Ken Calhoun*
President and Head Trader of Daytrading University
Focus: Trading education, especially day trading NASDAQ tech stocks
* Not employed by or affiliated with eSignal
Ken Calhoun's Breakout/Bounce Approach to Trading Using eSignal
To understand my breakout/bounce trading approach, you need, first, to take
a look at my eSignal setup: check out my 6-monitor setup here. (You will need to scroll right and down to see all of it.)
The indicators you see in the screen shot are the ones I use continuously to scan the market for day trading opportunities, in descending order of importance (indicators at the top being the most important). Think of it as a process flowchart for day trading decision-making. (I'll add more chart details to it in time.)
Note that many new day traders fail because they only look at the indicators that I consider further down the order of priority (e.g., specific stock chart patterns) and get whipsawed and/or make late entries. The market is a system, and you need to read it top-down, rapidly, to scan for profitable trading opportunities. Welcome to professional trading!
Now, follow this quick guide to the 7 levels of scanning I do everyday to find my stock picks.
KEN'S EDUCATOR CREDENTIALS
Ken Calhoun, President and Head Trader of Daytrading University, is DTU's founder and is the live trader training coach at Daytrading University's Live Trading Room. Having provided online training to active traders from more than 24 countries, he is dedicated to helping traders learn successful trading skills, including how to identify support and resistance areas, trends, entries and exits for their stocks. Ken trains members of DTU to trade using 2-minute charts, stochastics, $TRINQ, sector trading and market indexes, and advanced level 2/t&s trading techniques. He took his profits from a successful 12-year consulting career and discovered the world of active stock trading. Ken applies a wealth of disciplined charting and applied technical analysis chart pattern knowledge to his active trading methods.
KEN CALHOUN'S WRITINGS
As an internationally published business management consultant, Ken previously trained more than 22,000 people in 144+ companies worldwide. He is featured on the video "Advanced Day Trading: Using Chart Patterns and NASDAQ Level II."
**eSignal is not responsible for any interaction between the user and the entity identified above.
Level 1: The NASDAQ Composite Range Check
What to Check For:
Is it a NASDAQ Composite wide-range day or narrow-range day?
How to Scan for It:
See if the current day's COMPQ is making a high above the previous day's high or a low below the previous day's low.
Purpose:
To gauge overall trading potential for the day; wide-range days are better, with more trading opportunities than narrow-range days, which tend to be choppy
How to Trade:
If it's a narrow-range day, then we trade less or not at all. Intrarange
trades are most often Fibonacci bounces versus breakout trades. If it's a wide-range day, then look for cup pattern breakout 2-day highs for entries.
Level 2: The NASDAQ Volume Check
What to Check For:
Is the NASDAQ TRINQ (a volume indicator) less than 1.0 (indicating a "bullish" day) or greater than 1.0 (indicating a "bearish" day)?
How to
Scan for It:
Keep an eye on the
NASDAQ TRINQ (buy/sell volume and a/d line) for reversals,
trend and net value.
Purpose:
To gauge buy versus
sell pressure, volume and trend for the current 5- to
10-minute time frame
How to
Trade:
If TRINQ is
> 1.0 and trending up, then we look for weak
sectors, as the broad market is falling, and we look for
breakdown shorts. If TRINQ is < 1.0 and falling (or chopping),
then we look for breakout longs and/or reversal
bounce longs following selloff.
Level 3: Sector Percentage
Check
What
to Check For:
What relative strength/weakness
and money flow are the sectors showing?
How to
Scan for It:
Sort your quote box
by Percent Change from Open for $SOX, $GHA, $GSO, $GIN,
$NBI and so forth.
Purpose:
To assess which sectors
and Tier 1 lead stocks are the "outliers" and,
thus, significant. (Note that we check for sectors that
are showing a > 1 - 2% change after 10:00 a.m. ET and
red/green for the day and so forth.)
How to
Trade:
If we see one
or two sectors that are greater than 2% after 10 a.m.
ET etc., either red or green, then we look for
the "outlier stocks" in these sectors for continuations
and/or reversal plays. If we see a strong trend from 9:40 until 10:15
a.m. ET or so (e.g., changes from 1.1% green to 1.8%,
etc.), then we look for continuation plays in the
direction of the sector.
Level 4: Tier 1 Lead
Stock Check
What
to Check For:
What type of movement
is a Tier 1 lead stock showing -- a 2-day high/low breakout/breakdown
-- or is it choppy?
How to
Scan for It:
Check the Tier 1 lead
stock's 2-day chart pattern to see if it is making a high
above the previous day's high (or a low below the previous
day's low). Use INTC for $SOX, MSFT for $GSO, DELL/AAPL
for $GHA, IDPH/AMGN for $NBI and EBAY/YHOO for $GIN.
Purpose:
To compare the Tier
1 lead stocks to their sectors to help determine the breadth
and depth of movement and the likelihood of follow-through
in the direction of the movement for Tier 2 stocks that
are also moving in the same sectors
How
to Trade:
If
we see a 2-day high breakout in a Tier 1 stock in a strong
sector, then we look to our core trading stocks
for breakout longs in the direction of the stock that's
making the move. If the Tier 1 stocks are just chopping around in
each sector, then we don't trade much unless a
specific stock is having a wide-range day with a tradable
chart pattern.
Level 5: Core Trading
Basket Check
What
to Check For:
What Outlier, Breakout
or Bounce candidates show up in the stock chart patterns
for your Core Trading Basket stocks?
How to
Scan for It:
Once you've seen a
green light from the indicators in the previous four levels
(which you should be able to scan within 5 - 8 seconds),
you now look for specific trading patterns. Note that
bounces/fades should be <20% of all trade attempts.
You are looking for stocks priced between $15 and $60
that have 2-to-4-point intraday trading ranges on average
volume of at least 1.2 million shares/day. You use the
Tier 1 breakouts as the lead/confirming indicator for
core stock entries.
Purpose:
To profit
Core
Trading Stock Charts for Day Trading the NASDAQ:
2-day, 2-minute candlestick
chart (8:30 a.m. to 4:00 p.m. ET) (Technical Analysis:
22 Moving Average [simple], volume)½-day, 1-minute
candlestick chart (8:30 to 11:30 a.m. ET) (Technical Analysis:
15/5 stochastics, volume)
Tips on How to Use Real-Time
Alerts for Breakouts/Bounces
Breakouts:
We like to enter breakouts
.3 to .6 above the whole number above the previous day's
high on the 2-day chart. This is one of the "filters"
we use to keep us out of false breakouts and choppiness.
The maximum stop loss is the whole number.
Bounces:
We like to enter long
bounces off the previous day's low support. These may
be .25 to .4 greater than the whole number. Preference
is given to bounces that are sharp, multi-point drops
(e.g., > 1.5 points in < 20 minutes). Use Fibonacci
retracements for exits (e.g., approximately 30 to 50%
bounce of the range of the first move for the exit).
Level 6: Time and Sales
Check
What
to Check For:
When is the best opportunity
to time the specific entry using Time and Sales?
How to
Scan for It:
Once the stock is trading
near the entry alert, we look at the tape to assess the
"pattern," the net ratio of buyers to sellers.
Use the patterns the Daytrading University teaches: Tape
speed, reversals, block trades and print sizes. You are
also, of course, keeping an eye on the TRINQ, the sector
charts and the Tier 1's to check for any early reversal
signs and steer clear. (For example, your QCOM chart looks
great, but there's a pullback in the sector chart, and
the TRINQ has just reversed. You should wait for them
to resume the trend prior to entering. Otherwise, no entry.)
Purpose:
To balance
the specific stock indicators (e.g., charts, Time and
Sales) against the market internals and sector movement
How
to Trade:
If
the specific stock indicators and the market internals
and sector movement are in conflict with each other, then
avoid an entry unless the stock shows compelling (e.g.,
high-volume) movement. "When in doubt, stay out."
It is also important to be in the first third of the movement.
You can't wait for "all the planets to line up"
as it were. In time, you should be able to identify trade
entry points correctly and use trailing stops of "the
red band" (e.g., 3 - 4 spreads out of market, in
NASDAQ Market Depth [Level II]) to lock in profits on
open wins.
Level 7: Multiple Position
Check
What
to Check For:
Is there room for dynamic
position sizing (DPS) (i.e., the holding of multiple positions
simultaneously)?
How
to Scan for It:
Use DPSs
to add to winning trades incrementally (e.g., buy 500
shares at $34.42; buy another 200 at $34.61; sell all
700 at $35.31 as it fades). Use multiple positions on
strong, wide-range days to multiply profits.
Purpose:
Advanced
techniques for experienced traders: To fade in and out
of positions; to be more fluid in money management and
trades
How
to Trade:
If
the Semis (traded on the Iron and Steel eXchange) are
strong, then we are long QLGC and XLNX at the same
time.
