A Guide to Using Swing Trading Resources
The sole broker used is TradeKing. [UPDATE: TradeKing is now Ally.com] It is used primarily to execute trades. Here is its order entry screen:
TradeKing Order Entry Screen – Market Buy Order
Here a buy order is filled out: 45 shares of CBS are to be bought at the current market price. This number of shares was chosen because it comes closest to $2000 without exceeding that amount. It thus remains within previously specified risk parameters (i.e., no more than 20% of the initial $10,000 trading account is to be committed to any one stock). The position size calculation can be confirmed on the subsequent preview order screen where the estimated order total, including a commission of $4.95, is given. Assuming the last price of $43.70 holds, that total will be $1971.45.
The primary source for official, real-time market data is Quotestream. It is a streaming research platform offered free to any TradeKing client who executes more than 10 trades per month. Here is a screenshot of the embedded window that opens after logging in: [UPDATE: TradeKing is now Ally.com]
Quotestream Embedded Window
On this particular day and time, 11 of the 15 stocks selected are up from the previous day's close. This is denoted by green numbers in the Change and % Change columns. (The colored cells of these numbers are independent of this; they continuously flash green and red throughout the day whenever the stock is bought and sold).
As can be seen, more data is offered here than what TradeKing's snap quote utility provides. And there is no need to constantly hit a refresh button to get updated data, as Quotestream automatically updates in real-time. [UPDATE: TradeKing is now Ally.com]
If even more data is desired, a click of the Full Screen button in the upper-right hand corner will launch the following window:
Quotestream Full Screen
This screen is fully customizable. Portfolio Manager, News and Charts are just three of the many sub-windows that can be added. These can also be examined in greater detail by expanding them into their own full screens.
TradeKing clients who execute more than 25 trades per month are also entitled to Level 2 quotes. This data is accessed through the Float menu item. It looks like this: [UPDATE: TradeKing is now Ally.com]
Quotestream Level 2 Quotes
All orders for a stock appear on this fast moving screen. Among other things, it identifies who is buying and selling, and the quantities of shares they demand and supply at various price levels. Used in conjunction with chart analysis, Level 2 quotes can provide deep insight into the short-term direction of a stock's price.
The primary charting service used is TradingView.com. Here is a screenshot of an annotated chart:
Eight indicators have been selected to aid in the analysis of screened stocks. These appear in the upper-left hand corner of the chart. The top four indicators have been set to active and are visible on the chart; the bottom four have been set to inactive and are not. A trend line has also been drawn on the chart to clearly indicate the downward sloping of prices. As can be seen, the current day's prices have just broken the trend line.
The sole screener used is provided by finviz.com. Here is a screenshot:
There are a number of filters on the Screener page. These are arranged into three categories: Descriptive, Fundamental, and Technical. Without applying any filters, the total number of stocks that results is 7256. These are stocks from the three US exchanges to which Finviz has access: NYSE, NASDAQ and AMEX.
By applying three filters under the Descriptive tab (i.e., mkt cap >$10B, avg vol >1M, price >$10), the total number of stocks drops to 414, or about 6% of the original stock population. This number will fluctuate between 400–500, depending on market conditions.
A watch list is maintained in an Excel spreadsheet:
Watch List for Strategy: 1-2-3 (long only)
This watch list is used in conjunction with TradingView's charting service (after an initial identification of the entire stock universe using the Finviz screener). Exactly how this is done is detailed on the Live Trading Walk-through page.
No significant backtesting was done using an automated tool or site for strategy 1-2-3 (long only). However, some sites were used in the initial development of the strategy. These include PastStat.com, StockBackTest.com, and MarketInOut.com.
The backtesting that was done was an extension of paper trading. Briefly, the trading days, weeks and months over the last 25 years were assigned numerical values and selected using a random number generator. An effort was made to ensure that bull and bear markets were fairly represented. Specific stock symbols were then selected using a random letter sequence generator. The trading strategy was then applied on these stocks for those time periods. Once a statistically significant sample size (30+) was tested to be profitable, the strategy was then paper traded.
Paper trading primarily mobilized TradingView charts, the Finviz screener, the watch list, and the Trading Log and Calculator.
As paper trading was conducted in virtually the same way as live trading (the main difference being that during the testing period, there was no access to real-time quote data), the details on how it was conducted can be found on the Live Trading Walk-through page.
Other components of the trading system are kept open on the computer during the trading day. This encourages trades to be executed and maintained as per the trading plan and strategy. Backtesting and paper trading records are kept close by as well. They are occasionally annotated with suggestions for further tests, and then reviewed during off-market hours.
As well, the Trading Log and Calculator that was developed during testing is also kept open during live trading sessions. Here is a screenshot:
Trading Log and Calculator for Strategy: 1-2-3 (long only)
Other Trading Sites
The primary site for pre-market index futures data, as well as market-related news throughout the day, is CNBC.com. The primary site for pre-market and after hours quotes is Nasdaq.com. The primary site for educational purposes is Investopedia.com. Business news channels watched include CNBC, Fox Business Network, Bloomberg TV, and CNBC World.
Two laptop computers are used, both of which are hardwired to the internet for added security. The connection speed is 30/5Mbps. The laptop exclusively used to place orders has a processor speed of 1.8 GHz and 2 GB of RAM. The laptop used for research is 1.5 GHz and 6 GB.
The workspace used for trading is exclusively earmarked for that purpose. It consists of a simple desk large enough to accommodate two laptop computers, with a matching executive-style office chair. This desk is located facing away from windows to minimize potential distractions, and in a room where others have little need to enter during the day. Above the desk is a corkboard where assorted items are thumbtacked. These include a calendar marking trading days, holidays, and special market hours, inspirational quotations, contact information, and various handwritten reminder-memos – all of which are centered around a post-it note that has that day's potential trades. The single deep desk drawer has an area where file folders are hung. These folders hold backup hardcopies of all critical documents, like the trading plan, trading strategy, testing documentation, all broker-generated and related documents (like account statements, trade confirmations, tax forms, account opening forms, and customer agreements), trading journal, and handwritten notes. The rest of the drawer has items found in any office: pens, pencils, sharpeners, erasers, markers, highlighters, paper, post-it note pads, paper clips, glue, rulers, a stapler, tape, letter openers, scissors, thumbtacks, binders, a three-hold punch, USB flash drives, and headphones to muffle indoor and outdoor sounds when necessary. To the right of the desk is a small shelving unit which holds a growing library of books on the financial markets in general, and on stock, options, futures, and forex trading in particular.
There are certain classic books that should be in every trader's library. These include:
- Murphy, John J. Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications (Paramus: NYIF, 1999)
- Sperandeo, Victor. Trader Vic: Methods of a Wall Street Master (New York: John Wiley & Sons, 1991, 1993)
These authoritative works have influenced countless numbers of swing traders in the development of their own trading systems. Murphy's book is very much as its title advertises: comprehensive. It is not only an excellent place to begin learning about trading. It is a book to return to again and again. And Trader Vic's more personally written book is an absolute joy to read. It weaves humorous anecdotes into its cutting analysis of market psychology to great effect. Anyone reading its Chapter 7 will immediately recognize how it forms the basis for the 1-2-3 (long only) strategy illustrating this site.