Sunday, January 30, 2011

How I trade breakouts in momentum stocks...

On evenings after the market close, I scroll my long ideas watch list and short ideas watch list in looking for patterns. After I have identified the stocks with patterns I like, I put their tickers into a separate watch list I call "Focus List". I identify the entry and exit levels implied by the pattern and mark them with horizontal trend lines in freestockcharts. After this I create price alerts for these levels in my TOS platform so that I will be notified with in seconds that price is at or near an actionable level for a particular stock.
I then quickly calculate how far away from the entry price the stop loss (determined the night before) is in percentage terms. For stop losses below 1%, I can take on full margin; 1% - 2.5% = 100% of equity position; 2.5% - 5% = 50% of equity position and 5% - 10% = 25% of equity position. I rarely take positions with stops wider than 10% - 12%. I usually do not take more than 2 - 3 positions at a time and most often I am already on full margin with 2 -3 positions.

Three things I look at prior to taking a trade are: the volume on the current 5/15 min bar relative to the average of the past two to three days bars; the speed, side and size of prints on the time and sales and the bid/ask spread on the level II. If these do not line up I will not take the trade. You need the stock to be more active relative to what it normally trades so show increased interest otherwise it is very unlikely that the stock will follow through. Also it does not matter if the stock moves against you intra-day. What is more important is that the stock maintains its intra day trend besides I am not day trading!

So this is how I take momentum trades in a nutshell.

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