How And What We Trade

Because we are trading full time, and don’t have the luxury of millions of dollars to lose, we have been somewhat conservative in our trading strategy. We had done a little day trading in 2005, and held some positions for months at the time. Going into this venture, we were unsure of what type of trading would suit us best and be the most profitable, so we took it easy and tried not to lose large sums of money. Knowing that our beginner’s ignorance would lead to losses, we kept our size small, our stops close, and our risk to a minimum.

In the first few months we were at a loss as to how to approach the markets. The financial markets are so vast offering limitless opportunities across instruments, time frames and strategies. Equity trading was our main focus in the beginning, but since then we have tried our hand at index futures, bond futures, currency futures, spot currencies, and stock options, with varied success. The only instruments that we have traded enough to develop a system for are index futures and equities. Our options, forex, and bond futures trading have mostly come out of curiosity and a desire to learn new markets.

Stock Trading

Over the last twelve months we have worked on several different strategies for trading stocks. We have pulled ideas from many different sources including websites, books, blogs and other traders. We currently trade two different time frames, day trading (opening and closing out a position within one day’s trading hours) and swing trading (holding an open position from a few days to a few weeks). Although both of these time frames are based on similar entry criteria, they require totally different forms of discipline.

Daytrading

1. The first order of business every trading day is to run our system. We have built a list of the highest priced stocks that also have sufficient volume, volatility and momentum. The system simply looks at the 5min charts of the stocks in our watch list and triggers an alert every time one of these crosses above or below the 20 period Simple Moving Average (20-SMA). The system updates the trigger list in real time so that we have the most up to date information.

2. Since we are looking for 5min candlesticks to cross above or below the 20-SMA, we normally do not take any trades in the first thirty minutes of the day. After receiving a list of stocks that meet our criteria, we review the charts to see which stocks are setting up nicely and offer the most potential return.

3. From here, the mechanics of trading and discretion play a huge role in our system. There are several different setups that we take trades on both long and short.

4. 1. The Holy Grail is a setup that was pioneered by Linda Raschke and outlined in an interview she did with Active Trader magazine. The basic idea behind the Holy Grail is to look for stocks that are trending up that pull back to touch the 20-SMA. After a test of the 20-SMA, we look at various things to determine whether a trade is warranted. We like to see declining volume on the move down, we look for strength in that stock’s sector, we also look for a tight trading range at the 20-SMA, and we look for confirmation in the MFI with overbought/oversold or divergences. Below is an example of a Holy Grail setup.
      
      

2. The Inverse Holy Grail is very much self explanatory, but there are a few differences when taking a short signal. When the scan reveals a down trending stock that has pushed upwards through the 20-SMA we will be looking to short the stock. Shorting is trickier because you have to find a liquid stock to be able to borrow shares to sell. The main difference between this system and the long system is how the stock reacts when it touches the 20-SMA.

3. The Reversal 20-Touch is a hybrid trading system that I came up with while trading the other two systems. I look for stocks that are in a downtrend that are crossing above their 20-SMA. I then wait for the moving average to turn positive and catch up with price. This test of the 20-SMA from above is a good signal that the trend is reversing and a long position is preferred.