GREY1's APPROACH TO TRADING US STOCKS

There are many many ways to win the stock market . I will set a foundation for all levels of traders during the course of this thread.

Generally speaking there are two different approaches to intra day trading of US stocks

1) TOP DOWN APPROACH

2) BOTTOM UPAPPROACH

A top down approach is used by professionals.

A top down approach is when a trader starts with analysis of market direction first and thenmoves on to do the stock analysis .

A top down analysts there fore does not move to do any analysis what so ever on the stock unless he has done a full analysis on the market direction .

A top down analysts wants to know where market is heading ( UP, DOWN , SIDEWAY ) during the time frame that he is trading before any analysis done on the direction of the stock . A top down approach is a must for scalper to postio traders of many weeks


There fore if you ever decided to go long or short any stock you must have a definite view on where market going before taking a position . DONOT START WITH STOCK FIRST . DONOT SAY WELL APPL IS STRONG SO I AM GOING TO GO LONG . MOST TIP SHEETS YOU GET IGNORE MARKET DIRECTION AND THEY ONLY GO BY STOCKS VAL UATION DERIVED FROM FUNDAMENTALS.


Now, I want to take this issue slightly further,

The TOP DOWN approach can be expanded into

1) MARKET DIRECTION
2) SECTOR DIRECTION
3) STOCK DIRECTION

This technique is used amongst many technical or fundamentalist ( institutions/Hedge funds).

Now that we know what TOP DOWN is we introduce a strategy ..

STRATEGY 1


IF MARKET IS LONG AND SECTOR X is OUT PERFORMING THE MARKET THEN LONG STOCKS THAT OUT PERFORMING THEIR SECTOR



( REVERSE OBVIOUSLY FOR SHORT MARKET AND UNDER PERFROMING SECTORS AND STOCKS)


2) BOTTOM UP APPROACH

This is opposite of TOP DOWN and often the newbies play this game. When i say newbie i donot mean those who ae new to stock market i mean those who still have a lot to learn to make money from the market.


I will also discuss high frequency strategies in due course which reduces the need for market direction by slicing the time frame and increasing the exposure.


PS:_- There are software available that performs a TOP DOWN Approach automatically and in real time ( AIQ , OMIN TRADER )


Grey1

Thanks for offering up this thread Grey1.

I, for one, can't wait to learn more from one of the masters!

Cheers

Steve (Evostik)

The first strategy was a sector strategy . Some traders prefer not to look into sectors and just watch market and stock .

Lets say Trader’s analysis results in a LONG view for the market ( remember we are using TOP DOWN approach,, so if you feel you aren’t sure about the market direction then you don’t move to second phase which is stock direction )

Stock direction

There are some basic rules for stock direction .

These are the rules

1) Stocks that have gapped up the most and stayed in positive territory are LONG candidates ( reverse for SHORT )
2) Stocks that stay positive when market oscillates into negative before moving back to positive are LONG candidates . ( reverse for short )


STRATEGY 2


If MARKET is LONG THEN GO LONG rules 1 and 2




Remember I have still have not told you about the entry techniques . I am just telling you that you have more chance of winning if you are trading in the direction of the market and stock . ( even if you throw a dart at your entry price as long as you are trading according to above rules you have more chance of eventually moving into profit.

Grey1

Confused... did you not say in Jerrys thread you don't need to know market direction?

chrisw said:

Confused... did you not say in Jerrys thread you don't need to know market direction?

Click to expand...

No I said VWAP strategy does not need market direction .. VWAP strategy is rather advanced and uses time frame slicing to trade. Mean while you all have to analyse the market direction before learning about more advanced side of TA


grey1

Grey1 said:

No I said VWAP strategy does not need market direction .. VWAP strategy is rather advanced and uses time frame slicing to trade. Mean while you all have to analyse the market direction before learning about more advanced side of TA

grey1

Click to expand...

Ahh, VWAP, far beyond my meagre education so far, still in the basics of my US stock life.

I notice there are quite a few VWAP related threads, can anyone suggest/recommend the better, more informative ones...?

Cheers


EDIT: In case anyone else wanting, this looks a good one... VWAP_thread_here...

chrisw said:

Ahh, VWAP, far beyond my meagre education so far, still in the basics of my US stock life.

I notice there are quite a few VWAP related threads, can anyone suggest/recommend the better, more informative ones...?

Cheers

Click to expand...

Those started or contributed to by Grey1

Grey1, thanks for starting this great new thread. :arrowu: :arrowd:

Trend what is it ?

Trend does not exist unless it has already exhausted .. this is what some traders say ? well this is correct to a degree but it is not the whole story

Now from here on wards you have to concentrate to what I tell you because this is the whole concept of trend trading .

If you ever asked me hey grey has the trend for stock X exhausted I would say to you .. WHAT TIME FRAME ARE WE TALIKING ABOUT .. In another word trend might be exhausted in 5 minute time frame but not in hourly or weekly time frame.

So this means even though a trend might look that has been exhausted, it might still continue to trend into higher time frame .

SO in another word a trend is born in lower time frame and dies ( often refers as PULL BACK ) and then it trends again to extend into a higher time frame . ( NEW BIRTH OF TREND STANDING ON THE TOP OF PREVIOUS TREND).

Now

If you are trading a 5 min chart and you see a LONG signal from your indicators you MUST GO BACK TO LOWER TIME FRAME to see if the stock has been trending in previous younger time frames and exhausted and if yes . then you can go long on the 5 min bar which at this stage has no TREND HISTORY. TREND ALWAYS STARTS IN LOWER TIME FRAMES and do you know why ? Because smart money has more information in his disposal which eventually leaks to the market to start a baby trend

Grey1

Risk management


This subject is for those who trade for living and their capital is their business . it is for those who are serious traders and count on long term wins.

If you wanted to become a pro trader and live off of other market players for years to come you have to know about the following

1) How much should I risk for each trade
2) How much , when and How to scale in and out during the trade

This subject is often referred to risk management .

There are many academic definitions for risk . some people argue one cannot not ever measure risk . I kina agree but it does not help a trader lol

A trader needs to know the un known . This is the bottom line. Hence we approximate out maths and our reasoning to gives us a projection of risk control .

A traders is at risk because of volatility . If the market is closed then you are not risking any thing because by definition market is closed lol if you trade during consolidation then you are less exposed to risk than open due to volatility . so is volatility the root of all evil ?

Is volatility dangerous ? I will answer this question if you can answer me the next question ? ARE LION DANGEROUS ? well lion is not a dangerous animal if you know how to handle them .. Lion Tamers do that in circus. Are Shark dangerous,, well again not really if you are in a metal cage ? so the point is if you know about volatility nothing is dangerous .

VOLATILY MEANS RISK and RISK MEANS POSTION SIZING CONTROL .
Hence to tame VOLATILITY YOU NEED TO BE ABLE TO CONTROL YOUR POSITION SIZING BEFORE YOU OPENING A POSiTiON AND DURING THE TRADE

Now

I am going to leave you with a quiz…

IS SPENDING £1 on the LOTTO a risky adventure ? or not


Grey 1

Grey1

I would say, in the context we are talking about that YES it is a risky adventure in terms of risk reward.

Cheers

Steve

no

hey chump - whats the odds of us both being wrong LOL

chump said:

no

Click to expand...

Chump

what if , it was your last $1 ? would your answer still be No ?

grey1

Grey1 said:

IS SPENDING £1 on the LOTTO a risky adventure ? or not


Grey 1

Click to expand...

(a) Depends on what proportion of your capital £1 represents.
(b) potential reward = say £2,000,000 so good R/R BUT
(c) probability of the winning trade about 15,000,000:1 against (that's a win about every 28,000 yars)

Not a good investment eh? Much too risky.

The answer would still be no as the calculation of the risk is unchanged. However , you are asking a specific question ,is this a risky venture and not would I take on that risk.
Perhaps I should clarify. I am saying if you can calculate risk then it is not risky as is the case with this example. Risky is when you cannot calculate risk.

Grey1 said:

IS SPENDING £1 on the LOTTO a risky adventure ? or not Grey 1

Click to expand...

Yes. You are placing £1 on something that you have a one 15 million chance of getting a return from.

LevII said:

(a) Depends on what proportion of your capital £1 represents.
(b) potential reward = say £2,000,000 so good R/R BUT
(c) probability of the winning trade about 15,000,000 against.

Not a good investment eh? Much too risky.

Click to expand...

Spot on levII


we have two definitions here ? What do we mean by risky adventure ?

Do we mean risk comparing to reward or risk to total capital ...?

If our capital was large then £1 loss would not bankrupt us hence not a risky adventure, however if £1 was the last money one had,, then he would be better off to get a fish and chips with it .( please remember that it is still a bad bet but since £1 is not going to ruin you we still consder is as worth while to spend £1) .. We as a trader have to concentrate on those risks that puts our capital in dangeour first.


Please write this down

IF ( AMOUNT BET ) > PROBABILITY OF WIN * AMOUNT OF WIN THEN THE TRADE IS RISKY .


a) Probably of win comes from your strategy
b) Amount of win comes from the Possible reward ( donot expect 7$ run from a low volatile stocks ,, such as AMZN for example.... i will expand on that in due course )

grey1

Grey1 said:

If our capital was large then £1 loss would not bankrupt us hence not a risky adventure, however if £1 was the last money one had,, then he would be better off to get a fish and chips with it .

grey1

Click to expand...

Whether you have £1 or £1000 capital, 15,000,000:1 is too risky regardless.

chrisw said:

Whether you have £1 or £1000 capital, 15,000,000:1 is too risky regardless.

Click to expand...

I totally agree .. 100 % .. however i was trying to refer to another valid point . The point is even if I take a risky adventure and lose £1 that is not going to wipe me out even though the pay out does not justify the bet ( risky ) .

SO traders have to some times take a trade which they donot know the probably of win or win amount so the least thing they should and can do is to correctly protect their capital and as much as they can to take trades that are less riskier as i defined with the formula above

grey