KNOW YOUR VOLUME BEFORE ITS TOO LATE

So this week started full of good intentions. We planned on continue building up on the good run we were having so far. The market opened with the normal batch of news, gaps, rumors, noise and all…. But lacking one very important ingredient to my trading style. VOLUME

Sad thing is I only noticed we were having a VERY low volume day at around 11 am AND after all of my set-ups and trades have been stopped out at loses or giving back earlier gains.

When trading momentum, volume is a must have component for a successful trade. I need more people to come in and buy or sell the stock I am already involved in. This becomes even more important when I am going long since a stock must have buyers to go up.

Does this sound too obvious? Well, think about this for a minute. If you are shorting you don’t really need sellers for the stock to go down. All you need is for buyers to STOP buying the stock. If sellers and short seller come to the party, then for sure the short positions will be doing great. But just the absence of buyers can make a stock go down.

What if you have a way to evaluate the market in the first 15 minutes and know what are the chances that we it will have a low volume day?

For me, it will mean that I will limit the amount of trades I will have open at the same time. It will also limit the strategies that I will use during the low volume environment.  It will also give me a clear indication to call it a day after the initial burst in volume at the opening minutes.

When I studied my trading records I found out that 80% of my losing days were on low volume days. And not only that, those days my average loss was bigger that the losses on average to high volume days.

So here are the results of my basic statistical studies.

I went back and looked at the average volume at 10:00 am EST over the last 50 trading days and simply calculated percentile levels to see what the significant levels when compared to my records were.

• Days in the lower 15 percentile were extremely volatile as long as my profit and loss statement numbers. 50% of my losers came on those low volume days. So in plain English, avoid trading 15 percentile volume days with strategies based exclusively on momentum.

• Days in the lower 35 percentile call for smaller size and lower targets.

I started using these levels today and so far the results were great. The idea is that we start using the table in this blog and start monitoring how those levels (if at all) help us make better choices regarding what kind of strategies we should use during the trading day.

REMEMBER: the holidays are coming and we may see a drop in volume at some point in time. Get ready. Know your VOLUME and how it affects your strategies!!

A Powerful Job Description - What Do Traders DO?

NOTE: Taken From the Book "TRADING FOR DUMMIES"....

Here is Our Cheklist to know if we are doing our job!!

• Do YOU have a Plan?
• Do YOU have clear strategies?  (List them!)
• Do the strategies give you a consistent EDGE?
• Do you have a system to SPOT "SCAN" for trading opportunities?
• Are you patiently waiting for your entries? Strategies?

Finally but also very important:  Are you taking the trades that your system dictates?  or are you just watching and thinking "Should have, Could have, would have"???

BE IN HARMONY = MOVE WITH THE MARKET

For those who saw my previous entry on My Stock Market Ideology, the first point should also raise a huge question… How do we move with the market? How do we “anticipate” or “know” what the market is going to do on a particular day?

The Answer is simple: YOU DO NOT! You do not anticipate and you do not need to “know” what the market will do. 

What you need is to HAVE A CLEAR PLAN of what to do when the market moves in a certain way.

First: Identify clear levels of support and resistance using Daily or Hourly charts. These levels should be obvious. If you are thinking too much then probably other traders won’t see them hence the self-fulfilling prophecy won’t be as powerful when/if it kicks in. 

Second: Observe – Watch the market “movement” near your levels. LET the market tell you what it is really going to do.  And keep this simple… if the market is not talking clearly to you IGNORE it… meaning... Sit on your hands and don’t trade!

Third: ACT decisively. You have a plan don’t you? Then execute. Take the trade and get the rewards of a well planned move.

And remember Price + Volume action will tell you all you need to know! Learn to read the tape, learn to interpret price-volume action.

TRADING TO WIN PROGRAM

"SAMPLE": Many traders show to the office without a PLAN of action for their Trading Business.... YES, trading is a business and unless you have a CLEAR GOAL and a clear way to get to the goal your chances of making it are greatly reduced.

Here is a sample of my Trading To Win Plan I followed for the month of June.

OBJECTIVES -  This month the main goal is to be net positive every week. I will increase my risk amount per trade to $xxx.xx and will implement a very strict POSITION SIZING program that will help me push myself into trading at a higher level and for higher profits. My second goal is to work on maximizing the amount of money I make per trade. This all will be measured in R terms.

TOOLS

1. MENTAL PREPARATION

·         Mental Rehearsing – Practice on a daily basis and before the market opens. Visualize the setups, the entries and the management I want to achieve.

·         Affirmations – I am patient – I am disciplined – I wait for triggers – I PLAN – I ACT

·         Process over outcome – commit to your strategies, profits are the outcome.

·         Peak Concentration separates the great traders from the average.

·         Absolute Emotional Control - Think like a sniper – position to observe.

2. GOOD TRADING PRACTICES

Ÿ  First Trade after 9:40 AM – Exception are "A" type gaps that I can enter on 5’ highs/lows.

Ÿ  Proper Position Size (R=XXX) Gaps can enter on ½R. 2 and 5 min entries ½R only. ADD.

Ÿ  3 STRIKES or 2Rs maximum loss per stock.  5Rs max. loss per day. 10R max loss week.

3. MANAGEMENT - POSITION SIZING GUIDELINES I WILL FOLLOW

For 5 minute or 2 minute PATTERNS enter with a ½R risk. When trade starts going your way and confirms the pattern in a 15 or 60 chart Scale IN to a full R risk. Add.

Ÿ  I ALWAYS WAIT FOR MY TRIGGER even on a 2 minute entry. * Scale in, add to full R. 

                * Opening Plays 1/3 to 1 / 2 R in risk

                * Climatic Plays 1/3. (Add to 1 / 2 R when trade starts working).

                * ½ R on 5 minute setups and 2 minute Triggers. (Scale in to full R)

                * Full R on 15 and 60 minute Set Ups.

                *Add in 50% increments.

4. GOAL ORIENTED TRADING Goal 15Rs. week / Ave. 3Rs per day NET.

I WILL ONLY TRADE MY BEST PATTERNS – NO SCALPING TRADES – GOOD SETUPS – DAILY

TIER ONE "A" GAPS – on 5 minute entries

TIER 2 "B" GAPS with intraday entries. 

V7 STRATEGY patterns

10 AM high plays – Midday Breakouts – Late Day Breakouts

Climatic and W patterns FULL Point.

“what you cannot do is throw away your capital in suboptimal trades” Richard Dennis

• NO PNL TRADING – Be aware of loses but don’t focus on profits while in the trade.

5. GREAT IDEAS TO FOCUS ON!
 

Ÿ  Leave some position to reach the ultimate target - see your ideas through their conclusion.

Ÿ  Prepare for adverse excursions to remove the anxiety.  “nothing ventured nothing gained”

Ÿ  Manage your trade not your THOUGHTS and FEELINGS about the trade -(don’t exit prematurely)

Ÿ  Don’t Treat reversals as a situation calling for blame. You have a plan - execute it.

Ÿ  Set stop profit levels (trailing stops) to maximize returns NOT to achieve a sense of certainty.

Ÿ  Once you set your stop level visualize how I would feel if that stop is hit. How would I respond to that worst case scenario. Also figure out WHAT my NEXT course of action will be. (build resilience)

Ÿ  SNAG YOUR TRADES – Document all the actions you take – Review – Learn

 TMO - Mario O - Professional Equities Trader