You’re a new trader overwhelmed with where to start. You’re a seasoned trader who has been experiencing “indicator creep.” Or you are just an ADD mutant like me who gets distracted when the wind blows.
Whatever your scenario, it is important to have a methodology that keeps you focused on good trade candidates and the setups to trade them. There is no way a blog post can cover every nuance of that process, but if you feel that your trading has gotten too convoluted and complex, starting from scratch and following these five steps will put you back on the right path.
Lists – This is where it all starts. You need to have a “go to” list of stocks to consider for trade candidates. The list does not need to be that large; in fact 200-300 stocks is optimal.
You can arrive at that list two ways; top down or bottom up.
The top down method just filters the universe of stocks until you get to a manageable list. Filtering by things like price, liquidity, and market cap drastically chops the list down. Then take out industries you don’t trade like biotech or porn, and just keep using progressively narrower criteria until you get to the size that works for you.
Bottom up is just building a list based upon what stocks are the most actively traded ones currently. You can start with the usual suspects like $AAPL, $AMZN, $SPY, etc. and then just look at the streams to find other candidates.
This then becomes your list to visually scan each night. You will prune this list from time to time, removing some stocks here or adding some stocks there, which can come from the occasional updated filtering of the broader market or from changes in trader sentiment on specific issues.
Levels – Once you have your list together for the first time it is now time to go through each stocks and draw levels. These are horizontal support and resistance levels that you will draw on the daily charts.
First start with obvious areas like gaps, and then look for spots where price has repeatedly found support or been turned away. You should go back a number of years when doing this as price has a long memory.
This process will make it very easy when scanning through your charts at night to see which stocks are coming into areas where potential setups may form.
Lines – Now go back through the charts and start to draw lines. These can be trendlines or channels, or they can indicate patterns like wedges, flags, or triangles. Once again you are trying to make it very easy to graphically see areas where prices might react or where price is consolidating as you do your visual scanning.
Curate – Okay, I lost the “L” theme here but that’s okay. Each night as you go through your list you are going to look for those stocks that have setups that might trigger during the next trading day. Flag these stocks and have them ready and loaded in your intra-day charting software as well as your trading platform.
The size of that list will depend on a number of factors, most importantly the current state of the market in general. But even in times where good setups are plentiful I think that it is best to focus on twenty stocks at most. But don’t worry, the next step will help make sure you don’t miss one that’s not in your intra-day list.
Alerts – I have written extensively before about setting up trade alerts, but the point here is that you are tying to focus and somewhat simplify your trading.
You have your list of stocks, each with their charts marked up to easily find key areas where trade entries might occur. Now by setting alerts just below those areas (or above for shorting), you do not have to constantly monitor every stock worrying that you might miss something.
You have pulled twenty or so of those out and put them in your intra-day set up and they can be your main focus, but if one from your larger list triggers, you will be aware of it as well.
The first three steps, Lists, Levels, and Lines will initially take a bit of time to complete, perhaps a weekend, but the beauty is that once you do that, you will rarely have to revise them. This is the same with Alerts, once they are set you don’t have to worry about them again until they are triggered.
That leaves just the process of visually scanning your stocks each night to Curate out the best candidates for the next days trading.
In trading you will never be able to catch every stock that sets up each day, but you don’t need to do that in order to be profitable. These steps will provide you with a simple and efficient way to get a good core of trade candidates each day.
Once you have internalize this process you can then add the nuances of indicators and studies into (or back into) the mix to better fine tune your trading success.
What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).