Stock Selection

My number one problem -- really only problem -- in trading is stock selection. For example today at the market open I notice that the financials were strong. I wanted to get into Fannie Mae (FNM) but felt like that the stock had already got away. It only advanced another point. Then at 11, the home-builders made a nice move. I was watching Ryland (RYL) but never thought that it was for real. In fact, I thought that the stock was going to consolidate. And RYL only advanced another point!

Today I traded Estee Lauder (EL) and Nordstrom (JWN), buying into the fake break-outs. There were several other sectors which I thought would trending but did nothing: REITs and retailers. What am I doing wrong?

From the way that you've described your stock selection I think that you are in need of a structured methodology in the selection of stock and the timing of your entries. You use the words "notice", "wanted", "felt", "thought" x3 etc. This indicates that you might be trading off gut-feel and not using a scientific rule-based approach. From the research that I've read and the people that I've talked to it appears that a gut-feel takes a long time to develop (at least 10 years of intensive and successful market trading) and until then you need to have a good trading plan which has specific rules for each aspect of your trading. Do you have a trading plan?

Why are you trading stocks? They are nothing but a pain in the arse and subject to many idiosyncrasies that S&P E-minis don't have. For one thing, you only need to follow one market. Pros who trade stocks know a handful of them from years of watching how they trade day in and day out as well as how they react to the market in general and their individual industry. They don't hop from one to another.

Do yourself a favor and stop trying to trade stocks when you have no edge.

My plan is to find a stock that is in an up-trend, and buy if it breaks its previous intra-day high between 9:45 and 11. I buy three hundred shares and sell the first hundred 15 cents away, the second hundred when the stock crosses below the 20-minute moving average of the one-minute chart and the last hundred when the stock crosses below the 20-minute moving average of the three-minute chart. The stop-loss is the 20-minute moving average of the one-minute chart, but I do not feel comfortable if it is more than 10 cents below my entry price.

Now that you asked for my strategy, I realize that there were times when I broke away from my plan. I think that has to do with the fact that there are still many opportunities when the stock is within a range, and that break-outs do not break out as I plan, like RYL was weak in the morning and did not break the previous high until 11:11, when the moving average was more than 20 cents away.

Thanks for your input, and may I ask what is your strategy? What do you see in my strategy that can be improved.

I don't have a strategy for stocks as I don't trade them. Also, I wasn't asking for your trading plan, just if you had one.

When you have broken from your plan has that improved your bottom line? i.e. were the deviations, on the whole, good or bad deviations?

Nothing wrong with trading stocks, a market is a market. As with trading any market, experience helps.

Your method as you outlined is based on short term momentum, or more correctly current price acceleration.

You stated your method waits for a price breakout to new highs between 9:45 and 11:00, but at the same time you will not enter if price is more than 0.10 cents away from the 20 minute moving average. Given the inherent lag of a 20 bar moving average, these two rules or entry criteria sound a bit contradictory to me. Here is an idea that may help satisfy your criteria in a slightly different way. In order to achieve an efficient entry price (near the breakout price level), you may want to consider using a resting stop order placed in the market before the actual price breakout occurs. Then after entry, as long as price does not move more than 0.10 cents below your entry price, stay in until the 20 minute moving average has time to catch up and move past the breakout price level, at which point you can trail price using the 1 minute and 3 minute moving averages as your original strategy outlines. This will give you a more mechanical and less discretionary way of participating in the actual breakout event and controlling your initial risk.

With respect to your initial question, what I would term the quality or reliability of a price breakout for a stock. More reliable price moves for stocks usually arise from basic price patterns found on the longer time frame charts: the daily or weekly charts. For price patterns, I prefer ascending or descending triangle breakouts the best. During the initial price breakout I want to see accelerating volume that is well above average on say the 5 or 15 minute time frame. Accelerating volume means higher volume with each subsequent bar. I am willing to ride a breakout into the first consolidation, where price stalls and volume dries up. If I am not going to swing the trade with an overnight hold, then I will exit when this consolidation beings. So fitting this back into your method, when you find a stock "in an uptrend", go check the daily and weekly charts for that stock and see if the price move your seeing is actually part of a much larger and significant price pattern, or if it is simply intra-day market noise.

When a meaningful or significant price move occurs, it is almost always in response to some event, thus you need to know why it is a specific stock moving. What is causing this new interest (volume surge) in the name ? Is it news related ? Is it technical (breakout...ect) ? Or is it less reliable intra-day noise ? This is where experience comes into play, knowing the probabilities associated with each type of event.

If you are trading stocks and like to keep things simple, I'd recommend reading up on Darvas. His method is wonderfully simple - to the point that I explained it to my seven-year-old and he could understand it. The other advantage of Darvas' techno-fundamental strategy is that it let's you go into a comfortable hunter-mode without the information overload.