Scanning - Managing your lists

So you figure out that you need to scan in order to generate ideas and you get really ambitious creating 5 or 6 scans that find setups that interest you. You run the scans and start building watch lists for those patterns that are interesting. You may make 2 or 3 trades based on your scans but for every trade you make, there's probably 10 or 20 still on the watch lists that you are observing. After a month of doing this your watch lists grow to a size that they basically become unusable. You have too much data now rather than too little! You still don't have a workable solution. You need to find a way to manage the lists. I know, I've been there and constantly am working to keep my lists fresh.

Just as there's no one scan that will give you that magical entry and only that entry, there's no magical way to manage your watch lists; at least not that I have found. The trade off is how much time you spend versus missing how many potential entries you miss because you were not on top of the situation.

Since I spend way to much time on trading already, I have tried to find a system that keeps my managing of lists to a reasonable amount. The way I've tried to do this is by managing my lists based on time frames. I've kind of formed a routine that, although not religiously followed each and every day, I try to go through the same steps daily to keep my lists fresh and ideas generating. Below is an accounting of the steps and a pointer to the lists that I have recently began publishing so that you may see them.

Background

I keep a lot of lists around but there is a method to the madness. Basically I have two sets of lists; lists that make up the basic market sectors where I store charts that are of interest to me and lists that I used to manage new ideas and possible trading setups. This discussion is about the latter group of watch lists.

List Management for New Ideas

The basic structure of how I maintain them is based on time frames. There are a total of six lists that I'm constantly working. They all start with the word Action and then their function. For example, one is called Action-Long and another Action-Short which are my two primary repositories of stocks that I've been following recently and still look to provide a tradeable setup in the near future. The are my longer term lists with respect to time frame.

Moving into the shorter time frame, each day I create a list of potential trades based on scans or other sources of information. That list is called Action-Daily and I maintain it and all the other lists talked about in this article as shared watch lists on Prophet Net. The page that you open by clicking on this link is a list of all shared watch lists on Prophet Net. You can find my personal lists by searching either in the Name column or the Owner column of the table that is presented. The name is the name is the name of the list (ex. Action-Daily). The owner is my moniker on Prophet Net, tradechatter. Since I already maintain my lists on that site, the simplest way currently to share them with you is to simply publish them and show where they are.

Daily Activity

Most every day, I go through the following process:

1. The first action is to review all stocks in the Action-Daily watch list. If they still look promising as an entry in the next day or two, I leave them there. If not, I look to move them to the Action-Weekly watch list if I believe they may offer a move in the coming week. If they appear as if they are still promising but will not move relatively soon, I move them to the Action-Short or Action-Long watch lists. If they no longer look promising I throw them away (remove them from the lists). This leaves me a relatively clean Action-Daily watch list
2. Next, I execute my nightly scans. If the stocks I uncover during scanning look to be immediate plays, then they go into the Action-Daily list. If they look like they may offer an opportunity within the next week, I'll drop them in the Action-Weekly watch list. Again, if interesting but not likely to produce an entry point within the coming week, I'll drop them into the Action-Short or Action-Long lists
3. During the trading day I often glance at the stocks in all my lists looking for action (up or down). I typically have the lists sorted by percentage change in price, so it's easy to spot those that are moving. If I see some unusual activity in a given stock, I'll look to monitor it more closely and may move it to Action-Daily or Action-Weekly watch lists

In case it isn't obvious at this point, the Action-Daily list gets the most attention each trading day. It is where I make new purchases or sells. The Action-Weekly list also receives attention because stocks there could begin to move at any time but nothing was urgent when I last reviewed them.

Weekly Activity

Once or twice a week I try to work through every stock in the Action-Weekly watch list to see how they are progressing. Just as with the daily routine, I either upgrade stocks to the Action-Daily watch list or downgrade them to the Action-Short or Action-Long lists or get rid of them altogether.

Earnings Activity

When earnings season rolls around, I keep an Action-Earnings watch list were I work through all the charts of those companies that have recently reported earnings and if there is an interesting setup I'll add them to this list. I only do this for the first 4 to 5 weeks of each earnings season as 80% of the companies report during that period. I do not look at every chart but a lot of them and I try to be reasonably selective on charts that are of interest. I typically do this each weekend. As with the other watch lists, when I'm ready to work this watch list, I first quickly look at the charts already in the list and cull them from the list quite liberally unless they are still of interest. Again, I move them appropriately to Action-Daily, Action-Weekly or Action-Short or Action-Long.

Recent Trades

The only other short term watch list I maintain the Action-RecentTrades watch list. Many times I will re-enter recent trades once they set back up again either from the long or short side. Since they tend to offer good continuing trades, I don't want to lose track of them and keep them in there own list. I periodically review them when I have time during the trading week and move them to an appropriate list as described above.

Summary

It's not a perfect list management scheme by any means but if you depend on a fresh set of ideas for trade setups, having some sort of list management scheme is necessary. The system I've outlined is what I use. You can find these lists on Prophet Net.

Scanning - it's a process

One of the common misperceptions that people have is that you need the perfect scan; that scan that gives you back 3 winners from the universe of stocks that exist. I don't believe that is reality. The reality is that you must look through 50 charts for every 3 that might make sense at right now. Of those 50, maybe 10 are worth watching, 2 or 3 may be worth an immediate trade and the rest are throwaways. Scanning is a process. I'm sure there are many ways to structure the process but, for your covenience, I've listed my mine below.

With Prophet Net (which I use almost exclusively) you can easily set up scans and watchlists to track potential trading candidates over time. I'm sure there are other services and I only mention them as an example because it's a product I use and have a subscription service to. One of the items I like best about about there service is that you can arrange your scan results to show the time periods you are interested in and you can place a number of charts on the same screen enabling you to flip through them really fast. I can flip through a 100 charts in 5 or 10 minutes and save the ones that need further analysis with a single key stroke. Once I have flipped through all the potentials, I review those that showed promise.

It is at this point that I divide them into two groups; immediate and future. The future ones I don't do much more on them until later. The immediate ones I'll look more at there longer term charts (I look at 6 month charts with only moving averages at first) and any recent news and how the stock reacted to it. During earnings season, I'm especially careful to try and avoid large positions in a stock that will report. I might carry a small position but a lot of times, I'll just stand aside and then re-enter later if it still makes sense.

A common misnomer is that you have to catch all of a move in order to be profitable as a trader. I could not disagree more. I don't care if I miss one dollar of a move at the beginning and then end and even a dollar in the middle if I catch a couple dollars of the overall move. If I'm constantly looking for setups, what does it matter whether I make all I can make in a given stock? What matters is not getting hit with a huge loss in any given stock. You can't always avoid this but if you work with a lot of charts that show promise, the odds are you will do ok. Of course now we are crossing into the land of money management and that's a subject for another piece.

Scanning for Set Ups ... continued

In the last couple posts I have shared some of the setup scans that I run nightly looking for fresh ideas of stocks to trade. One thing that I always keep in mind is what the general market trends are therefore where I wish to concentrate my time as I look for trading ideas. In other words, do I look for bearish setups or bullish setups. Are we transitioning from one to the other?

In the current environment I would argue that we are likely transitioning from bullish to bearish on an intermediate term trend basis. If that is indeed true (and that is my current thesis), then I should look for stocks that are likely doing the same thing. Here's a scan I use for just that purpose. Its target is to uncover stocks that have previously been bullish but now are potentially changing to bearish. The criteria is

• Exchanges: NYSE AMEX NASDAQ(NM)
• Average Volume is at least 50,000 shares
• Last Price crossed below 50-Day MA
• Last Price is below 20-Day MA
• Last Price is below 200-Day MA
• Virtual Volume is at least 50% greater than Average Volume
• Last Price is at least $2

I have another one that is essentially the same but it looks for stocks that are above the 200-Day MA but have just crossed under the 50-Day MA. The stocks in that scan are generally more positive but they have further to fall if in fact they are turning bearish so I always take a look to see.

Scanning for Set Ups ... continued

In the last post we talked about a general scan that I use in an intemediate term bull market. If you consider that the market (and individualy stocks as well) do not go straight up but instead advance, pull back, then advance further; then it makes sense to try and identify stock purchases when stocks are pulling back. The reasoning for this lies in the desire to buy stocks at a point where you can reduce your risk of error; that is if you are wrong and the stock really is done moving higher, then you want to be able to exit without it taking a large part of your capital. Note, that a retrace works the same if the direction is down. In that case, the trend is down, stocks retrace higher, then resume their decline.

So here's a scan I run when an identifiable bullish trend is in place. It attempts to identify stocks that have been strong but are currently coming back in some and may offer an opportunity to purchase them.

Criteria: • Exchanges: NYSE AMEX NASDAQ(NM)
• Average Volume is at least 50,000 shares
• Virtual Volume is at least 50% less than Average Volume (30 day MA)
• Last Price is greater than 2
• Last Price is below 20-Day MA
• Last Price is above 50-Day MA
• Last Price is within 10% of 52-Week High
• Last Price is above 200-Day MA
• Last Price is within 10% of Lifetime High

A somewhat opposite scan looks for bearish retraces although I'm still exploring a better set of criteria for it.

Criteria: • Exchanges: NYSE AMEX NASDAQ(NM)
• Average Volume is at least 50,000 shares
• Last Price is below 50-Day MA
• Virtual Volume is at least 50% greater than Average Volume (30 day MA)
• Last Price is at least 2
• Last Price is below 20-Day MA
• Last Price is below 200-Day MA

Scanning for Set Ups

There are many ways to approach trading. Over the years I have moved more and more towards managing a large number of positions rather than concentrating my money in just a few. I have purposefully done this to reduce risk as the size of a particular position is necessarily lower and the number of stocks I carry in a given sector tends to be more dispersed.

In order to do this though, you need a steady source of ideas. In today's world, the easiest way to generate these stock entry ideas is via stock scanning. There are many tools available to search for trade setups. I've chosen tools and data sets that are easily accessible and executable anywhere I might happen to be both domestically and around the world; thus the tools and data sets I keep need to be available remotely via the Internet. I do not care to have a heavy client but instead a thin client that is simply a browser which is enabled from the remote server. This has some limiting factors but it allows me the independence of not having to have a particular application on a particular hard drive of some computer that I have to have with me in order to work. With my setup (www.prophet.net) I can do my work where ever I may be as long as I can access the internet.

Independent of which tool set you might use, there are applications that allow you to scan for technical setups that may produce possible trades. The key is to find some set of criteria which yields potential trade setups. Since I believe that the market rewards some trades at a given time while punishing others, I have built scans (that I continue to refine) that attempt to identify the technical patterns that you see me trade with on this site like wedges, retraces, breakouts, etc. When the general market seems to be support a retrace pattern, like today and tomorrow, then I will concentrate on looking for bullish retrace patterns.

Here's a simple scan that I use anytime general market appears to be in an intermediate term bullish advance.

Criteria:

• Exchanges: NYSE AMEX NASDAQ(NM)
• Average Volume is at least 50,000 shares
• Last Price is above 50-Day MA
• Virtual Volume is at least 200% greater than Average Volume
• Last Price is at least $2

In this scan, I'm just looking at any stock that traded on above average volume today, is liquid and not a penny stock and is likely bullish (trading above the 50 day moving average).

In the next post, I'll review some other scans that I use as I continually look for trading ideas.

Mining your Data (Final Thoughts)

We left off asking the question about what was the bulk of the trades that made up the sweet spot of trading in our data analysis. The analysis showed that 70% of the trades were spread across four patterns

1. Breakout
2. Trend Line Break
3. Short/Intermediate Trade
4. Retrace

and in that order (in terms of success). The failures were across all trade setups (as well as the four above) but these four were the patterns that were best identified with winning trade setups that occurred in the >15 yet less than 30 day duration.

This got me to thinking of why these trades. My first thought is that most intermediate term moves play out in 5 to 7 weeks on average. The sweet spot trades lasted between 3 to 6 weeks. That tells me that the sweet spot trades most likely happened to catch the bulk of the move on an intermediate term leg up or down. I have not confirmed that, but it is my suspicion.

The second thought is that if a stock doesn't fail during the first 2 weeks or so, it's probably a keeper. Since I have a tendency to trim winning stocks, I usually don't let them play out much longer than this time period. Over the past couple years this has become even more true than previously as I had no losers greater than 30 days on the books.

Lastly, I've become more adverse to holding stock into earnings. Earnings occur every 3 months. That forces me to reduce size usually if not to outright close positions.

Further Work Needed

An area that I've began to collect data but don't have enough to make any general conclusions is the general trend of the makret (short, intermediate, long term) and it's impact on my trades. By next year I will be able to say more about this as I continue to consider what data I want to collect in order to make my trading more profitable.

Mining Your Data

I once was asked why I expend the effort to collect so much data about my trading. My answer then, as it is now, is that without data, there's nothing to analyze in order to improve. Anybody can collect data although few do. The trick is to make good decisions about what to collect, to collecte it, and then to do something with it.

There was a great comment over on The Chart Of the Day where the question was asked about time frames; whether the length of my trades has increased or decreased over the years and whether there was any correlation between that and my success or failure rate. The follow up question was whether risk was reduce/increased as a result as well. They were very thoughtful questions and reminded me that I indeed needed to revisit my data looking for answers.

Trading is Personal

Before we begin data mining the data that I have collected over the years, you first have to understand that trading is personal; it's a reflection of you. Although many people trade in a similar fashion, I suspect that no two people trade exactly alike. We are all individuals whoose make up is unique. The decisions we make about what to buy, to hold, to sell is very individual. There is no holy grail to trading successfully. It's about trial and error, analysis and improvement.

Data Mining

Before we begin to mine the collected data, we have to ask what we are looking for. The specific questions asked over on The Chart Of the Day was about length of trades and perceived risks. I would broaden that a bit to ask about ??


Time Frames - Winning and Losing

Over the past four plus years I have executed almost 7000 trades with the bulk of those trades coming in the past two years when I have been able to dedicate more of my time to the markets. As a result of the previous analysis I had done, I remember that the most important conclusion that came out of that reflection was the desire to not hold losers but instead to cut my losses sooner and to move on.

Towards the end of 2004, I had much more time to devote to trading and by 2005, I found myself trading in very short time frames; partly because I was experimenting with the idea of whether I trade successfully on a daily basis, partly because the markets dictated a shorter term focus (in a previous article I've talked about the affect of the general market on particular stocks).

Getting back to the data though. The tables you see here is a summary of that data examining:

• The percentage of trades that fall into day, 2 to 5 days, 6 to 10 days, 11 to 15 days, 16 to 30 days, and more than 30 days (for the 4 years of data points)
• The win percentage for each of these time frames
• The average return for each of these time frames
• The drawdowns for the three time frames where significant changes have ocurred over the 4 year period, namely the day trade, 3 weeks to a month, and greater than a month

From the data points collected over the past 4 years now, I clearly met the objective of cutting losses more quickly, having dramatically reduced the average loss on a stock from 38+% in 2002 to 0% in 2004 for trades that lasted more than 30 days. The improvement is clearly seen as well in trades between 16 to 30 days where I cut losses quicker moving from 27% to the low teens on a percentage basis.

At the same time, with my expermentation with very short term trades, I've seen my loss percentages rise on day trades reaching 23% but I improved the winning percentage of those trades once I began to concentrate on them from a toss up the first 3 years to almost 7 out of 10 in 2005. The devil is in the details though. If you dig deeper, the dollar figures show that the reason I increased the day trade win percentage is because I took profits early and allowed losers to run longer during the day. That's reflected in the percentage returns where you see 23.58% loss on a day trade basis compared to a 19.84% gain on the same time duration. Unless I can improve my absolute dollar gains on a day trading basis, it's a losing proposition.

Where Is the Sweet Spot?

The real gains in 2004 came from the trades that were > 15 days in duration but less than a month. Those trades accounted for 80% of the returns. When I look back at 2004, it was exactly the same story, accounting for some 90% of the gains for the year. This has been consistently true for me since the beginning. The bulk of my gains come in the 2 weeks to a month time frame. More analysis is needed to understand why this is so. In the next series, I'll take a look at what types of trades are the ones that make up the bulk of the sweet spot. Are they retrace trades, breakouts, etc. Is there a pattern that's repeated that we can look to exploit?

... to be continued ...