Seeking Alpha

Morpheus Tradin...'s  Instablog

Morpheus Trading Group
Send Message
Deron Wagner is the founder and portfolio manager of Morpheus Trading Group. His daily focus is managing and trading the Morpheus Capital Hedge Fund, which he founded in April of 2004. He also teaches his swing trading strategy with The Wagner Daily newsletter, which provides exact entry, exit,... More
My company:
Morpheus Trading Group
My blog:
Morpheus Trading Group - swing trading blog
My book:
Advanced Technical Analysis of ETFs
View Morpheus Trading Group's Instablogs on:
  • How To Improve Your Stock Pick Win Rate With Intraday Moving Averages

    In the past, I have shared with you how multiple timeframes analysis substantially increases your trading profits (check out this post for a simple overview).

    But since the Morpheus system focuses on short to intermediate-term swing trading, my blog posts have always concentrated on daily, weekly, and monthly chart timeframes...until now.

    This time, I share with you my favorite methodology for using moving averages on intraday timeframes, rather than the much longer periods typically discussed on this blog.

    Spend a few minutes reading this blog post, apply the simple technique, and your stock picking win rate is bound to improve.

    Not Really New

    Although I have been using this trading technique in the Wagner Daily newsletter for more than 10 years, this excellent strategy for fine tuning your intraday entry and exit points has rarely been explained.

    It's not that using moving averages on intraday charts is some kind of big secret; the concept itself is pretty basic.

    Still, I typically avoid discussion of intraday trading techniques to avoid confusion about the Morpheus trading strategy, since the average holding period of our stock and ETF trades is several weeks to months.

    So, before we dive in to this mini trading lesson, let's be clear on two things:

    1. We have not suddenly ditched swing and core trading in favor of daytrading.
    2. This strategy is merely designed to supplement your existing trading system by increasing your odds of buying at the right time.
    Establishing Trend Confirmation

    When determining which stocks to buy (in bull markets) or sell short (in bear markets), we typically scan for trade setups and look for ideal entry points on the weekly and daily chart intervals.

    Assuming the weekly and daily charts look good, and all the key moving averages are in order, the next step (usually) is to wait for any current, multi-week price consolidation to run its course, which is typically necessary before a stock can move higher in earnest.

    For example, the current daily chart of SolarCity ($SCTY) below shows all moving averages in the proper order to confirm an uptrend.

    Specifically, the 20-day EMA is above the 50-day MA, 50-day MA is above the 200-day MA, and all three moving averages are in an uptrend:

    (click to enlarge)

    With the price action tightening up around the 20-day EMA (beige line) lately, $SCTY may soon be ready to push higher (especially if support holds at $70).

    Conversely, a breakdown below the 20-day EMA would suggest the chart may need a few more weeks of consolidation before it is ready to move higher.

    Top-Down Chart Analysis

    Now that we know the daily chart pattern is solid (meaning a dominant uptrend is already in place), we next zoom in for a closer look at the intraday charts (60, 15, and 5 minute intervals) to get an idea of where the price action is, in relation to these moving averages.

    Hourly Chart

    After the daily chart, we next look for the following criteria on the hourly (60-minute) chart timeframe:

    • When dealing with a tight-ranged consolidation, it is important for the price of the stock to be above the 200-period MA on the 60-minute chart (this does not apply if seeking a pullback entry to the 50-day MA on a daily chart).
    • Price should be above, or ready to break above, the 20-period EMA, which should also be rising (or at least have flattened out).
    • 20-period EMA should be above, or ready to cross above, both the 50 and 200-period moving averages.

    On August 25, $SCTY gave the "all clear" signal on the hourly chart, around the $71.15 area, because the price was trading above all three moving averages.

    Take a look:

    (click to enlarge)

    15-Minute Chart
    • As with the 200-period MA on the hourly chart, we also look for the price to be above the 200-period MA on the 15-minute chart.
    • All moving averages should be in the proper order (shorter periods above the higher periods), or at least close to crossing over and trending in the same direction.
    • Again, $SCTY gave the "all clear" signal on the 15 minute chart, when it began trading above all three moving averages.

    Do you see the similarities to the hourly chart on the 15-minute chart below?

    (click to enlarge)

    5-Minute Chart
    • Once again, we want to see the price trading above the 200-period MA on the 5-minute chart, and for the average to be trending higher or at least have flattened out.
    • It is usually a bullish sign when the price action moves above a tight range on the 5-minute chart, especially when all the moving averages are clustered together (as they were late in the afternoon on August 22).
    • On August 22, around the $70.50 level, $SCTY shouted the "all clear" signal on the 5-minute chart, as the price began trading above all three moving averages (50-period MA was just below the 200-period MA, but still trending higher).

    This is all shown on the 5-minute chart below:

    (click to enlarge)

    If you were to analyze any one of the above charts by itself, without any other context, it would be difficult to spot this ideal buy setup.

    However, upon basic analysis of the 5, 15, and 60-minute charts, it is easily seen that the price was above all the major averages by the $71.15 level.

    On the daily chart, the move above $71 also put the price above all major moving averages (10-day MA, 20-day EMA, 50-day MA, and 200-day MA) as well.

    Although the weekly chart was not shown, the price was also above the 10-week MA ($70 area) and 40-week MA ($63.95).

    Put The Wind At Your Back

    With the price now trading above all important moving averages on the weekly, daily, and intraday charts, $SCTY now has a pretty good shot at zooming higher after a few weeks of consolidation (sometimes sooner).

    By patiently waiting for the three main moving averages to line up on multiple time frames, you will always be placing the wind at your back and increasing the odds of a profitable outcome when entering new stock and ETF trades.

    Obviously, there is more to successful trade entries than just price and moving averages.

    Reliable technical indicators such as volume, price movement of a stock's industry group, and the overall stock market itself are other crucial factors that must be assessed.

    But when all of these elements are in sync with one another, you are definitely looking at the potential for a superb winning trade!

    To profit from our top nightly stock and ETF picks, and to learn a proven trading system while doing so, sign up now for your risk-free trial subscription to The Wagner Daily newsletter (includes free access to the MTG Stock Screener)

    Follow Us: Follow us on Google+ Follow us on Twitter Join us on Facebook Our trading blog - RSS feed

    Original Source

    DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Daily (hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may or may not buy, sell or have positions in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.

    © 2002-2013 Morpheus Trading, LLC
    Reproduction without permission is strictly prohibited.

    Aug 28 6:09 AM | Link | Comment!
  • The Triad Of Trading Profits – Volatility, Liquidity, & Chart Patterns

    Scanning for reliable chart patterns is obviously one of the most important factors that determines which stocks and ETFs we buy in the model portfolio of The Wagner Daily newsletter.

    However, just because a stock has a bullish chart pattern does not mean you should automatically consider buying it.

    In addition to assessing overall market conditions, you must also determine if every potential stock trade also has the proper amount of volatility and liquidity.

    Read on to learn how to consistently choose only stocks with ample volatility, liquidity, and reliable chart patterns (the "triad of trading profits"), which directly impacts your long-term trading gains.

    The Perfect Balance

    In our style of stock trading (short to intermediate-term swing), we look to trade with the prevailing trend, which is usually in the direction of the 50-day moving average.

    When the market is in trend mode to the upside, it is important to expose our capital to as many bullish situations/setups as possible, in order to maximize trading profits.

    To do so, we focus on swing trading stocks that are volatile enough to produce gains of 20% or more in a short period of time, which allows us to rotate the portfolio, and again, maximize profits.

    Nevertheless, the process is not as simple as building a portfolio of the most volatile stocks in the market and letting the chips fall where they may.

    The goal in selecting the best stocks to buy (in a bullish market) is to achieve the perfect balance between volatility, liquidity, and reliable chart patterns.

    Finding The Triad

    How we screen for a stock that has the winning triad of volatility, liquidity, and chart pattern reliability is actually easier than it may sound.

    Volatility

    To determine the true volatility of a stock, we utilize a simple and highly effective formula known as the Price/ATR Ratio.

    When using a trading platform like TradeKing or TradeMONSTER (get free trades for 60 days), we start by displaying the ATR (average true range) of a stock.

    An objective, technical measurement of a stock's volatility, ATR is calculated as the greatest of the following:

    • current high less the current low
    • the absolute value of the current high less the previous close
    • the absolute value of the current low less the previous close

    Put another way, ATR basically measures the average intraday trading range of a stock. We use a 40-day ATR, which tells us the average daily volatility of a stock, as averaged over the past 40 days.

    To balance out the effect of higher priced stocks automatically having a greater trading range because of their high prices, we next divide the last price of a stock by its 40-day ATR (average true range).

    For example, if a stock with a $40 share price has a 2-point ATR, it trades at 20x its ATR ($40/2).

    A $40 stock with a 1 point ATR trades at 40x its ATR ($40/1).

    With this ratio, a lower number indicates a more volatile stock than a higher number (which is better for momentum swing trading).

    When dividing the stock price by its ATR (Price/ATR Ratio), 40-50 is roughly an average number where most stocks will fall.

    However, we prefer to trade stocks with a 20-50 Price/ATR ratio.

    A stock with a ratio above 60 is usually (not always) too "slow" to trade.

    Conversely, a stock with a Price/ATR Ratio below 20 means the stock may be a bit too volatile for our tastes.

    Liquidity

    The second component of scanning for suitable stocks to trade is liquidity.

    To qualify as a potential swing trade with full position size, individual stocks should trade with a minimum average daily volume of at least 1 million shares.

    Some stocks we trade have far less than 1 million shares per day changing hands, but we always reduce our position size in such a situation.

    Higher priced stocks are ideal, as they allow funds to maneuver in and out of trades with ease (learn why you should never avoid a high-priced stock, even with a small trading account).

    Note that our requirement for 1 million shares per day is only for individual stocks; we have a much lower requirement for ETFs, as high average daily volume is largely irrelevant when trading ETFs.

    Reliable Chart Patterns

    The final component in the triad of stock selection is subjective and deals with spotting good-looking charts that can produce low-risk, reliable buy entry points.

    Fast-moving stocks require low-risk entry points, which allow us to minimize risk and maximize the reward to risk ratio for each new swing trade entry.

    This article is not about how to find the best and most reliable chart patterns, but this article will point you in the right direction for the third element of finding the top stocks to buy.

    Volatility & Liquidity In Action

    Based on our system, Tesla Motors ($TSLA) is an ideal stock with a Price/ATR Ratio in the 30s and plenty of liquidity:

    (click to enlarge)

    Another solid stock to trade is SolarCity Corp. ($SCTY), which is nicely volatile with a Price/ATR Ratio of just 23:

    (click to enlarge)

    With a Price/ATR Ratio of more than 70, Cisco Systems ($CSCO) is too slow for us and is an example of a low-volatility stock we would not look to trade:

    (click to enlarge)

    With individual stocks, we usually pass on trade setups with a Price/ATR Ratio over 50.

    The ratio can be a bit higher for ETFs, which are generally slower-moving than stocks, but you should avoid ETFs trading with a Price/ATR Ratio of more than 80-90.

    The iShares Long-term T-Bond ETF ($TLT) is, for example, an ETF we would typically not look to trade.

    Although it is high-priced (which is generally good), it has a very low ATR. As such, the ETF trades at a price of 118 times its ATR.

    With a Price/ATR Ratio of 118, $TLT is simply too slow to trade:

    (click to enlarge)

    Are You Maximizing Your Potential Trading Profits?

    Unless you have the luxury of a trading account with virtually unlimited funds, it is crucial to scan for stocks that provide you with the most potential "bang for the buck" (highest profit potential when they take off).

    Although there may be hundreds of stocks with nice-looking chart patterns in a typical bull market, getting in the habit of checking for ample volatility (Price/ATR Ratio) and liquidity is an excellent way to further narrow down your arsenal of potential stock trades to consider.

    For an easy way to automatically make sure all your future stock trades possess the perfect triad of volatility, liquidity, and reliable chart patterns, sign up now for your risk-free trial to The Wagner Daily newsletter because we do the hard work of nightly, rule-based stock scanning for you.

    Follow Us: Follow us on Google+ Follow us on Twitter Join us on Facebook Our trading blog - RSS feed

    original article source

    DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Daily (hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may or may not buy, sell or have positions in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.

    © 2002-2013 Morpheus Trading, LLC
    Reproduction without permission is strictly prohibited.

    Aug 19 9:04 AM | Link | Comment!
  • How To Scale Out Of Winning Breakout Stock Trades For Maximum Profits

    Traders frequently tell me that knowing when to sell a winning breakout trade is one of the more challenging aspects of having a consistently profitable trading strategy.

    Sell too soon and you fight the feeling of regret while the stock continues cruising higher.

    Get too greedy and try (typically in vein) to catch the absolute top and you give back too much profit when the stock unexpectedly corrects sharply off the highs.

    With my swing trading system (overview here), the goal is always to let the winners ride, while cutting losing trades quickly.

    Nevertheless, since my profit target of most breakout swing trades is a 25-30% price gain from the time of entry, I start raising stops when winning stock trades reach that general target price area.

    One of most successful ways I have found to lock in profits on winning trades is through using a "split stop" strategy.

    This means that my protective stop price gets split into two, with a tightened stop being used on a partial share size, and a looser stop deployed on the remaining shares.

    A current example of exactly how I do this can be found in...

    Biodelivery Sciences ($BDSI) - Protecting a 33% gain

    Since my May 23 buy entry in The Wagner Daily newsletter, Biodelivery Sciences ($BDSI) is presently showing an unrealized share price gain of 33.1%.

    This was aided by a recent breakout to a new all-time high in this hot stock pick, which is shown on the monthly chart below:

    (click to enlarge)

    Since $BDSI has already surpassed my general swing trade breakout goal of a 25-30% gain (when it broke out to a new all-time high a few weeks ago), I am now going with a split stop (a tighter stop on 1/3 of the position, with a looser stop on the remaining 2/3 shares).

    Overall, my goal is to stick with the $BDSI position as long as it holds above near-term support of its 20-day exponential moving average (highlighted beige line on the daily chart below):

    (click to enlarge)

    Specifically, I have just informed subscribers in today's newsletter that I have raised my stop on 1/3 share size of $BDSI to just below yesterday's (June 30) low.

    If triggered, such a stop price would still secure a gain of 30% for traders who followed my buy entry five weeks ago.

    The stop price on the remaining 2/3 position of $BDSI has now been raised to just below the 20-day EMA (presently at $11.48).

    For stocks that are breaking out to new highs (swing trades only, not core/position trades), the 20-day exponential moving average is typically my "line in the sand" that the price must hold above.

    Additionally, subscribing members should also note in the "Open Positions" section of today's report that I also raised stops in $TSLA, $SANM, and $WWAV.

    Since $SANM and $WWAV are reporting earnings in mid-July, the idea here is to protect profits and get out of the way before the earnings report if the price action doesn't hold up.

    With $TSLA, which is currently showing an unrealized gain of 15.2% since my June 12 buy entry, I will lock in our gains and look for another low-risk entry point to form if yesterday's ugly close leads to more selling.

    Don't Miss The Buy Entry In This International ETF

    Rather than only talking about how to exit a winning trade, I will close today's blog post by also sharing a new swing trade setup of an ETF we are currently monitoring for potential buy entry in the coming days. Bonus!

    iShares Philippines ($EPHE) has been forming a valid base of consolidation, which is one of the best ways to find breakouts in strong stocks and ETFs before they actually break out.

    The setup is shown on the daily chart of $EPHE below:

    (click to enlarge)

    $EPHE is forming a bullish base above the rising 50-day moving average (teal line), with the consolidation correcting more by time than price (the 20-day exponential moving average is still above the 50-day moving average).

    The recent bounce off the $36 support level stalled at the short-term downtrend line (just above $37).

    Now, I look for the action to pull back a bit further, but remain above the 50-day moving average (minus a shakeout bar or two).

    If that occurs, a bullish reversal candlestick around the 50-day moving average would serve as a low-risk pullback entry on weakness.

    An alternative buy entry would be a breakout above the downtrend line as an entry on strength.

    As always, regular subscribers of my nightly stock picking newsletter will be notified of my EXACT buy trigger, stop, and target prices in advance if this trade setup makes the cut to my "official" watchlist.

    Follow Us: Follow us on Google+ Follow us on Twitter Join us on Facebook Our trading blog - RSS feed

    Original Source
    DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Daily (hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may or may not buy, sell or have positions in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.

    © 2002-2013 Morpheus Trading, LLC
    Reproduction without permission is strictly prohibited.

    Jul 01 11:03 AM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.