Finding Trades With Reduced Risk, and Big Profit Potential

January 6, 2012

Uncategorized

By Geoff Bysshe

The beginning of a new year is a great time to look for the beginning of a new trend in stocks. As traders come back from holiday vacation and tax issues of the prior year are no longer a factor, a stock or market can take on a whole new look.

One of the ways I look for stocks that have potential to start the new year off with a nice tradable trend is to treat the first day of the year as an “event day”. Trading an event day has a lot of angles and nuances but the basic premise is simple and powerful – follow the direction the market takes after the event day. If you took our recent Calendar Ranges you know what I mean by nuances that create great trades, but even if you didn’t you can take advantage of this trade setup.

You don’t need special software to do this, but HotScans enables you to scan for trading opportunities, monitor developing patterns, and visually alert you when it’s time to act.

Here’s one way how the New Year set up works, and this year was particularly interesting because it was actually an event – the major equity indexes all gapped out of either a daily wedge pattern or a monthly consolidation pattern (DIA).  Even if it wasn’t the first day of the year, a big day in the market is often a great day to find great trades. Here’s one way…

  1. Define your “event” day. In this case I’ll call it the first trading day of the year. It could also be a huge volume day or a big gap day, etc.
  2. The day after the event scan for stock that move beyond the event day’s range. In this case I’m going to require that the stocks actually close above the event day high or below the event day low. If you don’t have a scanner you can simply review a list of stocks you like to follow.If you do have HotScans, you’ll want to create up to three new portfolios. Each portfolio will be your list of stocks to scan and filter over the coming days. The portfolios are:
    - stock that closed over the event day high – these are you bullish bias candidates
    - stocks that closed under the event day low – these are your bearish bias candidates
    - stocks that closed with an inside day pattern – I’m not going to cover this pattern in this post as this deserves more attention than I can give it right now, but many of our course cover various ways to trading this pattern so I’m sure many of you just need to be alerted that this a great time to look for inside days and HotScans will find them for you!
  3. Day trade or swing trade the stocks in the direction of their bias based on this setup.

Now that may seem a little simplistic, but the idea here is to find a simple way to identify a few stocks that are doing something significant enough to give you an edge in trading it. This process take about 10 minutes and the result is 3 portfolios of stocks (assuming I want three – you may only want longs or shorts) that I can quickly scan the daily charts of and find the best looking daily charts that are also set up based on the “event day”.

Just to give you some stats on how powerful this can be let’s look at what happened yesterday (Jan 5th). Remember this is the first day of having our portfolios. I created the bullish portfolio by simply taking the top 100 stocks based on relative daily volume on Jan 4th that closed over the event day high (of Jan. 3rd). I did had pick any stocks in this list and…

Yesterday, Jan. 5th, 3 of the major market indexes (DIA, SPY, QQQ, IWM) traded substantially below their prior day (1/4) lows. In fact, over 50% of the DIA stocks broke the Jan. 4th lows, but only 12% of my completely rules based portfolio took out their prior day lows.

How does this help your trading?

Do you like to buy stocks on weakness? I do.  And since one of my key reference points for setting my stops is the prior day low, I’d much rather be looking at a list of stocks were only 12% break that key level than over 50%!

Do you like to buy momentum? The screen shot below shows you the top 25 performers from the portfolio. Note the SPY was up .3% and the QQQ up .8% and everyone of the top 25 beat the QQQ’s. In fact, the average percent gain of the top 10 was 3.3% and thereby beat the average of the SPY and QQQ ( .55%) by over 6 times.

The idea is that trading is easier if you are looking at the right stocks. This is just one way. I hope this helps your trading either by giving you a new perspective, or even better, a strategy for stock selection you can use right now!

 The top 25 stocks in the "bullish" portfolio. (Click image to enlarge):