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Thursday, 28 January 2016

Effective Ways For Finding Winning Trades


Basic Trading Concepts Defined


Finding good trades requires a daily routine that filters the vast universe of stocks, currencies and other market venues, seeking securities with favorable risk/reward profiles and easily observed entry points. A well-constructed scanning program helps this process, targeting specific volume, volatility, trend and momentum characteristics that offer a starting point in the hunt for winners.

The next step removes instruments that aren’t well-suited to short term strategies. These change over time but roughly include American Depository Receipts (ADRs), thinly traded issues, closed-end funds, and most real estate investment funds (REITs). Add an additional filter when focused on short sale opportunities, removing the majority of dividend plays because you’re on the hook for those payouts when holding a short position through the ex-dividend date.

Culling Down Scan Lists

Trading requires quick entries and exits at specific price levels, increasing the desirability of highly liquid issues that trade in excess of 1 million shares on a daily basis.. However, many issues carry relatively narrow bid-ask spreads all the way down to 250,000 to 300,000 daily shares, expanding the database where you’ll find the majority of opportunities. Take exposure in a more thinly traded issue and you’ll introduce high transaction costs that will undermine profitability.

The culling process reduces the pool of acceptable securities to under 3000 issues, with 95% lacking the range and pattern structure to support a profitable entry in a given session. Your task is to find the remaining 5% and look for the most favorable opportunities within this elite group. This works best through quick visual examination, flipping through charts while allocating no more than a second or two to each observation, which is enough time for the skilled eye to see well-organized setup.

Third Party Calls

​There are just two ways to find good trades: locate them yourself or have someone else do it for you. The scanning process works well for independent traders wary of chat rooms, trading services and other third party venues because it only takes a little effort to find promising setups, as well as other securities that deserve a place on your trading screen and watch list. But don’t rule out potential winners uncovered by other sources.

Just be prepared to do your own analysis, to see if the call makes sense and whether or into it fits into your risk tolerance and trading plan. Twitter and financial news sites offer the easiest ways to find these securities while many traders also choose to pay for nightly or real-time subscription services. Just don’t assume that paying for your market calls will get you better opportunities than following a few smart folks making free calls on social media.

Final Reality Check

The hunt for fresh opportunities relaxes the mind and puts the brain into game theory mode while hindsight notes how past setups would have yielded fabulous gains. Now add the mind’s capacity to form fit a mix of price bars into perfectly organized patterns that promise flawless outcomes and understand how easy it is to get excited about a prospect that will fail objective technical testing. In other words, avoid the tendency to see something that isn’t there.

As a general rule, if you have to look too hard, there’s nothing to see. Supplement this mental discipline with a final set of filters and rules that ensure the opportunity matches the exposure you’re looking to take. Be ruthless with this last barrier to entry, tossing out the vast majority and keeping just a handful of the most potent patterns and setups.

Bottom Line

Use scanning filters and third party services to find potential winners, while performing secondary analysis to ensure they fit the way you trade.

Reference: Alan Farley

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