IDEA
1. Daily chart pattern/set-up: my best two (2) daily set-ups over the past 3 months have been the "over extended gap down (20%+) into daily support" and the "multi-day/multi-week breakout long"
2. Fundamentals: this includes the float, short float%, average volume, ATR and relative volume of the stock. For my style of trading, stocks with 50-200 million share float have been my most profitable. However, I will take trades in stocks with floats as low as 20 million but not greater than 1 billion. As far as short float% goes, over 15% is excellent for longs and over 30% is extremely good especially if the move is not accompanied by a fresh catalyst. However, where shorting is concerned, stocks with short float% over 30 are prone to sudden and very sharp squeezes! In terms of average volume, over 15 million or so is my preferred level but I will take trades in stocks with average daily volume as low as 1 million although they do not typically trade as well. In terms of ATR, ideally I like to day trade stocks with ATR of $2.50 and above but I will go as low as $1.00 especially if they have a powerful catalyst. Finally, where RVol is concerned, 200% is my absolute cut off. Note however, that where as 200% will be acceptable for stocks with high average daily volumes (over 10-15 million); I need to see extremely high RVol (1,000%+) for stocks with average daily volumes nearer to 1 million.
3. Catalyst: this is a kind of tricky one as stocks can and often run huge in a day and trade cleanly without any sort of fresh news especially if/when they are in a hot sector/group and/or have low float and/or high short float%. However, all else equal, stocks with fresh news especially earnings and earnings guidance related often run much further and trade cleaner. In fact, the only circumstance under which I will consider taking short trades in this current bullish environment would be on really bad news such as accounting fraud or the like. FDA drug trial failures are a notable exception, however, as they often just lead to huge gap downs but do not have much intra-day range after the open.
EXECUTION
1. Spread and order flow: Spreads under $0.05 accompanied by fast order flow are extremely important for getting good fills (particularly when using stops) and giving you the confidence to trust price action/intra-day patterns. Stocks with wide spreads and/or slow, drippy order flow can be very dangerous to your account especially if you use hard stops (like I do) or even if you don't as price can move against you in a flash on very, very little volume!
2. 5-minute chart set-up: Granted the spread is tight and the order flow is solid; I try to take entries off two (2) triggers only: Opening range breaks (ORB) and Trend Continuation (TC) near the 9-ema. Although trend continuation set-ups can occur at any time during the market open, set-ups prior to 10:00am tend to have the greatest edge. After 10:00am, trend continuation can and do work, but you need to me more discerning and wait for flatter, tighter patterns (triangles, wedges) versus pull back type set-ups. Another factor that I take into consideration (but often neglect to) is the realistic profit potential of the trade versus the risk that will be taken which ideally should be greater than 2:1 before I can initiate a trade.
3. Stops and profit taking: In order to ensure that I do not lose more than 1R ($50 at the moment for me) plus slippage (hence the reason for tight spreads and good order flow); I have hot buttons for 1R max loss stops for both longs and shorts which I hit as soon as I enter a new trade. Loss management and control is what keeps you alive in this game! Managing winners has always and will likely continue to be very tricky for me as well as most traders. That being said, typically, I try to take 50-75% of my position off once I'm up around 2R's and then I try to let the last 1/4-1/2 run as far as possible with a hard stop at break even but also using the 9-ema to trail a mental stop. Often times, I have not been disciplined at this and end up booking significantly smaller winners than I should have. This is one of the areas that I'll need to work on the most when I resume trading in 2021 as this is one of the few areas other than improving my loss and red day management that I can use to increase my day trading edge.
IDEA vs EXECUTION
Now, why do I say that the idea behind the trade is more important than the execution? Well the reason for this is that from my years of experience day trading, you can be sloppy with your execution and still make money as long as your trades are in a very strong idea! This is so because your odds of taking a big loss or even getting stopped out even with a sloppy entry (granted you're trading in the direction of the trend as I do since I am a momentum trader) is lower than when taking trades in poor ideas. Generally speaking, momentum trades do not work as well in poor trade ideas. Even with razor sharp execution on poor ideas, it's extremely difficult to make money. For one, the odds of nasty slippage is much higher. Secondly, win rate will be lower (my personal win rate has hovered between 40-45%). Profit potential on trades that do go on to work is significantly lower than with good ideas (my win loss ratio has been consistently around 2:1). So in fact, you're very likely to lose money even with perfect execution if you're consistently taking trades in bad ideas!
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