Ross' Book Flashcards
Short Sale Restriction Definition
Can only short stock on an uptick to inhibit flash crashing
Risk Management
- 2;1 profit loss ratio ie potential profits must be twice potential losses - set up stop loss at begining of trade
- Data mine by keeping records of your trades
- Cap losses with defined stop loss AND daily max stop loss at 25% of daily goal (judgement impaired)
- Balanced risk (same amount each trade)
- DON’T LET EMOTIONS GET INVOLVED
- Gamblers think about profit and traders about risk
Stock Selection
- Stock must have Volume - volume scanners ID relative volume ratios
- Catalyst - Up premarket > is there a catalyst > is the source reliable?
- Former runners (eg previous 100% b/o likely to again 4. Low Float stocks - <50mil = good, <10mil = best
- follow throughs - if they start strong following a previous big run the day before
- inside days = green starting inside previous days red . . . he stays on sidelines
- Intraday extremes . . . rarer but if strong volume and catalyst then they are all to play for
Battle of bulls/bears
After 5-10 green/reds indicates trend reversal
Topping tail
Indicates trend reversal
Hammer/inverted hammer
Tred reversal esp if near support level
Chart layout
Exponential Moving Averages
9, 20, 50, 200
Respected levels of support reistance
Just below could be a good stop loss
Good for buying pullbacks
Don’t go long if below 200
Resistance at 200? - potential reversal
Volume weighted Average Price (VWAP)
Takes into account volume and acts as equilibrium point of the stock for the day
good entry point for trend based trading
countertrend setups if extremely extended from VWAP
Bollinger bands
20 period moving average with 2.0 standard deviation
Only use on 5m charts for Reversal trades
extreme situation anytime price is outside these bands
Relative strength Index
Exclusivly in reversal trades
>90 = extremely overbought
<10 = extremely oversold
Use in scanners (>20/<80) for reversal ideas
Volume Bars
Decrease could be change in direction
increasing could show potential break
Support and Resistance
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Ascending and descending S/R lines
- draw the next levels of S/R based on daily charts
-
Window - large gap w/o obvious S/R
- must be larger than ATR (average true range .. . eg 50p means on average for the last 15 days it moves 50p/day therefore 75p window = good)
- Trigger - resistance level with large window above
- Gaps - Opening significantly higher or lower leaves gaps (eg earnings/ news) - Gaps more obvious and best trades = the most obvious
-
S/R $ and 1/2$
- entry near $ and stop loss on other side
- long position aproaching a dollar start taking profits
-
Moving average S/R
- gapping up and down should be away from this
- good entry on pullbacks
- if been tracking EMA 9 whole day then crosses its a sign of trend reversal
Order types
- Market Order = trade + # of shares
- limit order = stock + # of shares +max price
- stop order = stock to sell + # of shares + trigger price
- market stop = send as market order
- sto limits = send as limit order
- buy stop = buy shares after a trigger price
- must do with a stop limit to protect yourself!
- ECNs - not imorptant if high volumes
Level 2
Should get on brokers
- seen line up of buyers and sellers
- large orders can act as S/R
- spoofing - large orders cancelled before filled
- only look just before trade
- Hot keys to mx trades after intial entry
General Strategy
Want ; Obvious, great catalyst, large volume, large windows
Focus on pullback entries
Buy close to S/R
Set stop loss just below support BEFORE you enter trade
2;1 profit loss ratio ( work back from calculated potential gains)
Enter and exit at ask price
sell 1/2 at first profit target then reajust stop loss to breakeven
Mommentum trading strategies
- Bull flags
- flat top breakouts
- flat bottom breadowns
- moving average oullbacks
- parabolic movers
Want predictable volatility with a low float + previous runners
ID with premarket ARV scanners
buy 1st and 2nd pullbacks . .. riskier after
buy pullbacks from bull falg, FT b/o or moving avg retracement
BEST = Bull flag that bounces off the 9EMA
Momentum and Gap and Go Entry Requirements
All Gap and Go setups should meet the following entry requirements:
- 100k in volume in the first one minute of trading when the market opens (Gap and Go trades)
- 1mil in volume (Momentum Trading Strategy trades)
- We can reasonably achieve 2:1 profit loss ratio
- The stock should have high relative volume of at least 2
- The pattern must be obvious and clear. We know even the best patterns do not always work
- Ideally, the entry point will be close the 9 EMA or 20 EMA support level
- Ideally, the float is under 50 million shares, with under 10 million having the most potential. The exception is that VWAP trading strategies can be used on heavier Á oat stocks
- Ideally, the stock will have a good catalyst
- Ideally, the stock will have a clean daily chart with windows and triggers
Momentum and Gap and Go Exit Indicators
If I see any of the following exit indicators, I immediately exit my position:
- A five minute candle making a new low BEFORE I have scaled out of half my position (five minute candles making a new low can indicate a possible reversal) . . . bur if you’ve set stop loss to breakeven you can holder longer . . . new bull flag may form
- Price breaks below the 9 EMA on the five minute chart (can run the whole day without breaking this)
- I adjusted my stop to breakeven and get stopped out
Stop price intitially based on either maximum loss or a specific support level
Reversal Entry Requirements
- 3+ Consecutive Five minute candles
- Candles are riding the bollinger bands or outside the bollinger bands
- Stock is at High of Day or Low of Day
- RSI is above 80 or below 20
- Float is typically not an issue here, but is worth noting before entering a position
- Ideally, the final candle is one of our preferred reversal candles
- Ideally, we are bouncing off daily resistance
- Ideally, the overall market supports our decision
- I must be able to reasonably achieve a 2:1 profit loss ratio
- There must be at least 30 cents to the 9 EMA on the five minute chart
Reversal Exit Indicators
- When I first enter a reversal trade, I set my stop either at the high of day or low of day. If my stop gets touched, I am immediately out of the trade.
- I will sell half when the price touches the 9 EMA on the À ve minute chart, or when I hit my 2:1 profit loss ratio. I then adjust my stop to breakeven on the balance.
- Once the price breaks the 9 EMA, I will adjust my stop to the other side of the 9 EMA, and keep adjusting it every 5-10 minutes.
- At the VWAP, I will do another partial sell and keep a smaller position for a move back over the VWAP and for a possible swing trade.
Should work very quickly .. . get out if it doesnt
Can go from mommentum to reversal but very risky going from reversal to mommentum as already overextended
Indicators
Exponential Moving Averages
9, 20, 50, 200
Respected levels of support reistance
Just below could be a good stop loss
Good for buying pullbacks
Don’t go long if below 200
Resistance at 200? - potential reversal
Volume weighted Average Price (VWAP)
Takes into account volume and acts as equilibrium point of the stock for the day
good entry point for trend based trading
countertrend setups if extremely extended from VWAP
Bollinger bands
20 period moving average with 2.0 standard deviation
Only use on 5m charts for Reversal trades
extreme situation anytime price is outside these bands
Relative strength Index
Exclusivly in reversal trades
>90 = extremely overbought
<10 = extremely oversold
Use in scanners (>20/<80) for reversal ideas
Volume Bars
Decrease could be change in direction
increasing could show potential break
Flat Top Breakout
Strong move (4%) but instead of pulling back it trades sidewase at resistance level.
Wand higher lows creating ascending support level
Buy near high of the consolidation
Stop = just below ascending support line
Want to see volume surge as it breaks level (lots of buying waiting for the same)
might retest b/o by tapping back down on support
can form over minutes or hours
1/2 sized order as buying at high of day
if it breaks out and then back below sell immediatelly
Hold if it does not break out the first time
Sell 1/2 once profit = risk, adjust stop to breakeven and hold till stop out or exit indicator
could be 1st and 2nd pullback if confident and adjust stop to low of pullback
Flat Bottom Breakdowns
Same but in reverse
The inverse to the Á at top breakout is the Á at bottom breakdown. When a stock is very weak and consolidating near the lows, just above a critical support level, we have the same opportunity as a Á at top breakout. There is the potential for a quick proÀ t with a low risk entry. As with any other setup, we want to do our due diligence and review the catalyst in play, search the daily chart for support/resistance areas, and make sure we can achieve at least a 2:1 proÀ t loss ratio. We base this on the À rst proÀ t target and the distance from a logical stop
Bull Flags
Four to five long body candles followed by 1-3 pullback (best pullback <25% of move)
1-5m best but can trade on eany time frame
On heavy volume so premarcket gappers or high of day mommentum scanners
Buy - when first candle makes new high
stop loss = low of the bpullback
profit = high of day price
DO NOT mistake bullflag for a flat top and buy at the high of day. Flat top = 3 or more taps on resistance price
Volume wise want high on initial move up, low on pullback and high again as it moves back up
Bear Flag
The inverse of a bear flag
Strong sell off > light bounce > resumed sell off
Only trade if very obvious (flat bottome breakdown is better)
If bear flag is forming on light volume the strength or weakness of the market has a stronger influence on it
Moving average retracements
Initial move up, then stock pulls back, then, instead of moving back up as with a bull flag it consolidates during the puback
want to consolodate above the 9EMA (possibly the 20)
5m chart as slower forming setup (need more traders to notice)
Buy when it actually pulls abck and touchs 9 EMA
Can follow the 9EMA for hours, any pullback here offers a buy opportunity
Stop loss - low of pullback or just below 9 EMA
Sell half when it reaches half of day and set stop to breakeven - hold until exit indicator
You can also do the reverse of thise and short below the moving average
Buying a higher high after a pullback during a five minute uptrend
You can see differnet setups depending on if you are looking at 1m or 5m chart
The stock pulls back to price (1), then pivots and pops up to price (2), then pivots again and pulled back to price (3). It is important to note that the pullback of (3) was a higher price than (1). A break of price (2), on the one minute chart will indicate the trend is being restored as the price is making a higher high. What makes this pattern on the one minute especially strong is the fact that the break of price (2), will also be the first five minute candle to make a new high.
Parabolic Moves
CAREFUL: high risk, high reward
Straight up/down on a strong catalyst
They are irrationally strong/weak
Buy on momentary bull flag or flat top breakout on 1m chart
ride as long as you can but you want to seel half quickly and set to breakeven as its not uncommon for it to quickly turn
Risky as chasing therefore use smaller positions until built a cusion up
Reversal
Can also trade the reversal but just as risky trying to predict the reversal . . .. could run another 100%
enter on 1/4 position - scale in as might have right idea but wrong time
benefit is the stop is usually far below. eg 9EMA
Gap and Go Mommentum General Strategy
Strong in pre-market almost always high relative volume in day
Works best in stocks <$20 (do smaller size if trading larger)
Gap and Go trender = >4% gap and >50k shares volume
must be consolidating at top of premarket range and must have a strong catalyst (strong news, reliable source)
Then map out support and resistance levels on daychart
Entry and stop price are most important
The best ones have a flat top breakout or bull flag patttern in premarket
Create 2-4 premarket watch list and trade the most obcious setups
Gap and Go - buing the bull flag or flat top Breakout
Bull flag
buyt first 1m or 5m candle to make a new high set stop at the low of the pullback - hold till profit target or exit indicator
Flat top breakout
buy premarket high if clear flattop breakout pattern holding above EMA
Heave offer on Level 2 when market opens confirms resistance at apex point - place order when this is about to expire
Timing very important so need the best tools (hot keys, direct access routing)
Move very quick after break
take profit on first surge and set to breakeven
Gap and Go - Buying the one minute opening range breakout (ORB)
Use trading opens between suport and resistance levels
Use first 1m candle as reference with the high being your entry point and the low your stop out
If it does work in the first couple of minutes then can switch to 5 minute candle
Move on if nothing triggered in 1st 15-20 minutes
Gap and Go - Buying the first pullback
Use if you miss premarket flag or the ORB
1st pullback must be traditional bull flag, flat top breakout or 9ema pullback
Less risky for begginers - best Gap and Gos breakout of the 1st and 2nd pullbacks
Gap and Go - Red to Green
beautiful candidate sells hard right out the gate
Can play these if they come back and break their opening price (shorts covering their postion here). .
Entry at firs tcandle to make new high (1m or 5m)
stop loss at low of day but stop out if it goes back to red immediately then sell for loss
Sell half when make what you are risking and set to breakeven
could then play pullback
RISKY as already shown weakness
Entering a mommentum trade
Check level 2 for a tight spread
One minute Entries
Need extremely high relative volume
Have entry price in mind (apex of the pattern)
ORB = top of 1min candle
Flat top breakout limit order a few cents above the flat top
One minute entries enter on half position and double up if you can set to breakeven
Should work straight away on 1m. If not get out.
Five Minute Entries
Larger size for the ORB, flat top breakout
Gap and Go trades usually 1m entry unless 5m ORB, first pullack or Green to Red move
Intraday trades (after 10am aka 1st 30mins) should only really be done on 5m unless VERY high bolume
set stop to low of pullnack, just below 9EMA or below ascending support line depening on setup
Mommentum/ Gap and Go profit targets
The Reversal Bar
Indication of reversal
ideally fully outside bollinger bands
ideal a doji, topping/bottoming tail or hammer/inverted hammer
In a top reversal we short the first 5m candle to make new low vs loow of the trigger candle
our stop is the high of the trigger candle
entry size based on level of risk between the entry and stop
Reversal: alignment with the daily chart
The best reversal set ups will have confirmation on daily chart (more traders will get involved)
reversal point on daily chart can be touching a critical area of support or resistance eg moving average
Reversal: Volume and Sector Extremes
Volume
Not as important as mommentum as nothing to break through . .. can slowly go back to VWAP
but genearlly wany 500,000 volume in a day to consider
Trading volumes on lighter volume means the overall market can influence
Sector Extremes
If entire sectors are very extended then they may show up on reversal scanners
however if who sector starts reversing then all to play for
Entering a Reversal Trade
Check level 2 for spreads
Enter immediatelly if requirements met with a 20% stop or a stop at high/low of day
start with 1/4 position size (may have right idea buy wrong timing)
New high/low then stop out but hold if remains between entry and stop
One minute entry
First one to make new high after 10 consecutive one min candles
double on 5m confirmation
might enter near whole dollar if to breaks it but then comes back through
potentially great returns as enetering high/ low of day. . . large P:L ratios
avoid for beginers
Five Minute Entry
reversal confirmation is candle over candle pattern on 5m chart
candle outside bollinger bands? use bottom as stop and top as entry or double up if entered on 1m
have at least 30cents potential to 9EMA
if double up tighten stop to breakeven or -10cents
Buying the first pullback on reversals
