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Monday, February 28, 2011

Promoted from comments...

loanme5 asked the following in comments:

"X, What is your process for putting together or finding set ups that you test? I've watched you make adjustments over the years and always wondered what was going on underneath those patterns that I don't seem to grasp. I guess I am asking what are the basic fundamentals of all set ups that you feel make up a quality set up and trigger? You often say, "trade what works best for you", but sometimes I struggle with even knowing where to start and knowing what works best for me. Hence, I still find myself "chasing success" every now and then.

And if I have not said it in awhile, thanks for everything that you do. If not for you, I would have been out of this business long ago."

My process is simple - I look at a lot of charts five days a week (outside of my normal trading hours). I can't stress enough the importance of establishing (and maintaining!) this discipline. I look at charts, I take screen shots, and I make notes. I study several different timeframes, I experiment with plotting my Fibonacci lines in different ways, I segment my watchlist by price, I segment my watchlist by gap (size of gap, gap inside the previous day's range vs. outside the previous day's range), and I study!

I have several dozen solid setups that I study, but in the end I only trade a few because I believe in less trades with higher win rates. But, I still study everything else. And I am always on the lookout for new setups, or variations of existing setups.

As regular readers know, my trading has evolved over the years. Today, I am normally done trading within two hours of the open; sometimes I am done within one hour of the open. As a result, I trade faster timeframes. I have migrated from 30, 15, and 10-minute timframes to 5 and 2-minute timeframes. But throughout my trading career, these characteristics remain constant:

1.) I trade gaps.
2.) I use Fibonacci lines.
3.) I use candlestick charts and analysis.

Along with these "constants", I have these "almost constants":

1.) I use moving averages to help me tell if price is extended too far.
2.) I sometimes watch the previous day's high/low for support/resistance/targets.
3.) I sometimes keep an eye on pivot lines (standard calculation in my software package) for support/resistance/targets.
4.) I sometimes watch whole dollar levels, and to a lesser extent half-dollar levels for support/resistance/targets.

I am sure there are a few other things I can list, but this is a good overview of my style. It is important to note that I have left everything on the blog as my trading has evolved - so you can go back and look at what I did when I traded 15-minute or 10-minute timeframes, or what I did when I plotted my Fibonacci lines one way vs. another. Nothing is obsolete, regardless of whether I still use it or not.

In March, I will try to elaborate more on my methods as I continue to post charts and analyze reader's trades. I have also talked to Kernan from TRADEthemove.com about doing a guest post on the different ways of plotting Fibonacci lines. He has committed to get me something in the next few weeks, and I think everyone will find it informative.

Goodbye February!



Wolf said...

Nice, thanks Trader-X!

Tajir said...

Thanks X for posting constants and almost constants in your trading. It helps to see how experience traders have evolved in their career. Another question related to this is; you have mentioned that you take the setups that produce 70-80% success rate. As markets are evolving and setups can stop working, I am wondering at what point would consider that setup has stopped working for you. In other words how many losses would take in a row before abandoning the setup. Also, I have not seen you post any short setups recently. Are you shorting stocks at all? Thanks for great blog!!

Flowtastical said...

I couldn't have found success in day trading without you. It took about two years of reading your blog and refining my method but now I found a style that works for me. Thanks for continuing to blog.

Times of Your Life said...

excellent information...

loanme5 said...

Thank you very much.

Michael said...

Nice X. I look forward to Kernan's post. Also, do you know if the guys at equity watchlist will ever open up to new subscribers? I've been waiting a long time, but get no indication. I would like to try them out for a watchlist.

Trader-X said...

Tajir - I do short stocks. I take the setups that come daily, whether long or short. I don't have a bias for/against any type. Let me give your other question some thought before I answer.

Flow - thank you! That means a lot.

Michael - the guys at equitywatchlist have a good product, but I don't know they will open it up to new subscribers (they might, I don't know). Their problem is that it is geared toward experienced traders who have their own methods, but want someone to provide good analysis nightly of potential big movers for the next day. When they opened up memebership, a lot of novice traders subscribed to the service, and it turned out to be too high maintenance. So they scaled it back, closed membership, and everyone goes on a wait list and they add once someone leaves (which isn't very often, because they do a good job). But, to be added, you have to answer a pretty detailed questionnaire to show you are experienced. I will ask them to give us an update. One of the founders also "Tweets" to a private group with market thoughts/setups, and he toyed with the notion of opening that up to subscribers this year. I will ask him to make us aware if he does.

Thanks guys!

Times of Your Life said...

I didn't trade the following cuz I am a bit worry it will not work because recently market become trick (hahhaha it just what i think, maybe not true. it is tricky all the time, but maybe become even more tricky)

will you guys take the follow trades...

1. ROYL, 2 min, PDC to CDO
entered at the 7th bar

Maybe it is not working because it is near the $7.50. It provide some kind of resistance
1st candle is red but with a bullish tail...
2nd to 6th candles has a upper tails
which counter the bullish signal of the 1st candle

even the 7th candle looks like hammer the 5th candle pulled in too deep, which maybe somewhat bearish

2. PRU, 5 min, PDC to CDO
entered at the 10th candle

the reason not working, maybe too much red flags?
the 2nd to 4th candles are some what bullish, got support back up once it push down the price

Michael said...

Thank you X!

Michael said...

Times of your life, widen your stop. PRU looks like a nice winner on the short side. You should put your stop at the previous swing high, which would have been 63.73. You would still be in the trade.

Do the opposite going long - your stop at the previous swing low.

Michael said...

Times, my thoughts on ROYL. Not enough profit potential, even if it rallied to the FE. And I didn't like the setup. It wasn't a rally and pullback I like. The first bar was down/red which makes a big difference for me. I like them all green in a rally. The 2, 3, 4, 5 all had upper tails signaling some kind of resistance. Just a few things to look at.

Times of Your Life said...

ah thanks a lot Michael...
those are very something I need to consider more when going into a trade