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Momentum Stock Trader (MST) User's Guide
Tony Golan
Chief Technical Analyst
StockProfit.com™
Introduction
The StockProfit Momentum Stock Trader only trades in the direction of the long-term trend.
That means it only buys stocks that are in long-term up-trends, and it only sells-short stocks
that are in long-term down-trends.
The direction of the long-term trend is determined by the stock's position relative to the 200-
day moving average:
- If the stock is trading above a rising 200-day moving average, it is in a long-term uptrend.
If the stock is trading below a declining 200-day moving average, it is in a longterm
down-trend.
- If the stock is trading below a declining 200-day moving average, it is in a long-term
down-trend.
However, simply being above or below the 200-day moving average doesn't necessarily mean
the stock is trending. The stock actually has to trend, or sustain movement, AWAY from the
moving average to develop move that is sustainable over time. The longer the stock can
continue to move in the same direction, the more money can be made on it, pure and simple.
Relative Strength
Differential (RSD) measures how strong these moves away from the 200-day
moving average are. An RSD measure of 30 indicates the stock's Relative Strength line (RS) is
30% above its own 200-day moving average. A minimum RSD reading of 25 is required for a
stock to be a momentum stock. If a stock's RSD is below 25, it means either the stock is in a
slow-moving up-trend or not in an up-trend at all. This means that if a stock's RSD is greater
than 25, the stock in up-trending and outperforming the S&P 500.
Momentum Stocks give a buy signal when they rally with a white candlestick and aboveaverage,
rising volume. The signal is then confirmed when the stock goes .02 above the high of
the buy-signal day. Therefore, we enter the position ONLY when the stock trades 0.02 above
the high of the white candlestick or the buy-signal day.
How far the stock is off its high when it rallies with the white candlestick and above-average,
rising volume indicates how long the ensuing up-trend is likely to last and therefore how long
we should plan to stay in the trade:
- If the stock is at or near a new high, we expect the ensuing up-trend to only last the next
day and it's called a daytrade setup. In reality, trends like that could last longer, but a
new high is often a bad place to enter trades for any longer than just the next day.
- If the stock is off its high but not enough to be oversold, we expect the ensuing up-trend
to last several days to several weeks, known as a swing trade setup.
- If the stock is off its high AND oversold, the ensuing up-trend should last several weeks
to several months, and is therefore a very desirable point to enter a trade.
Intermediate-Term Trades
Intermediate-term trade setups are very desirable, and therefore infrequent. All intermediateterm
trade setups look the same on the chart. Some turn out to be big winners, while others
turn out to be small losers. I never know ahead of time which of these will work out and which
won't, and neither do you. Therefore, we must trade each and every intermediate-term setup
with equal dollar amount. That way, you will not cherry-pick stocks and end up with 2 losers
and one that isn't moving while the other 3 go straight up.
Doing equal dollar amount is very important. Please don't fall into the trap of trading equal
share amounts. The reason why is because, while the chart patterns on all intermediate-term
trades look the same, they are not always at the same price levels.
For example, if I recommend two trades with identical chart patterns but one stock is at 45, the
other at 17, and we lose 10% on the $45 stock but make 20% on the $17 stock, here's how the
money management will work on both these trades:
Equal Share Amount
By buying 1,000 shares of each,
1,000x45=$45,000x10% loss = $4,500 loss.
1,000x17=$17,000x20% gain= $3,400 gain.
Result: a net loss of $1,100.
Equal Dollar Amount
Buying $10,000 worth of the $45 stock x 10% loss = $1,000 loss (10% of $10,000).
Buying $10,000 worth of the $17 stock x 20% gain =$2,000 gain (20% of 10,000).
Result: a net gain of $1,000.
There are never more than 6 intermediate-term positions open at one time. Therefore, when
you start to trade intermediate-term positions, take 15-20% of your trading capital and set it
aside as a "reserve amount", then divide the remaining amount in six equal chunks and trade
each and every intermediate-term trade with equal dollar amount.
For example, if we start out with a $100,000 account, we will set aside $16,000 as the "reserve
amount", divide the remaining $84,000 in 6 equal chunks, and trade each and every
intermediate-term position with $14,000.
We set aside the 15-20% "reserve amount" for the simple reason that if we hit a losing streak
right off the bat, we will still be able to continue to trade each and every position with $14,000
dollar (using the example above). If we didn't set aside a reserve amount and we hit a few
losing trades in the beginning, we wouldn't have enough to continue trading the same size, and
it would be an uphill battle.
When you get an intermediate-term trade, it will read something like "Buy TBSI @22.49 Stop
23.49 Limit GTC. One your order is executed, immediately place an order to sell TBSI @20.16
Stop GTC."
In English, this means "When TBSI trades at 22.49 or higher, buy it at the best available price
but don't pay any more than $23.49 for it". The 23.49 limit on the buy-price ensures that you
won't pay substantially more for the stock if it gaps-up at the open and you, as an EOD trader
cannot be there to cancel the order when you find out where the stock is going to open. The
rules for limits on stops are .50 limit on stocks under 20, 1.00 limit on stocks above 20.
IMPORTANT: If you are new, don't buy the existing positions that have already moved. Start out
by getting into the next new intermediate-term trade.
Place every order exactly as it reads with equal dollar amount. If your broker doesn't accept
different prices for the stop and the limit and you can't be in front of the computer all day,
consider a different broker. Don't jump the gun and try to buy these stocks before they go .02
above the buy-signal day's high. Often if they don't trigger, we cancel them and move into
others. Just as often, if they don't trigger, they go down and make lower lows.
After you receive confirmation of the buy, place the accompanying stop. This is the single most
important thing you can do for your success in the market. Failure to do so will almost
guarantee future failure. Don't "watch it". Don't "set a mental stop". Place the actual stop
EXACTLY as it reads in the Momentum Stock Trader.
When the stock goes through the sell-stop (and it will, if you don't place it), the phone and the
mouse weigh a ton. Hope springs eternal.
When you place the stop, you show maturity and discipline. You also take the decisions out of
your hands at the moment of truth. Why test your ability to follow through on your decision? I
have seen so many people fail at trading because they were unable to execute their decision to
sell at a certain price when the stock got there.
Place the stop. It is an easy habit to develop. Develop it now, before you blow your trading
account. Many brokers these days offer OSO orders, whereas your sell-stop is entered
automatically as soon as your buy is executed, so look into it.
After you place the stop, all you have to do is keep checking the Momentum Stock Trader
section titled "Intermediate-term Positions Updates" every night for instructions on raising the
stop or cancelling the stop and selling the stock at the market at the open the next day.
Swing Trades
Swing trades are short-term trades, lasting anywhere from a couple of days to 3-4 weeks.
Just like intermediates, there are never more than 6 swing positions open at one time.
Just like intermediates, DO NOT buy existing swing positions that have already moved if you are
a new person starting out. Leg into these one at a time as the new trades come out on the
MST.
Just like intermediate-term trades, of the money you'll use for trading swing trades, put aside
15-20% of the money as a "reserve amount" and divide the rest in 6 equal chunks. Trade each
and every position with equal dollar amount.
Once we are in the position, the position gets logged in the Existing Positions table at the
bottom of each of the Swing trade page and the stop is updated and listed in red whenever it
needs to be, removing the guess work on your part.
As a guideline,
For long swings, we move up the stop to .03 below the low of the most recent trading day if
that day the stock makes a higher high and a higher low than the previous day and closes above
the open.
For short swings, for every day in which the stock makes a lower high and a lower low and
closes below the open, move down the Buy-to-Cover-Stop to .03 above that day's high.
We don't move up the sell-stop on long swings if it was an inside day or the stock closed below
the open.
For short swings, we don't move down the Buy-to-Cover-Stop if it was an inside day or the stock
closed above the open.
Just as with intermediates, we place the trade with a $1 limit on the stop price for stocks over
$20, .50 limit on stocks below 20. Just as with intermediates, the MST spells exactly how to
place the swing buy or sell short order, removing any guesswork on your part.
Once we're in the position, move your stop up or down every day based on the stop published
in the MST. When it needs to be changed, the stop is colored red. If it doesn't need to be
changed, the stop is colored black.
Daytrades
Daytrades are trades you enter into and exit out of on the same day. That means they don't
have a lot of time to work. It also means these need to be some swiftly-trending stocks. Since
they don't have a lot of time to work, you need to watch them on intraday 5-minute charts,
where each candlestick represents the price action for a 5-minute timeframe.
Before we go further, you need to become familiar with the concepts of pivots and round
numbers.
To make money on a daytrade, the stock needs to move. That is, to continue trending higher
throughout the day, making higher highs and higher lows. That means the stock goes to a new
high, pulls back, makes a higher low, turns back up, rallies to a new high, pulls back some, turns
back up, rallies to a new high, and so on. This is what an up-trend is.
Bullish Pivots are (at least) 4-candlestick patterns, where as the stock makes a new high, then
corrects for 3 or more candlesticks that make lower highs, lower lows, or lower highs and lower
lows than the previous candlestick, followed by a candlestick that makes a higher high. In other
words, it's like a "V" bottom, where the corrections on the left part of the "V" take at least 3
candlesticks. Corrections of less than 3 candlesticks are considered insignificant. In essence,
bullish pivots represent higher lows in an up-trend.
On the very short-term, stocks run into resistance or support at price multiples of 5, which I
refer to as "round numbers", or more accurately, strike prices. In other words, if a stock rallies,
it will run into resistance at 20, then again at 25, then again at 30, then again at 35, and so on.
These resistance and support levels sometimes only hold for a short while, a day or less, and
sometimes for days or weeks or months.
The trading implications of round numbers are:
- Take profits or tighten up stops when a stock approaches a round number.
- Don't set stops just ahead of round numbers.
- Don't initiate trades just below round numbers.
Daytrades, like all other trades, are only entered into after they go .02 above the high of the
buy-signal day. For most stocks, it is the high of the previous day. For most daytrades, and
definitely for the ones listed in the Momentum Stock Trader, the entry will be executed
immediately as soon as the stock trades .02 or more above the high of the previous day. At
that point, you would immediately place a sell-stop .03 below whatever the low of the day is. If
the stock continues to advance after you get in, then pulls back for at least three candlesticks,
then turns back up and starts to rally again, the sell-stop will be moved up to below the lowest
low of the correction of at least 3 candlesticks. If the stock continues to trend up, we will
continue raising the stop below the lows of the intraday pullbacks or corrections, and exit at the
close (in the best-case scenario) or on moves close to resistance levels, or get stopped out
when the stock stops trending up.
First of all, it is very important to note that although these stocks are strong, if the market goes
down, they won't stay strong for long. Also, if the market, as a whole, goes down, it is not
worth the risk to try and buy stocks and make money on the upside. Save your money for a
better day. Therefore, if two out of the three major averages (Dow, S&P, NASDAQ) drop below
the previous day's low, suspend all trading on the long side and cancel your buy stop orders. If
the averages then go back above the previous day's low, you can always place your buy-stop
orders again.
Another important rule is not to take trades that trigger in the final hour. If your buy-stops
haven't triggered by 3pm Eastern time, cancel them. These trades need time to work.
Before the open, set alerts on all the stocks on the daytrading page. If a stock opens above our
buy-stop price or triggers in the first 30 minutes, consider it a gap-up and scratch it off your
buy-stop list.
After the first 30 minutes of trading, place buy-stop orders on all the stocks that haven't
triggered their buy-stop price yet.
When a stock triggers, immediately place a sell-stop .03 below what is the low of the day at that
point. Then, watch the stock on a 5-minute chart. Whenever the stock makes a new high, then
pulls back for 3 or more candlesticks (on the 5-minute chart), makes a low, and starts to trend
back up, (and in other words makes a bullish pivot), raise the stop to .03 below the pivot low.
Continue raising the stop as the stock continues to make higher pivot lows.
Take profits when the stock approaches a round number or close it out at the end of the day, if
you haven't been stopped out before then.
Lastly, if a stock that gapped-up or triggered in the first 30 minutes continues to rally after the
open, then pulls back mildly for 3 or more 5-minute candlesticks, and turns back up, completing
a good-looking bullish pivot, you can enter at the completion of the pivot and set your stop .03
below the pivot low. If the stock continues to go up from there, continue to raise the stop to
.03 below successively higher pivot lows, or take profits rallying into a round number.
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