Findings trades is a process of elimination, like going through the garage and throwing away old junk.
The problem with trading, as with spring cleaning, is how to choose what stays and what goes. In the markets, your trading style determines the tools you use to make those all important keep or toss decisions.
A longer-term trader that values the financial fitness of a company looks for good earnings over several quarters and other data points on corporate SEC filings. They look at the product and the market. This is value investing, where a position can last for years, or even a lifetime.
Notable value investors include Warren Buffet (who often will buy control of companies he likes) and Jim Cramer (who pounds a big button and shouts "Buybuybuy!") A slight stylistic difference between the Sage of Omaha and the Really Noisy Dude of New York, but they're both value investors.
A short-term trader like me -- the word "speculator" comes to mind -- must look to the technical indicators, since there is no shortage of tradeable stocks.
My positions generally last no more than 30 days, and I tend to avoid earnings announcements. So the financial reports are simply too long-term to influence prices much in my time horizon.
I'm looking for momentum. I want a price that trending strongly in one direction or another, and I'll try to capture last least a portion of that rise or fall.
My trading methods have a lot in common with day traders. The main difference is that I use a longer-term chart -- a daily chart covering three months.
Since I trade quickly, I must choose quickly.
My practice is to look first at a binary indicator -- one that's either in bull phase or bear phase, with no ambiguity whatsoever. The parabolic sar is one such. So is Person's Proprietary Signal. The macd can be treated that way.
I use the parabolic sar.
The reason for using a binary signal is that's easy to read at a glance. I can look at a chart for two seconds and know if that stock meets my initial criteria.
If it does pass the test, then the next step for me is to see if there's a trend. I could look at a chart to determine this, but I find it easier to have a more objective number. I use the average directional index. If it's above 30, then I know I'm looking at a stock with a strong enough trend to meet my needs.
I insist on a stronger trend in hope of finding persistance in the directional move, over several weeks. A weakly or non- trending stock will tend to reverse signals in just a few days. The stronger the trend, the less likely it is that the binary signal will produce a whipsaw by reversing quickly.
Finally, I determine if the trend is in the same direction as the binary signal: An uptrend for a bull signal, and a downtrend for a bear signal.
The concept of trend is pretty slippery. My three-day downtrend might be a blip in your two-year uptrend. Markets jitterbug up and down every day, and every minute.
I determine trend subjectively, by looking at my three-month chart and, working backward from the present, seeing which way in general prices have been moving. For a strongly trending stock, I find very little ambiguity in this method.
So what do I miss by using this method?
I will never get in immediately on a major trend switch, because the signal will be counter-trend, so I give up some potential profits.
I will miss breakouts from sideways movements, because the average directional index will still be low when the breakout occurs.
But I'm not aiming for perfect, or 100%. I don't think it's possible.
My goal is to trade like San Francisco streetcar passenger: Grab on to the side and ride for a block or two, and then swing off and catch another car.
Today so far
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