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Hi all, in this video I plan to disclose some of the theory and application behind the trading strategy I have used for many years, the detail of which can be found in our popular E-Book.
We look at the considerations I make when entering trades, some may call them swing trades or breakout trades, nonetheless we touch on timing, stop loss management, key indicators, and other aspects legendary traders often consider. If this type of video is something you would like to see more of then please let me know in the comments below or hit the like button.
Let’s start with price action itself. Medium to long term price movement often occurs in stages, resembling a series of ascending steps with pauses along the way. A trader aims to enter at the beginning of one of these upward steps, strategically positioning themselves to capture the next price surge or larger upward trend. Identifying key stop-loss levels within such price action is also crucial. Ideally, the stop-loss should align with the chart structure initially identified, serving as confirmation if that structure fails. This approach helps limit downside risk if the anticipated price movement does not occur.
To enter any trade, it's essential to first identify stocks that are exhibiting the desired price action—specifically, those that are trending. Every trader has their own method for shortlisting these trending stocks. For Mark Minervini, it's the trend template; for William O'Neil, it was the CANSLIM strategy. As for me, I rely on a combination of technical and fundamental parameters that a stock must meet to qualify as a trending stock
I believe this is a crucial aspect of swing trading, and getting it right is essential. That's why I've developed a bespoke scanner, which I use and make available to members of my group. This tool gives them a significant head start in their trading journey by helping them identify the right stocks with the desired price action more efficiently
Let's dive into the specifics of what I look for when scanning stocks and entering trades.
The first and non-negotiable step in my process is selecting the right time interval for chart analysis, and I prefer weekly charts for both screening and analysis. Weekly charts have several key advantages: they smooth out the daily volatility that can obscure a stock's true trend, and they give you ample time to process information and make well-informed decisions. Unlike shorter timeframes that can prompt hasty actions and lead to avoidable trading mistakes, weekly charts are better aligned with stock fundamentals, which take time to digest and evolve. Since my trade entries are based on the weekly chart, it’s only natural to use the same weekly chart for determining exits, ensuring consistency and alignment with the broader trend
I also rely on a few key indicators, such as moving averages and the mack dee, all set on weekly timeframe charts, to help time my trades. These indicators are primarily used to confirm the existence of a trend or the potential reversal of one. While indicators are valuable tools, they are not the holy grail of trading. It's crucial to understand when they provide clear, actionable signals and when they might give murky or misleading information.
It's also important to avoid overloading your analysis with too many indicators. Using too many can lead to confusion and make decision-making unnecessarily complex. The goal is to keep your approach streamlined and focused, allowing you to make confident and timely trading decisions.
Another aspect to focus on is the settings you choose for screening stocks and executing trades. Most indicators come with default settings, but these can be customized based on your specific needs and trading style. For instance, I use a 20-week moving average and the default settings on the MACD. These two choices are the result of extensive trial and error, in alignment to my style.
I’m not claiming that the indicators are universally the best, but they are what work best for me given my approach and timeframe. It’s important to recognize that there are other settings that may work well in different situations or on different charts. However, you must accept that you can’t capture every opportunity in the market.
If you want to succeed in the long run, you need to find your own strategy and perfect it, rather than chasing after someone else’s success. Pick your "ring" and focus on practicing your "winning kicks"—the setups and strategies that work for you—without getting distracted by the successes of others. Only then can you apply your strategy consistently for the longer term.
That said, I always keep my eyes and ears open for opportunities to refine and improve my approach. The market is constantly evolving, and it's crucial to adapt accordingly. Recently (after much research) we incorporated the 10 and 20 Exponential moving average indicators to identify the broader market direction. The video on our research is highly recommended.
In terms of our scanner, here's a snapshot that demonstrates how stocks are ranked across all the relevant parameters while filtering them. With everything laid out in a structured manner, this tool significantly simplifies the process of scanning and selecting stocks. It consolidates all the critical data points in one place, allowing me to quickly identify the best candidates for trading, making the entire process more efficient and less time-consuming.
Very often, technically strong stocks also exhibit solid fundamental factors, such as earnings growth or favorable industry trends. When it comes to evaluating fundamentals, I apply a set of basic filters designed to weed out companies with unimpressive growth or poor quality. I’m careful not to make these filters too strict, as I don’t want to exclude companies that are still decent, but I also avoid stocks with little or no fundamental support.
An important consideration I make is revenue growth, the companies that pass through my filters are often those that have shown respectable revenue growth over the past 4 to 8 which also shows continuation within recent earnings reports. This ensures that I’m only considering stocks with a strong and consistent track record of performance, which is crucial for finding reliable trading opportunities.
Let’s dive deeper into my trading technique. As a breakout trader, I focus on identifying periods of consolidation in trending stocks, followed by breakouts accompanied by increased volume.
For example, NVIDIA appeared in my stock scanner in early 2024. The stock had been in consolidation for several weeks after rallying nearly 5x from the lows marked in late 2022. Following this consolidation, it broke out on high volume after spending seven weeks in a tight range. The breakout price was approximately $51, with a low-risk stop placed around $45, which was the low of the tight range.
After the breakout, the stock surged, reaching a high of $140 within six months. This represents almost a 15x return on the risk of $6 for the trade. While the trade would not have been closed at the peak, it would have been exited around $110 when a confirmed loss of momentum appeared. This still offers a respectable 10x reward-to-risk ratio.
The missed profit from the peak is often a necessary sacrifice for traders who aim to let the trade run as long as possible, capturing as much profit as the trend allows before it loses steam. This approach helps avoid exiting too early and ensures that you maximize the potential of a strong trade.
Here is a trade from the scanner that we closed on recently taken on the same principles. In this chart of Geo Group Inc., the stock broke out of consolidation here at $7.7 with good volumes. The stop was placed here at the low of consolidation at $6.94 - a bearable 11% stop loss. The stock rallied $10 from the breakout point, more than doubling in eight months. The reward to risk in this case was a solid 12.5x at the highest price and a respectable 6.5x when the system alerted an exit. Another sacrifice of profit from the peak, but this is easy to argue in hindsight, it’s just as possible a trader not willing to allow for any loss of profit may have exited much earlier.
Managing a trade once you have committed capital is a highly important aspect and is something I will delve deeper into on my next video.
This video provides a brief overview of my entry requirements, which I have carefully developed and refined over decades of trading experience. In my membership, I delve into these strategies in much greater detail, offering a comprehensive guide that can fast-track your trading career. By joining, you will not only have access to the scanner, but you will be joined by some fantastic members all helping the community thrive. Thanks for watching.
For those interested, we have a highly engaged group that uses our bespoke breakout scanner to find some of the best trades, offering low-risk high reward potential. Feel free to use the links below, and as always thanks for watching.
Access Our Group Here - https://www.financialwisdomtv.com/service
My Brokerage Account (Interactive Brokers) - https://bit.ly/3UGvn1U
My Breakout Scanner - https://bit.ly/3ea6sl8
My Forum - https://www.financialwisdomTV.com/forum
My Strategy Blueprint - https://www.financialwisdomtv.com/plans-pricing
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