Day and shorter-term swing traders often ask themselves these questions: How can I find bigger winners? How can I increase my winning percentage on my trades? How can I stay consistent during a trendless, choppy market?
We don’t have the easy answers to those questions…sorry! However, after 14 years of trading, we do our best and most consistent trading when we stick to what we call 5-Star Setups.
5-Star Setups are pretty simply defined, in that they have positive catalysts in each of five different categories. Here are those categories:
Before we even look at intraday charts, we filter a bunch of names every night that have actionable daily charts. Everyone out there likes to trade their own pattern. Our favorite is range/consolidation breakouts (popular among short-term momentum traders), but we will trade others, including oversold/overbought names, names trading around key moving averages as well as a few others. The daily chart setup is key to finding the big winners* out there, as the profit potential is greater if it can fulfill its daily chart pattern instead of just an intraday pattern.
*The biggest and best trades come from trades that start out as day trades, and act so well, that you are able to take enough off that day to make a tidy profit but keep a portion on for a swing trade, while moving your stop to break even. As they fulfill their daily chart pattern, you keep raising your stop on this “free” portion of the trade.
It is very important to know if the stock you are looking at has had some relevant news that came out, or at least some sector news that can/will be a driver for the stock. Finding stocks that have positive news/sector catalysts can help push up the volume which can serve as the engine for the move you are looking for.
Volume is the most important indicator for a short(er) term trader. Most short-term traders are trading based on a certain chart pattern or momentum indicator. Quite simply, those patterns and indicators just have a hard time playing out when the volume dries up, or wasn’t there to begin with. When looking at a name, make sure that the volume is at least above (ideally greater than) its relative average before making a trade.
It is important to look at your intraday chart as well before jumping into a trade. Volume looks good? Daily chart pattern got triggered? That is great, but if the stock has just run $1 and put a long up candle ahead of your entry, you are not doing yourself any favors (granted, this depends on your profit goals and stop loss price). It can have a very negative effect on your ability to hold the trade if after buying it when you watch it immediately go against you, especially if you feel like you may have top ticked the short term move. Ideally, it helps if you can enter your trade on some sort of pullback, or consolidation before jumping in.
Broad market sentiment
Seems like common sense, but if the market is tanking, it may not be a good idea to play for your “breakout” trade long. Thanks to high-frequency trading (HFT) and program trading, stocks are as correlated as ever, and if the broad market is going against you, it can (though not always) hurt your chances of catching a winner. Try and match up the market sentiment time frame with the time frame you expect for your trade.
For example, if you are looking for a multi-day/week move, it may not matter as much what the market is doing that morning, but it might matter how the market has been acting for the days/weeks leading up to the trade. Conversely, if you are looking for a morning only day trade, then you might want to make sure the market is green and/or moving higher for your longs and red/moving lower for your shorts.
There you have it. Those are the five catalysts to monitor in each trade you make. Certainly more common sense than rocket science. To make things easier for yourself, filter down some stocks before and after the market that have chart patterns that fit your trading style, as well as certain relative volume characteristics. Also, make yourself aware of what stocks are in the news that day/week.
We’d be lying if we said we only executed trades that saw those five stars align. We wouldn’t be lying if we said that our biggest winners and best winning percentage came on those that did.