day trading setups

Is it possible to make money in the market every day? Is it possible to make 1% a day?

I believe both are possible if you trade setups and have the discipline to only trade setups.

I started playing the market years ago looking more or less at the fundamentals. After losing a lot of money, I decided that there's no way I could figure out the truth or profit from them. Most analysts are wrong even though they make a living on only a few stocks. Even if you're right about a company, the stock may not move in your way for months or even years.

I then experimented with the technical approach. But it didn't work out too well either. A break-out may fail. A head and shoulders break-down may reverse and the toad could even go on to make a new high. A bullish flag might frustrate me for days and then would break out after I finally give up.

Like most traders, I made lots of trades using intuition. Market seems strong but RIMM isn't participating, so I buy hoping the toad would wake up. Sometimes it does wake up; but sometimes it wakes down. I believe this is why most traders make money one day and lose the next.

It all comes down to odds. Fundamentals, technicals, intuition, often their odds are no better than a coin toss. Besides, as normal men or women, we tend to pick the bad trades more often thus further decreasing the odds. Over the years, I've become more and more convinced that setups are the way to go because they have much better odds, some with almost sure outcomes. The reason? Stocks usually move in the same way under the same circumstances.

There're different setups occurring every day in the market, bull or bear, dull or active. As a result, you can consistently get a paycheck from the market, every single day. And the setups unfold in hours or even minutes so you never have to subject your money to risk for long.

One example. Recently, GHM suddenly got killed on no news, dropping from $70 to $62 in about an hour. Longs were puzzled. One guy screamed "classic buying opp" and said he was all-in. What do you think?





Next morning, despite strong bids at $62.30, the toad quickly dropped to $58.02 in almost seconds. There're plenty of time to buy under $59 and some more around $59 half an hour later.



If you understand this setup, you could've bought the spike low and made a dollar or two in minutes. At least you wouldn't do an all-in the day before. There's no technical analysis. No fundamental analysis. No time wasted for your money on a dead stock. No agony over what would happen tomorrow or next week. No risk of getting killed over earnings. Just a setup. Plain and simple. Fast and reliable.

Where will GHM go from here? I don't care. This is the essence of trading setups. You don't guess where a stock or a market would go. Nobody can do this successfully over time. You only enter if a stock is in a setup. Most stocks are not in a setup most of the time. Most traders trade by guessing so they'll never be able to make a living.



Homer: Kids, you tried your best and you failed miserably. The lesson is: never try, just wait for setups.

z's laws of panic

"Do you want to make money? Of course we all do." Gushed the woman on TV peddling mail-order diplomas.

"Do you want to make 30% a year with no effort? Of course we all do." Said Trader Z.

I'm offering you here a secret to make 30% a year every year consistently with almost no effort. For such a great offering, I'm asking not $1000. Not even $500. Not even $100 which you probably think is very reasonable. Now hold your breath. I'm asking your $0. That's right. Zero. Nada. Nothing. In fact, if you order in the next 20 minutes, you'll get another secret mailed to you absolutely free.

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I've had such an idea for quite some time. The idea is to buy a big gap-down or spike-down of a stock, or preferably a market, after a severe sell-off in the preceeding days. In my experience, the probability for an sizable immediate gain is 100%. If you do this a few times a year, you'd make 30%. With almost no effort.

Have I done it? Not really. The hard part is to have the guts to jump in when the sky seems to be falling. The harder part is to have the stomach to incur some initial loss, even big loss, so you don't miss the boat altogether. The latter is the core of my problems: I always wait too low and even if I had a good price initially, I'd move lower and lower when the toad is approaching.

I've watched the stupid gold stocks intently in the last few days. I felt they're way over-sold. Yesterday when futures were limit-down and markets the world over were crashing, I felt that gold stocks offered exactly such a panic buying opportunity.

But I missed it again because I waited too low. The toads went into the green in about half an hour and went up almost 10% more 2 hours later.

See for yourself. And tell me if you can make 30% a year. If you have the guts and stomach. And now send me a check for $0.

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After another sad miss, I thought about the thing a bit more. In order for me to hopefully have more confidence for such trades next time, I came out with some Z's Laws of Panic.

First, the toads always reverse fast, very often right away. So get in early and get in big.

Second, the longer you hold your position, the more money you'll make. You're likely to get a good price some time during the day and very possibly you'll get a better price the day after. Therefore, be confident to get in and be confident to hold.

Third, very likely, the toad would go into the green on the day. This should anchor your expectations on the low end.

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Another example from yesterday, though not as compelling as the gold stocks. Tons more if you care to look yourself.

the joy of small size

Can you make a small living 30 shares at a time? The answer is probably yes. And this could be the break-through idea for thousands of beginning traders out there.

One big problem with my trading is the fear of commitment. I'd pass a lot of good trades every day, sometimes because I'm afraid of losing but very often it's simply the desire to be risk free. Using smaller size has definitely helped me breaking this barrier.

Since I opened my Virtual Trading Office in July, I kind of forced myself to enter trades more often. Because the account I report on is small with only $30000 capital, I'm more risk averse. At first I reduced size to 50 shares. Lately, however, I most often start with only 30 shares. Despite the much smaller size, I've had better performance. In the last 20 trading days, I averaged $75 a day. Had I not passed some good trades every day, the performance can easily be much better.

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Lately, I've thought about the idea some more. Here're the benefits I see using small size.

First, it's a lot easier psychologically to enter a position with 30 shares. Even if the toad goes against you by $10, you only lose $300. With that kind of loss, you have almost nothing to fear but fear itself. So you're more likely to enter all the good trades, even shorting the super stupid stocks like CMG thus capturing the fast $2 you otherwise would have passed.




Second, it makes averaging-in workable. I like to trade counter trend. With this style, it's almost a certainty that the toads would go against you right away. If you're comfortable with 100 shares, then you have room to triple up your position when you start with 30 shares. I'm more patient now so I often do catch the top. However, frequently I still need to double up. Once in a while, I would have to triple up. But I don't have much fear with 100 shares. They can't kill you with 100 shares, as I used to say. Yesterday for example, I shorted the stupid BKR at $37.40 and doubled up at $38.09.




Third, you can be more liberal with stops. Once again, they just can't kill you with 30 shares, or 100. I have very low opinion of stops in the common sense. IMO, unless you entered in a very bad time, like shorting a bottom or buying a top, you are better off in the long run to forget about stops for most trades. Stocks go up and down. All the big losses I took over the years would have been gains a mere days later, usually just a day later. With 100 share position, it's easy to hold for that extra few days. I got stuck with the stupid TSCO a couple of days ago. Look where it is now.




Fourth, using small size might lead you to focus on bigger moves. How much money would you have made shorting 10 shares of SKF at $300? It dropped to $100 in about 10 days. And you would have made $2000 on a $3000 capital.

I did short 10 shares of SKF at $300, by the way. But I covered for $2.




And finally, even if you do get ambushed once in a while, you can trade your way out of trouble. Starting with 30 shares makes it like you have unlimited funds. Increasing your position to 300 shares is a tremendous "surge" in fire power which is likely to "shock and awe" your opponents.

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With 30 shares at a time, in December I made $1535 on this small $30000 account. If I can do this consistently, it'd be $18000 a year. Sounds like a small living, no? Besides, on average, I only use about $6000 to $7000 capital each day.

crooks or traders?

I often suspect that crooks are behind the moves of stocks, especially small stocks. However, once in a while, I do question myself. Maybe, I thought, it's just traders trading?

Crooks or traders? It's a super important question. If crooks are at work, it's usually wrong to go against them. However, if it's just traders, more often than not, taking the other side of the trade is the right thing to do. You never know what the crooks will do next, but traders are easier to figure out.

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Last week or two, I've been greatly bothered by the stupid BKR. Despite a market selling off every hour and every day, this stupid toad stook firm as a rock. Every day, it'd spike down and I'd be in the green by $0.50 or $1. Then a big spike would wipe out my gains and the toad would climb steadily up $1 or $2. Disgusting. All when the market was crashing.

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I kind of thought that the toad was manipulated by crooks. As a result, I just stood there instead of profiting from the $2 - $3 daily moves. Today, the toad simply crashed. I covered my last 100 shares at $39.40 after it again showed "strength" in yet another sell-off in the market. And I left $3 on the table. I thought about it some more and I felt that the toad's silly moves are simply traders trading. And I should've made a lot more money on this stupid toad had my perception been correct.

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The stubbornness of the toad during the first couple of days of the market reversal could be simply traders trading. The toad had such a low volume that you may not get 100 shares easily even if you buy at the ask price. The people placing the bids were probably just shorts trying to cover. Despite the sell-off in the market, they probably had trouble covering even a few hundred shares.

The toad's seeming "strength" probably got some traders' attention. And they might jump in with a few hundred shares. Since the toad had such a low volume, this could easily push it up a few dimes. Then the frustrated shorts would get alarmed and they might even cover with market orders. Because of the low volume, the toad would stay elevated. This would attract more traders and frustrate more shorts. And it could spike up one more time later in the day.

However, neither shorts or longs would want to chase the stupid toad at extended price, especially when the market was selling off. And the toad would fall on its own weight.

A few back and forth like this, all the nervous shorts got flushed. The toad would lose its silliness. And now instead of shorts wanting to get out, longs would start to feel nervous. Instead of moving up easily with the market, the toad would stay dead. Longs would get more nervous. Then when the market drops, the toad would start to free fall.

Did anything change about the stupid BKR from a couple of days ago to warrant the almost 10% sell-off today? Probably not. It could all be just traders trading.

z's principle of panic

Over the years, I've witnessed this phenomenon hundreds or even thousands of times. There're definitely exceptions, but I don't remember any.

When a stock hits a price in a panic, it rebounds, sometimes sharply. However, Z's Principle of Panic is not about this. Rather, it states that very soon, often in a few weeks, the stock will hit the panic price again, no matter the market, no matter how ridiculous that panic price appeared.

I started noticing this years ago with stocks following earnings. So far, this still happens the most often with earnings stocks. Today I got an different example.

SQM has been touted by Navellier to be the "battery" stock which is guaranteed to go up by at least 50% in a month or two. About 4 weeks ago, in a panic opening spike down, it hit $36.36. I caught it there. It rebounded. With Z's Principle of Panic, I felt the toad should hit that price again, soon. However, lately I lost my confidence on at least this one with the ANALysts pumping the fertilizers daily and Navalier pumping this toad in particular.

However, today, it hit $36 again.

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I wrote the above a few months ago on my blog. The most recent example is C. Lots of people probably thought the toad would never tank again after the FED backstopped $300 billion of their toxic waste. Last week, however, it almost revisted the panic level reached a couple of months ago.