Here's How I Identify The Stocks I Trade

Hi, my name is Costas Tsaklas. I’m a full-time trader and a long-time member of Tradingmarkets.com.  Over the years that I have been part of this community, many traders have asked me about the process I follow to identify stocks that I trade.  In this article, I will describe this process step-by-step and I will provide a brief description of how I enter most of my trades.  I say “most of my trades” because there are always exceptions.

I am a firm believer that during the trading day, the only thing a trader should do is execute their trading plan.  The trading plan, which includes the stocks, their entries, stops and targets, is something that must be done either the night before or over the weekend, as I personally prefer.  I consider myself a swing trader.  In most cases, my trades last from one to two days and I’m looking to make one to two points, on average.  Although I use initial protective stops, I don’t use trailing stops.  I expect the stocks I trade to move to my profit targets in a short period of time.  If they don’t, I close the position, with or without a profit.

As I mentioned before, the majority of my analysis takes place over the weekend. I scan through hundreds of charts on the weekly timeframe, looking for stocks that recently changed their trend from down to up and visa versa. When I find these stocks, I keep them on a watch list, waiting for them to provide low risk entries that have a clear and definable stop.  Let’s look at ATRS, a stock I recently traded:
 

First, I want to identify the intermediate-term trend of the stock. Looking at the chart, is not always clear where exactly the uptrend ended and when the downtrend began.  Since I am a big fan of Gann’s method of trading, I use Gann Swings to define the trend.  A series of two consecutive higher highs on the weekly timeframe establishes the last low as “swing pivot low” and two consecutive lower lows, establish the last high as “swing pivot high.  Take a look at the second chart:

Throughout 2003, ATRS was on an intermediate term uptrend as it was defined by higher highs and higher lows.  Point A was the last swing pivot low before the yearly high at point X.  After that, the stock started to correct and when the price moved below the pivot at point A, the trend changed from “up” to “down”.  Although there were rallies during the downtrend (from point 1 to point 2 and from point 3 to point 4) the stock was on an intermediate term down swing and if anyone wanted to trade from the long side during these rallies, the trades should have been considered “counter-trend”.  After a low in July 2004 (point 5), the stock started another counter-trend rally up to the point it traded above point B (previous swing pivot high).  At that moment the intermediate term trend changed again to “up” and from that point forward I started looking for a pullback to setup a long entry.  For trade set-ups I use the daily chart.  Although the timeframe is different, the process remains the same.

As ATRS started correcting from late September 2004 (point X) I started looking for the moment that the stock will trade above the previous, short-term, pivot high, in order to initiate a long trade. 

In order to be ready to enter a trade when all the criteria are in place, I set my software to alert me when the price reaches either a pivot high or low.  This way I don’t have to constantly monitor all the stocks that are setting up on a daily basis.  Every weekend I update the alerts with new values if new swing pivots have been established.

Late November 2004, ATRS triggered a buy entry as it traded above the previous pivot high at point A.  I initiated a long trade and I placed my stop below the low of the previous day.  From that point on, the chart of the stock was in front of me, on my daily watch list and I traded it from the long side for as long as the trend remained up.

For managing a trade, I use a 60-minute chart with three exponential moving averages (50-period, 34-period and a 20-period) in addition to  Keltner channels. Since the weekly and the daily trends are up, as defined by the Gann Swings, my expectation is that the moving averages will maintain a positive crossover for as long as the daily trend remains in the same direction.  Within this trend, I look for trades based on traditional technical analysis patterns

Let’s take a look how many trades were setup since then:

First trade was the breakout above the daily pivot high at point 1.  The stock moved fast, over two points, and closed at the extreme of the second hourly bar outside the Keltner band (point 2).  This is usually a sign that the stock is ready to consolidate.

Another trade was the bull flag, at point 3, just above the 20-period EMA. 

At point 4, we see a positive divergence, along with a test of the 50-period EMA on the 60-minute timeframe. The stock bounced off the lows and slowly moved up towards the previous pivot high.  At point 5, the stock traded above that pivot high and triggered another long entry.  The question someone might ask is why don’t I hold the stock for as long as it is moving up, instead of getting in and out.  That is something which has to do with my personality.  I feel more comfortable taking a one-point of profit when I have it instead of waiting to see how much I could “potentially” make on the trade.  In my opinion, there isn’t a right or wrong way to approach this issue. Traders have to identify what works best for them and stick with it.

Trading is a business of managing risk and uncertainty. In order to be successful, we need to be able to reduce the risk by identifying the direction of the trend. The use of Gann Swings is not the only method for this purpose, but it is the method I feel most comfortable with and that’s very important.  Find a method you understand and stick with it. I know it sounds easier than it actually is, but having a set of rules to follow will improve your trading results dramatically.  Having a wrong plan is better than having no plan at all. 

Good luck with your trading!
 

Costas Tsaklas
 

Costas Tsaklas is a full-time trader of stocks and futures.  Although he is involved in the stock market from the early 90's, Costas made trading his full-time profession, in 1997 .  Prior to that he owned and operated a succesful software consulting business for the financial industry. Costas believes that proper management of risk is the key to succesful trading."