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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
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  • 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!
  • Why Stocks Are Now Poised To Move Lower (And How To Profit If They Do)

    For the past five weeks, the S&P 500 and NASDAQ Composite have been stuck in choppy, sideways ranges.

    This lack of direction has caused the number of low-risk trade setups to dwindle, which is why I said in my most recent blog post that SOH mode (sitting on hands) is the best plan of action until the stock market eventually makes a clear move in one direction or the other.

    Are You Ready For Action?

    The good news is my top leading technical indicator (explained below) is strongly hinting that stocks may finally be ready to make a significant, definitive move in the coming days...to the downside.

    But if stocks are ready to move lower, you may be wondering why that would be considered "good news."

    It would be positive news because, as a technical swing trader, you have the fortunate ability to also profit in weak markets by short selling stocks and ETFs (and any trend is better than no trend).

    For traditional "buy and hold" (buy and pray?) investors, on the other hand, a resumption of the selling pressure that began a few months ago would definitely not be good news.

    In this blog post, I explain why stocks appear ready to move lower, then follow-up with a brief video analysis of a few stocks and ETFs that are setting up for potential short entry in my daily stock picking newsletter.

    The Most Reliable Technical Indicator In Any Market

    One of the best technical indicators in a swing trader's arsenal is volume, which is arguably the most reliable indicator as well.

    Yet, volume ironically seems to be one of the least discussed indicators whenever I stumble across other traders' technical analysis of stocks around the web.

    Analysis of volume patterns in the market is crucial because well over half of the stock market's average daily volume is the result of trading among banks, mutual funds, hedge funds, and other institutions.

    As such, the major indices typically follow the money flow of institutional trading.

    This means volume is a leading indicator, rather than a lagging indicator (such as moving averages).

    If the "big boys" are accumulating stocks (represented by higher volume gains), the market will be forced to move higher.

    On the other hand, stocks will move lower when faced with enough institutional distribution (higher volume losses).

    With this knowledge, take a look at the following daily chart of the NASDAQ Composite, which shows the bearish volume pattern of recent weeks (light volume up days, followed by heavier volume down days):

    (click to enlarge)

    The combination of the bearish volume patterns in the NASDAQ and an abundance of overhead resistance (such as the 50-day moving average), leads me to believe the next move in the stock market will be lower.

    To help you make money on the short side of the market if the anticipated breakdown occurs, below is a 3-minute video that highlights a few of the best ETFs and stocks on my radar screen for potential short selling entry in the near-term.

    For best viewing quality, select full-screen HD mode by clicking the rectangular icon on the bottom right of video player window:

    Short Selling Stock Picks Video - May 21, 2014

    One of the greatest benefits of momentum trend trading is the ability to profit in both uptrending and downtrending markets.

    Although the model portfolio of my nightly swing trading letter has been mostly cash over the past month, I am fully prepared to profit from selling short stocks and ETFs that are rolling over and/or breaking down (assuming the NASDAQ and S&P 500 break down as well).

    Sign me up now for my risk-free subscription to The Wagner Daily newsletter, so that I will receive exact entry, stop, and target prices for the best short selling setups (such as those discussed in today's video).

    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.

    May 21 11:50 AM | Link | Comment!
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