Slow Trader

Tag: stocks

  • The reactive trader

    Not really the trading period I was looking for to progress my twelve-month trading challenge. A couple of weeks after my last post, I didn’t record any trades. I turned up every day, but just watched and waited. Such a cold market. No opportunities for me. Probably opportunities for the larger fund, but even those, I suspect, would have been weak and fleeting.

    Some improvement, however, as we entered March. When I say ‘improvement,’ a few stocks in early March showed strong momentum. VCIG, a consultancy firm, was one. There were also a couple of Biotech and Pharma stocks, which remain my preferred low float opportunities. Other than that, Artificial Intelligence stocks moved occasionally. More recently, energy and defence stocks have moved, albeit irregularly.

    Previously, many stocks would have bounced significantly, but at the moment, I’m happy with a few cents of positive movement. This change in my expectations stems from the extended periods of waiting—weeks in February and days in March before a trade opportunity appears.

    These waiting times can leave me open to mistakes. To mitigate this, recording past trades on the tape (level 2, time and sales) for simulation would be highly beneficial. For example, when a trade popped up recently after days without activity, I entered it manually (rather than using hotkeys or hotbuttons). Still, I didn’t update the inside ask price before hitting the buy button.

    The difference was 30 cents higher than the anticipated price. The stock had a particularly low float and a significantly high relative volume. My limit order was executed immediately. Yes, I did manage to get a 70-cent profit. But with better execution, that profit would have been a whole dollar. Multiplied by the shares traded, it’s easy to calculate the difference.

    I primarily trade with hot keys tied to the ask price. I choose the ask over the bid, unlike most traders, due to my reactive style. I avoid predictive setups whenever I can. Though I sometimes slip, I’m improving at staying reactive.

    Let me explain what I understand as a reactive trade. As Lance Breitstein says, “trade on the right side of the V.” For me, that means whichever timeframe we’re using on a chart, the green bars (long) are winning. This is as opposed to red bars (shorts) winning.

    It is always easy to look at a chart in hindsight and, with total confidence, say, “This is the entry.” This perspective often shapes how most YouTube courses and the like sell their methods—it looks so obvious in hindsight. But, in real time, it is not as clear-cut. That’s why it is so important for each of us to find what works for us.

    Whether we are good with rapid change, whether we can read signals—be it price action, indicators, or both—and which combination suits us best and how proficient we are at reading the tape. Personally, to ensure I’m being reactive rather than falling into the predictive trap, I primarily use the tape. I check the fundamentals that matter to me, and once I have a suitable reaction on the tape, I check the chart for a worthwhile trade setup. This step-by-step approach helps me stay reactive.

    Sometimes a trade entry can follow this simple sequence, especially when the stock is moving so quickly: I glance at the necessary fundamentals, see the tape take off, check the chart for structure, refer back to the tape, and, a moment later, I’ve taken the trade. At this stage, most of my attention is now glued to the tape.

    More often than not, the process is slower. In these cases, I mark resistance levels on the chart and examine all necessary timeframes for clues. Then, I wait for the tape. The danger is during this wait, when we try—consciously or subconsciously—to predict price and chart structure.

    The arrow on the chart above shows an entry. Notice how, for me, the level 2 and time and sales dominate the area rather than the chart itself.

  • Why is trading difficult?

    We make trading difficult for ourselves, often by trying too hard. Trading is an odd skill to learn. It’s not like anything we’ve come across before. It really isn’t “The Wolf of Wall Street” stuff. Proper trading—the skills that mark a competent trader and that can generate lots of money come with extended periods of boredom.

    In cold markets, such as most recently, we can sit for nearly a week without a setup to take. But then, one comes along—it’s not perfect, but maybe good enough—and we have to go with it—trade it, let it move, take profit, and enter again and again if the stock has room to run.

    When suitable trades are not available, and we have the presence of mind to sit on the sidelines, watching and waiting for the best part of a week, it is, I think, quite a mature accomplishment. Something I have not managed previously until this week.

    A justified wait, too. When I reviewed each trading period, I was correct to hold; there had been no trades for me. Yes, some weak opportunities showed themselves, and others might have been available for the bigger account. But for me, looking for low float moves with some catalyst, there was nothing of note. Not just stubbornly waiting for “A” grade trades, but “B” grade or, at a pinch, a “C+”.

    The trade that became available at the end of the week was a “B”. At best, a “B” to my eyes, as the stock price already stood at nearly $9. Blue sky above, no resistance of note once price steadied above $9, all the way to $12.50. I gained a few cents on the trade up to the $9 level. Another setup appeared above $9, and a full-dollar trade was taken as the price eventually reached the $12.50 resistance and pulled back quickly.

    Why was it a “B” trade? At nearly $9, the price was a little high for my small account. Between $2 and $5 is ideal. The float was particularly small. A share float of less than 10 million but more than 1 million is about right—this stock had a float of only 500,000 with a wide bid/offer spread. Yes, volume was high, but liquidity was, as expected, reasonably weak. That made the exit a struggle, even as the price shot up.

    So why do we make trading more difficult than it needs to be? Simply because, when the market goes quiet for an extended period, we try to trade something anyway. Inactivity, boredom, and a general feeling that we ought to do something to justify our time. But, of course, when things do move—and it can happen in moments in the low float world—we have to pounce and not hesitate. A difficult balance to learn.

    We make things too difficult because most of us get those two scenarios the wrong way round. We trade when we should be patient, and on the sidelines, and when something does take off, we freeze or over-analyse.

  • Update on My Trading Setup and Strategy

    As we begin the new year, I wanted to provide you with an update on my trading strategy and the adjustments I’ve made to my trading screen, which I believe will enhance our efforts moving forward.

    Recently, I’ve dedicated time to organising my trading screen to improve my workflow. This organisation enables me to better monitor potential stock opportunities and respond to high-priority trades as they arise. Although I’ve been experimenting with various timeframes, setups, and indicators, the objective is to refine my approach to prioritise ‘A’ list trades.

    The adjustments primarily revolve around the Level 2 and tape information, which remain consistent with my previous setup. I have repositioned my information and context charts to the right of the tape, which seems promising. These charts help identify trends across specific timeframes using a single Exponential Moving Average and a Wilder line, enabling a clearer view of market dynamics.

    On the left side of Level 2, my primary entry chart is now a 1-minute or 2-minute timeframe. Data from my Tradervue results indicate that these timeframes yield higher success rates than shorter periods, such as the 10- or 15-second charts, which is encouraging and aligns with my overall strategy.

    Additionally, I’ve incorporated the Relative Strength Indicator (RSI) with key thresholds at 80 (overbought) and 20 (oversold) to better gauge market conditions. I have found valuable insights from Garrett Drimon of SMB Capital that have reinforced my decision to include this indicator.

    To maintain clarity, I keep my charts simple. The entry chart displays only the Average True Range (ATR) and the Volume Weighted Average Price (VWAP) line, avoiding clutter and making decision-making easier.

    In sum, as a short-term momentum trader, these enhancements to my trading setup will provide greater clarity on entry points and reinforce our trading strategy. The depth of trends shown to the right of Level 2, coupled with indicators to the left, will aid in identifying optimal setups. VWAP with session anchoring I’ve always included; however, the ATR dynamic stop-loss management is a new approach.

  • How to invest

    I have written about investments before. But it is worth going over again.

    The problem is the medium term investment area. Where most of us have our investments. Mutual funds, pensions and the like. This is the near term to 25 year investment timeframe.

    The investment area that works, if done correctly, is following Warren Buffet’s example of investing in undervalued stocks and holding for more than 30 years, indeed he doesn’t sell.

    The other area that works, but is difficult to master, is the very short-term stuff. I cover this every week in this blog.

    Okay, we have only two time-frames that we can invest with confidence: the very long and the very short.

    Why does the middle investment area not work? because of market volatility and the probability of a market crash within that time frame.

    A market crash for the Warren Buffet model, the very long-term investors, is just a blip in the big scheme of things. Not a problem. In the Buffet model we go through many crashes and use them as opportunities to add more stocks.

    A market crash for the day traders and daily chart readers (like myself) is not normally an issue because the signals of a crash will show on the day and get out stops are very tight for these type of investors. Actually, for these guys, if they’re good, a crash is a big payday. They’re taking it all from the mutual funds.

    For the Warren Buffet followers among us we need excellent fundamental information which we review annually. This information we’ll cover in another blog.

    On the other extreme, the short-term investors, day trading and daily chart reading, is not for everyone.

    So that leaves us back with what to do about the middle timeframe investing problem.

    If we have to be a middle term investor then avoid the traditional, heavily biased towards stocks, mutual funds.

    Watch carefully where the mutual fund invests. Few funds balance investments between cash, stocks, bonds and commodities. Funds that do this, and not being more than 25% invested in stocks, are extremely steady funds and good medium term investments.

    If we do have to go the mutual route then costs are a big factor. For every 1% that we pay a mutual fund will result in 20% to the fund managers over the medium time frame. Look for a cost of around 0.5%, no more. Same goes for pension funds.

    The majority of mutual funds, however, invest more heavily in stocks and most don’t beat the index. These mutual funds are in the danger zone. When a stock crash happens the fund profit and much of the capital is wiped out. Allow several years to get back to neutral. Not a lot of fun.

    So, if we have to invest in the middle term investments then look for: a fund (mutual and pension) that has low fund costs; and an investment portfolio that balances bonds, cash, commodities and stocks – and is particularly light on stocks.