I have made tens of millions the past few years trading 3 simple, timeless setups. These setups occured last year, 10 years ago, 50 years ago and 100+ years ago. They occur over and over again. They occur in the Japanese market, they occur in the Swedish market, they occur in the Indian market. The U.S. stock markets are the biggest and baddest of them all and therefore the best hunting grounds if you have a setup with an edge.
These 3 setups are:
- Breakouts (if you want to learn this setup this is a mandatory video: https://www.youtube.com/watch?v=xx8GvtAxilk&feature=youtu.be&t=1
Note: that’s one of my moderator Youtube channel, not mine)
- The Episodic Pivot (EP)
- The Parabolic short (or long)
Before I go into detail about where to buy, lock in profits, position sizing and stopping out of a losing trade, I want to talk a little about position sizing and risk.
I don’t believe you should ever have more than 30% of your account over night in any stock or ETF. Intraday you can do more since you don’t have to deal with potential over night gaps.
Most of my positions are 10-20% of account size.
My risk on most trades is usually 0.25-1%. I rarely risk more than 1% of my account on any trade.
When my accounts were small, less than a few million, I risked more, maybe 0.5-1.5%.
At the very beginning I risked more still, but honestly I had not a great grasp of the concept risk and position sizing in the beginning.
Okay, let’s get to the setups!
If you study thousands of the biggest winning stocks over the past 100 years they tend to move in stair steps. Meaning they will make a 20-50%+ move, pull back and go sideways for a while, then make another move. This is how most leading stocks act.
This pattern is something we as traders can use to our advantage, to get an edge.
How to find these setups?
Scan for the 1 or 2% of stocks that are up the most over these 3 timeframes
This is how you find the stocks that are leading right now.
There are 3 steps to this setup:
- A big move higher sometime in the past 1-3 months. This move can be anywhere from 30-100%+ and usually lasts a few days to a few weeks.
- An orderly pullback and consolidation with higher lows and tightening range in the consolidation phase.
- A range expansion (breakout) out of that consolidation. The consolidation phase is usually 2 weeks to 2 months. During the consolidation the stock price “surfs” the rising 10- and 20-day. and sometimes toe 50-day moving average.
How do you trade this setup?
- Identify the setups. You need to have a watchlist ready before the market open. You should also probably have alerts set, and know how many shares you want to buy.
- Enter on the opening range highs. The opening range highs can be the highs of the first 1-minute candle, the 5-minute candle or the 60-minute candle (on the 60-minute timeframe the first candle is always only 30 minutes, 9.30-10 AM). You can use whatever timeframe or a combination of them. You don’t even have to use any intraday chart, just look at the daily chart and enter when the stock is starting to break out.
This method can also be traded by anticipating the breakout but I don’t find it as effective and more skill and experience is needed.
- Stop is always lows of the day and stop should not be wider than the ATR or ADR of the stock, to prevent the risk/reward mechanics getting out of whack. So if the ADR of the stock is 5%, your stop shouldn’t be wider than 5%. If the ATR if 50c, then stop should not be wider than 50c.
- You should sell 1/3 to 1/2 of the position after 3-5 days, and then move the stop to break even. The rest of the position should be trailed with the 10- or the 20-day moving average. Depends on how fast the stock is. If a beginner stick to the 10-day. You wait for the first CLOSE below the 10- day.
In a bullish market it is very common to get moves that are 10-20x+ your initial risk if you are good at setup selection.
There are variations of this setup but the premise stays the same.
I am a swing trader and use the daily chart to find these setups, but this setups also works on the weekly chart and the intraday (1- and 5-minute) charts. On the intraday timeframe this setup is called Holy Grail by some on the daily it can be called a hight tight flags sometimes. It’s pretty much flat channels, symmertrical and descending triangles. I’ve even drawn the lines to illustrate this on 2 of the examples below.
I am providing 3 examples of breakout setups with 5-10 years between them.
If you look closely, there are additional setups on these stocks.
Episodic Pivot (EP)
When unexpected good news hits a stock, especially if that stock is neglected, that can trigger multi-month, and multi-year moves.
There are many types of EPs:
Earnings and earnings guidance
Government regulations, political stuff
Biotech related like drug trial results or FDA decisions
Macro and political related
…and many more!
The main ones I focus on are earnings and earnings guidance. When a stock reports unexpected good earnings and guidance, that is often a catalyst for a big and prolonged move.
Let’s take a look at $NVDA from 2016 and 2017.
Look at what happened at the leftmost red arrow. The stock gapped up on big earnings numbers and a big beat to analyst expectations. A big surprise. Look at the volume, it ended up having several times average volume that day. Look at the move it made over the next few months.
Now the middle red arrow, the stock gapped up slightly but sold off. This is not an EP. The earnings were big, the analyst beat was big but this didn’t matter.
An EP needs to be a gap of 10%+ and big volume should be there, if not in pre-market then the first 5-10 minutes after the open.
Look at the last red arrow. The stock had essentially been going sidewats for 4 months and had another huge quarter, with EPS and Revenues growing 126% and 48% respectively. Another big beat with EPS of 85c vs analyst expectations of 67c.
Scroll down to see what happened next.
Learn this setup, it takes 4-8 earnings seasons (1-2 years) to get good at this setup and understand it.
Once you learn it, you need to do very little work to find these. You literally let them come to you.
Create your own sell rules. You can trail these with the 20- or 50-day moving average, or whatever you find to work the best.
The steps to this setup are:
- Gap up 10%+
- Big volume. If the volume is not there in premarket, it needs to come in at the open. Many times the best ones have traded their average daily volume in the first 15-30 minutes after the open.
- If an earnings or earnings guidance related EP, there has to be big growth numbers, preferably mid/high or even triple digit EPS and revenue growth and a significant beat to analyst expectations. Many times the smaller stocks don’t have analyst coverage, you just have to trust the numbers and volume.
- It’s best if the stock has not rallied over the past 3-6 months. If the stock has already made a big, multi month move into the gap-up, is it really a surprise to the market? It’s your job to figure it out!
How do you trade this setup?
- Identify the setup, this can usually be done in after-hours or pre-market as we are looking for stocks gapping up on news/earnings.
- Enter opening range highs. ORH can be the highs of the first 1-, 5-, or 60-minute candle. The stop is at the lows of the day.
- Trail your stop with the 10- or 20-day moving average once they surpass your initial stop.
The Parabolic Short (or long)
Think of stocks as rubber bands, if they get really stretched short term, they can have powerful snapbacks. This is by far the riskiest setup if done wrong or if you have issues with not obeying your stops.
Most of these are short setups, but sometimes there are also good long setups but they don’t occur as often.
These are the steps for this setup:
- A stock up 50-100%+ in a few days or weeks (if larger cap) or 300-1000%+ (if smaller cap).
- The stock should be up 3-5+ days in a row. Many times you have examples where a stock trends higher for weeks or months and then starts speeding up, some just explode from nowhere.
How do you trade this setup?
- When you think you have identified a candidate you can short on the opening range lows (1-minute, 5-minute candles). You can wait for the first red 5-minute candle in case the stock goes straight up from the open. You can wait for the stock to have the first crack, bounce back into VWAP (the only intraday indicator I really use) and if it fails at VWAP you can enter (or add). The fail could be the first red 1- or 5-minute candle into the VWAP. The stop is highs of the day or if VWAP fail, a reclaim of the VWAP. The key is to get relatively tight and defined stops.
- The target area is the 10- and 20-day moving averages, that’s where these stocks usually bounce.
- Don’t be too early. WAIT for the right setup. Let the amateur shorts get run over, that’s where your edge comes in.
- This setups is not like the Breakout or the EP where you can sometimes get a 30-50x+ risk reward on your trade. This setup is more like 5-10x risk reward, but if you wait for the perfect setups your win rate is probably going to be higher.
Let’s take a look at a parabolic long setup. These are not very common but any time a successful parabolic short goes down 50-60%+ in a few days, that’s the premise for the long setup. Entry is opening range highs or the first green 5-minute candle or any range break to the upside if the stock doesn’t rally out of the gate, which they usually do. These things can bounce 50-100% in a few days.
All of my setups are about finding low risk entries on fast moving stocks. It’s all about finding tight, high probability areas to enter, so you can have high risk/reward on your trades. It’s all about making 5-20+ times your initial risk. You can be wildly profitable with having just a 25-30% winrate, it’s all about having small losses and big winners.
I have an Evernote database I worked on for 7-8 years where I track these setups and I have a collection of thousands of them. Most of these charts are from my Evernote database. I have probably spent 1000+ hours building it and went back decades on thousands of stocks to find these setups.
Be creative, there are at least a couple of other setups I can think of that you can trade with great success but I have chosen these three for myself.
You need to look at every stock in the US stock markets as far back as you can and look for reoccurring patterns. I personally have also checked the biggest stocks in every international stock market.
If you want to become financially independent and change your life, if you want to be filthy rich or just want the security and the freedom that comes with it – you have to put in the work!
“There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again, and again, and again. – Jesse Livermore