Author: Chris Hood
Be sure to check out new episodes of my video podcast each week, where my ace pupil Brian Jones and I talk the ins and outs of options trading- and give you insights and strategy that you can immediately put to work for you in the markets.
You don’t have to look very far to find ‘hot stock tips.’
Reddit chats, trading groups, your buddies at the gym, and the ridiculous talking heads like Jim Cramer throw them around like confetti on New Year’s Eve.
If your trading strategy revolves around these tips, you’re on a one-way ticket to the poor house.
I’d be lying if I said I felt sorry for you. People who trade without taking the time to learn what they’re doing deserve to lose.
“The market is a zero-sum game.
When I buy or sell options, there must be someone on the other end of that trade. So if I win, someone else lost.
As a professional, I look for any advantage I can get.”
I recently read that about 4 million new accounts were opened in Robinhood in the past couple of months. This herd of newbies making bad decisions makes my life easier.
More new traders mean it’s less likely I’ll be squaring off against some hedge fund wizard or super trader.
It may sound callous, but that’s the way the market works. It’s the way all businesses work – through competition.
Before you think I’m just some evil bastard who wants to rob you, consider this:
“The most fulfilling part of my job is coaching neophyte traders into financial success.
Sure, I want to win, but I want to bring you along for the ride. Otherwise, I wouldn’t bother writing these warnings or offer coaching services.”
So how do you stand out from the pack?
You need to do your homework and build a filter to determine what trades are likely to be profitable.
Most of these should come from your own watchlists and screening. This is what Alpha Hunters is all about.
If you do get some sort of stock tip, you must pull up the charts and determine whether it fits your criteria for a trade.
You must have a set of rules to evaluate the merits of each trade.
Some people only have a few criteria. I use dozens of indicators – some standard ones and others proprietary – that guide my bullish trades.
Here are 3 key technicals all traders should use.
Estimated Moving Averages (EMAs)
Bullish trends can be identified by the relationship between the 8, 13, 21, 34, 50, and 100-period EMAs.
When the 8, 13, and 21 are stacked (8 above the 13 above the 21), then short-term upside momentum is strong for trades of two weeks or less.
When the 34 is above the 50 and 100 EMAs, it represents a long-term uptrend.
When you plan to hold a trade for several weeks or longer, look to add to your position during pullbacks to the 21 or 34 EMA.
Look at the charts and notice where the stock tends to bounce. That’s a perfect time to add positions to the ticker.
Establish a chart with three channels above and below the moving average. I prefer to set mine at the 1, 2, and 3 ATR levels.
Stocks will tend to revert to the mean whenever they hit the 3rd Keltner lines allowing you to get in for the bottom bounce and avoid buying in just before a pullback.
As with the EMAs, different stocks tend to move within different ranges.
Look back and determine the range of the stock up or down. Then, use this data to assess your entries.
The TTM Squeeze indicator determines when the Bollinger Bands narrow inside the Keltner Channels. We’ll avoid getting too nerdy and leave it at that.
Think of the compression as potential energy. When the squeeze is on, there’s a high probability of a big move in one direction or the other.
Combined with other signals, you’ll be able to decide in which direction the stock will likely fire.
Keep in mind that no single indicator is foolproof.
Each one provides valuable data about potential stock movements, and it’s best to utilize several to base your trade on confluent data.
The more confirmation you have, the more confident you’ll be.
Build your rules, implement them, track your results, and make changes as necessary.
It’s as easy as that.