Trading Educator's Corner
President and founder of Daytrading University.
Focus: Equities; Momentum Trading* Not employed by or affiliated with Interactive Data
Ken Calhoun's Breakout / Bounce Approach to Trading Using eSignal
To understand my breakout / bounce trading approach, you need, first, to take a look at my eSignal setup: check out my 6-monitor setup here. (You will need to scroll right and down to see all of it.)
The indicators you see in the screen shot are the ones I use continuously to scan the market for day trading opportunities, in descending order of importance (indicators at the top being the most important). Think of it as a process flowchart for day trading decision-making. (I'll add more chart details to it in time.)
Note that many new day traders fail because they only look at the indicators that I consider further down the order of priority (e.g., specific stock chart patterns) and get whipsawed and/or make late entries. The market is a system, and you need to read it top-down, rapidly, to scan for profitable trading opportunities. Welcome to professional trading!
Now, follow this quick guide to the 7 levels of scanning I do everyday to find my stock picks.
|Level 1: The NASDAQ Composite Range Check|
|What to Check For:||Is it a NASDAQ Composite wide-range day or narrow-range day?|
|How to Scan for It:||See if the current day's COMPQ is making a high above the previous day's high or a low below the previous day's low.|
|Purpose:||To gauge overall trading potential for the day; wide-range days are better, with more trading opportunities than narrow-range days, which tend to be choppy|
|How to Trade:||If it's a narrow-range day, then we trade less or not at all. Intrarange trades are most often Fibonacci bounces versus breakout trades.
If it's a wide-range day, then look for cup pattern breakout 2-day highs for entries.
|Level 2: The NASDAQ Volume Check|
|What to Check For:||Is the NASDAQ TRINQ (a volume indicator) less than 1.0 (indicating a "bullish" day) or greater than 1.0 (indicating a "bearish" day)?|
|How to Scan for It:||Keep an eye on the NASDAQ TRINQ (buy/sell volume and a/d line) for reversals, trend and net value.|
|Purpose:||To gauge buy versus sell pressure, volume and trend for the current 5- to 10-minute time frame|
|How to Trade:||If TRINQ is > 1.0 and trending up, then we look for weak sectors, as the broad market is falling, and we look for breakdown shorts.
If TRINQ is < 1.0 and falling (or chopping), then we look for breakout longs and/or reversal bounce longs following selloff.
|Level 3: Sector Percentage Check|
|What to Check For:||What relative strength/weakness and money flow are the sectors showing?|
|How to Scan for It:||Sort your quote box by Percent Change from Open for $SOX, $GHA, $GSO, $GIN, $NBI and so forth.|
|Purpose:||To assess which sectors and Tier 1 lead stocks are the "outliers" and, thus, significant. (Note that we check for sectors that are showing a > 1 - 2% change after 10:00 a.m. ET and red/green for the day and so forth.)|
|How to Trade:||If we see one or two sectors that are greater than 2% after 10 a.m. ET etc., either red or green, then we look for the "outlier stocks" in these sectors for continuations and/or reversal plays.
If we see a strong trend from 9:40 until 10:15 a.m. ET or so (e.g., changes from 1.1% green to 1.8%, etc.), then we look for continuation plays in the direction of the sector.
|Level 4: Tier 1 Lead Stock Check|
|What to Check For:||What type of movement is a Tier 1 lead stock showing -- a 2-day high/low breakout/breakdown -- or is it choppy?|
|How to Scan for It:||Check the Tier 1 lead stock's 2-day chart pattern to see if it is making a high above the previous day's high (or a low below the previous day's low). Use INTC for $SOX, MSFT for $GSO, DELL/AAPL for $GHA, IDPH/AMGN for $NBI and EBAY/YHOO for $GIN.|
|Purpose:||To compare the Tier 1 lead stocks to their sectors to help determine the breadth and depth of movement and the likelihood of follow-through in the direction of the movement for Tier 2 stocks that are also moving in the same sectors|
|How to Trade:||If we see a 2-day high breakout in a Tier 1 stock in a strong sector, then we look to our core trading stocks for breakout longs in the direction of the stock that's making the move.
If the Tier 1 stocks are just chopping around in each sector, then we don't trade much unless a specific stock is having a wide-range day with a tradable chart pattern.
|Level 5: Core Trading Basket Check|
|What to Check For:||What Outlier, Breakout or Bounce candidates show up in the stock chart patterns for your Core Trading Basket stocks?|
|How to Scan for It:||Once you've seen a green light from the indicators in the previous four levels (which you should be able to scan within 5 - 8 seconds), you now look for specific trading patterns. Note that bounces/fades should be <20% of all trade attempts. You are looking for stocks priced between $15 and $60 that have 2-to-4-point intraday trading ranges on average volume of at least 1.2 million shares/day. You use the Tier 1 breakouts as the lead/confirming indicator for core stock entries.|
|Core Trading Stock Charts for Day Trading the NASDAQ:||2-day, 2-minute candlestick chart (8:30 a.m. to 4:00 p.m. ET) (Technical Analysis: 22 Moving Average [simple], volume)½-day, 1-minute candlestick chart (8:30 to 11:30 a.m. ET) (Technical Analysis: 15/5 stochastics, volume)|
|Tips on How to Use Real-Time Alerts for Breakouts / Bounces|
|Breakouts:||We like to enter breakouts .3 to .6 above the whole number above the previous day's high on the 2-day chart. This is one of the "filters" we use to keep us out of false breakouts and choppiness. The maximum stop loss is the whole number.|
|Bounces:||We like to enter long bounces off the previous day's low support. These may be .25 to .4 greater than the whole number. Preference is given to bounces that are sharp, multi-point drops (e.g., > 1.5 points in < 20 minutes). Use Fibonacci retracements for exits (e.g., approximately 30 to 50% bounce of the range of the first move for the exit).|
|Level 6: Time and Sales Check|
|What to Check For:||When is the best opportunity to time the specific entry using Time and Sales?|
|How to Scan for It:||Once the stock is trading near the entry alert, we look at the tape to assess the "pattern," the net ratio of buyers to sellers. Use the patterns the Daytrading University teaches: Tape speed, reversals, block trades and print sizes. You are also, of course, keeping an eye on the TRINQ, the sector charts and the Tier 1's to check for any early reversal signs and steer clear. (For example, your QCOM chart looks great, but there's a pullback in the sector chart, and the TRINQ has just reversed. You should wait for them to resume the trend prior to entering. Otherwise, no entry.)|
|Purpose:||To balance the specific stock indicators (e.g., charts, Time and Sales) against the market internals and sector movement|
|How to Trade:||If the specific stock indicators and the market internals and sector movement are in conflict with each other, then avoid an entry unless the stock shows compelling (e.g., high-volume) movement. "When in doubt, stay out." It is also important to be in the first third of the movement. You can't wait for "all the planets to line up" as it were. In time, you should be able to identify trade entry points correctly and use trailing stops of "the red band" (e.g., 3 - 4 spreads out of market, in NASDAQ Market Depth [Level II]) to lock in profits on open wins.|
|Level 7: Multiple Position Check|
|What to Check For:||Is there room for dynamic position sizing (DPS) (i.e., the holding of multiple positions simultaneously)?|
|How to Scan for It:||Use DPSs to add to winning trades incrementally (e.g., buy 500 shares at $34.42; buy another 200 at $34.61; sell all 700 at $35.31 as it fades). Use multiple positions on strong, wide-range days to multiply profits.|
|Purpose:||Advanced techniques for experienced traders: To fade in and out of positions; to be more fluid in money management and trades|
|How to Trade:||If the Semis (traded on the Iron and Steel eXchange) are strong, then we are long QLGC and XLNX at the same time.|