "just sometimes". It takes a lot of hard work - after all, if this was easy everyone would do it (and, there would be nothing in it for you and me!).

That is the purpose of this blog - I try to highlight charts that have a high probability of working over and over again. As boring as it may get, you have to study these every day and know them forwards and backwards.

From a 40,000 foot perspective, here are the steps that I take every day:

1.) Before I start the trading day, I say to myself "I don't have to make a trade today". This is an important mindset to be in, because (as I have pointed out many times before) most of my losers do not come from good set-ups that don't work - they come from mediocre set-ups and trades I try to force.

That is why I put so much emphasis on the post "A trader's job" - "...the job of a trader is to wade through all of the set-ups presented to him every day and discard the bad and mediocre ones".

2.) I posted here where I get my candidates or watchlist for the day. Once I have those stocks, I put them all into one list so I can easily move through each one. I look at two charts for each symbol - a 30-minute chart, and a 15-minute chart. And, I constantly scan the list every 15-minutes looking for a set-up.

Although my watchlist could conceivably have 100+ stocks in it, I sort by volume and focus on the top 20-30. This is a manageable number for me, and allows me to spend the time I need on analyzing the charts vs. just trying to get through my entire watchlist every 15-minutes. I focus on quality over quantity!

3.) Now for the $100,000 question - how do I settle on the stocks I trade? Simple, I am looking for all of the things that I post on this blog daily:
> stocks that are moving - I mainly trade gaps, because those stocks have a high probability of having a sustained move (and, you can usually get a good feel if that is going to happen after 30-minutes to an hour). I focus on big gaps - or gaps with a lot of "white space" (space between the previous day's close and current day's open).
> consolidation in the form of narrow range bars, and inside bars - especially after a wide-range bar or a nice move that could cover several bars. And, shallow pullbacks from the high/low with narrowing bars.
> candle patterns - hammers and "hammer-type" candles (bars) are nice, shooting stars, gravestone doji's, engulfing candles - all things I have discussed in multiple charts on this blog.

These are the common denominators in all my set-ups; I cannot possibly go into everything that constitutes a good set-up - again, that is the purpose of posting charts every day. So, look through all the charts!

4.) I analyze previous price action and the surrounding bars - this is where a lot of people make mistakes; they just look at a single bar in a vacuum. You cannot do that - you have to know what led up to the bar (or candle) you think is a signal. Was it a gap up or down? Did it bounce at support/stop at resistance? Were the previous bars strong or weak? Were they wide-range? Are there long tails (or wicks)? Is price above the 50% mark of the OR?

What is happening on the chart as a whole? That is why I go into detail on my charts and talk about the previous bars and price action before I enter the trade.

5.) Before I enter a trade, I make sure it has room to move. Thus, I know my target (or, at least I know my target for the first 1/2). Is there room for it to move to the retracement of the previous day's high to the opening range (OR) low? Is there room for it to move to the Fibonacci extension. Is there enough profit potential if it stalls out at the previous high/low?

Now, a lot of you ask what makes you choose one chart and not another? I cannot tell you without looking at the charts - but it is usually something obvious. A lot of you say, I saw a chart just like "that" and it didn't work. My response - I doubt if it was just like "that"; you may have seen one bar or candle that looked like something I traded, but did you analyze the previous bars and price action? As I already said, I don't just enter a trade based on one bar - I take into consideration the price action, previous bars, support and resistance, Fibonacci retracements, Fibonacci extensions...

Again (for the third time if you are counting), I post the charts every day for a reason. You have to study them. And, if you have a question about a specific chart, send it to me. If it is worth posting, I will do so and we can explore why it did/didn't work, if it was similar to something you saw me post in the past, et cetera.

We can make it a new feature - several times a week:
"Why didn't this set-up work?"
So, send your emails and let's all get better together!

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