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Timeframes and Trades
Tony Golan
Chief Technical Analyst
StockProfit.com™
From a logistic standpoint, there are two kinds of traders: The ones that can make trading decisions during the day, and those that cannot be in front of computer screens to make trading decisions during the day. People who can make trading decisions during the day are daytraders, and people that cannot make trading decisions during the day are called "end-of-day traders". Most people are end-of-day traders.
There are a lot of advantages to being an end-of-day trader. First, since end-of-day traders are not exposed to the emotional upheaval of watching intraday price movements, end-of-day traders are not affected by them and can therefore make unemotional trading decisions in the evening, when the market is closed and all they see are the final prices. Another advantage of being an end-of-day trader is the necessity to stay in the stock for longer periods of time, and therefore to be able to ride bigger trends to bigger profits.
The StockProfit Momentum Stock Trader by Tony Golan operates in three distinct timeframes:
- Daytrades - trades that last only the next day
- Swing trades - short-term trades that last from a couple of days to three weeks
- Intermediate-term Trades - trades that last from three weeks to months
Trading signals come when the stock, which is already in a strong long-term up-trend and whose RSD is already above 25%, rallies with a white candlestick and above-average, rising volume. The trading signal is confirmed when the stock goes .02 above the high of the white candlestick with the above-average and rising volume, and that's when we enter into the stock.
How far the stock is off its high determines how long the ensuing up-trend is likely to last. If the stock is at or near a new high, the up-leg is probably closer to its end than its beginning because stocks correct after they make new highs, and once they start to correct, you never know if it's just a normal, short-term pullback in an up-trend or whether it's the beginning of a new long-term down-trend. Therefore, at or near new highs, it's prudent to only enter for daytrades.
The number one fear of every trader is that the stock declines really fast right after they get in. Everybody wants to avoid having that happen to them. To avoid that, we only enter short-term trades after short-term corrections against the up-trend and we only enter intermediate-term trades after intermediate-term or oversold corrections.
Intermediate-term trades buy the stock as close as possible to the intermediate-term low and right at the onset of a new intermediate-term up-trend. Intermediate-term trades are relatively infrequent and therefore very desirable.
For an intermediate-term setup, a stock in a long-term up-trend, with an uninterrupted pattern of higher highs and higher lows and trading above a rising 200-day moving average, with RSD above 25%, will make a new high. Then, the stock will pull back slowly off the high, and become oversold. Once oversold, the correction in the stock will have reached an extreme (when compared with how high and how low the stock has been lately), and the intermediate-term up-trend will be likely to continue to new highs from there. After the stock has become oversold, most often it will rally with a white candlestick and above-average, rising volume. That's the intermediate-term buy signal.
 Zoom
In the chart above, you can see an example of the intermediate-term trade at work. ASF had been rallying since May 2005, from around 13 to 37.50 without any corrections to speak of. It then pulled back slowly to a low of 32.44, then turned back up with a white candlestick and above-average, rising volume. This completed the intermediate-term buy signal. The high of the day with the white candlestick and above-average, rising volume was 35.05. On the Momentum Stock Trader, the exact buy order read "Buy ASF @35.07 Stop 36.07 Limit GTC". This means to buy ASF only when it trades at 35.07 or higher. Then, buy it at a price not to exceed 36.07. The first part automates the entry for end-of-day traders. The second part protects you from overpaying in case of a big gap-up open.
Immediately upon entry, we placed a sell-stop below the most recent low of 32.44. If the stock now goes back down and goes below the oversold low, it will make lower highs and lower lows, which means a down-trend in progress, and a reversal of the intermediate-term up-trend. If we bought the stock because it was in an up-trend and then the price action invalidated the up-trend, there is no need to hang around any longer and the sell-stop order accomplishes that task beautifully.
The chart below shows what happened after we entered the trade.
Zoom
ASF initially rallied to a new high, then pulled back but never got to the sell-stop, and after consolidating for four months, resumed the up-trend and rallied to another new high of 58.99. It then had a big one-day drop, and we exited the next day at the open at the market at 47.10 for a 32.3% gain in just over 7 months.
Zoom
The above chart shows another example of the intermediate-term trade. HANS had been in a strong up-trend, going from a low of 10.03 in October to a high of 50.53 in December (point '2' on the chart). It then pulled back for only a few days, but became oversold (the red stochastic oscillator going below the 30% line). HANS then turned back up with a white candlestick and above-average, rising volume, flashing an intermediate-term buy signal. Subscribers of the Momentum Stock Trader received specific, clear trading instructions, instructing them to buy HANS @21.10 Stop 22.10 Limit GTC. The above chart reflects a 4:1 stock split, and the actual buy at the time was at 84.38. The protective sell-stop was immediately entered at 19.03, .05 below the oversold low.
Zoom
The chart above shows what happened after we entered the HANS trade. The stock initially pulled back, but not enough to trigger the sell-stop. It then rallied to a new high, pulled back to a yet higher low, and continued to trend higher for months. After staying in it for roughly six good months, and with the entire market reversing in May of 2006, we took our profits and exited at 189.71 or at 44.81 adjusted for the split for a 124.8% profit in 6 months.
The beauty of the intermediate-term trade and the intermediate-term stop is that they keep you in for the really big moves, yet cut your loss quickly if you're wrong. The buy on HANS was at 84.40, with the sell-stop at 76.27. That's a stop of 9.6%. The risk on the trade was less than 10%, and the gain was 124.8%. That's a 14:1 reward to risk ratio. This is phenomenal.
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TRID was in an up-trend, too, when it rallied from around 8 in April of 2005 to a high of 11.68 in June 2005 (The charts reflect a 2:1 stock split). TRID then pulled back for a few days, and became oversold for the first time in a couple of months. The stock turned back up the next day with a white candlestick and above-average, rising volume. Clients of the Momentum Stock Trader were instructed that night to buy TRID @11.20 Stop 11.70 Limit GTC. The sell-stop would be placed immediately at 10.53, just .05 below the low the stock just made. This would be a risk of 5.8% on this trade.
Zoom
The chart above shows what happened to TRID after we got in. TRID rallied right off the bat and continued higher. In early August, it made a low of 16.42 and turned back up. We moved up the sell-stop to 16.37. TRID tried to rally to a new high, then turned back down and stopped us out at 16.40 for a 46.2% gain in less than 2 months. With an initial sell-stop of 5.8% on this trade, the reward to risk ratio was just under 8.0 ! If you have any experience at all evaluating trades, you know these numbers are phenomenal.
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As you can see from the chart above, VLO was already in an up-trend in July of 2005. The stock had rallied from around 30 in May to 43.15 in July and pulled back enough to be oversold. It then turned back up with a white candlestick and above-average, rising volume. The trading instructions on the Momentum Stock Trader indicated to buy VLO @41.74 Stop 42.74 Limit GTC. The corresponding sell-stop would go at 39.33, just .05 below the oversold low. The initial risk on this trade was 5.7%.
Zoom
As you can see from the chart above, VLO trended higher, but did it slowly, with a lot of pullbacks. Eventually, it made it up to a high of 70.75, then pulled back, rebounded, and declined again to a lower low. We exited the trade at 59.25 when the stock made a lower low and the whole rest of the market seemed to be reversing into a down-trend. The gain on the trade was 43.6% in just under 10 months. The reward/risk ratio on this trade was 7.6.
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