Advised #7: 7 step plan to scan and daytrade stocks

2345 CST

Advised #7

Hi this is Derek Frazier from Mexico City and it's that time again. 

In today's newsletter I like to talk about the plan of action for the rest of the 20 week cycle. I talk about peace of mind that can be found with understanding cyclical analysis in trading. I also submit to the reader a clear plan for algorithmic trading. I also include my 7 steps to a solid scan and trading plan for daytrading

The plan for the rest of the 20 week cycle: short stocks

• Prices for stocks are too high. There was a recent break of a cyclical low in the general market on the rates decision, its still bearish.

• Watch for sectors that are starting to be weak, as the new 40 day cycle starts to turn up, there are still going to be bad stocks, watch those as the day develops and use the scans for detecting when a cyclical breakdown has occurred. 

• There will be bullish stocks in this new 40 day cycle. Only those that are above the 40 day FLD are acceptable to take for longs. But I prefer to not trade.

Why its hard to get peace of mind in the market 

Even if you have a working subscription or membership to a trading service that gives you wins its still doesn't give you the feeling of peace of mind. And it certainly doesn't give you understanding or confidence. That you can only get through cyclical analysis in my opinion. Well one of the ways anyways perhaps there's another way that I can find out about but I'll let you know when I find out about it I'm still waiting.  A lot of people say it's algorithmic trading but algorithmic trading is not done by amateurs, it's done by seasoned discretionary traders. 

Speaking of algorithmic trading

An algorithmic trading project must have the backbone of an analysis that starts with an understanding of cycles and works its way down to a highly specific goal oriented architecture. 

• I just don't believe overfitting applies when you're dealing with the top down approach using cycles. I think every algorithmic project needs to have the nominal model as the backbone, creating a proper seasonality template to trade off is essential, and 80 percent of the work is complete.

• You really can't overfit too much. Because once you're on top of the timing of a trade, you're just sorting out the other basic exit parameters like: how many days should the trade go for after entry and how many variables are needed to filter the trade. Like I said, no overfitting applies.. 

• I learned algo trading by playing with the software over at Build Alpha. 

• It quickly became apparent to me that I was absolutely going to get destroyed by the fact that I am illiterate when it comes to computer languages.

Cyclical Analysis and scans 

You have to think about the type of day that you want, and what you need to see before trading. Which I think is a sign of expertise. Knowing what tool to use during the proper time and job is critical, isnt it?

It is critical, like I said, to know what the general market is doing. Of course, this wont work if your assumption about the cyclical position of the market is wrong. For instance, when youre thinking its bullish when its really bearish or vice versa.

The performance of your scan will be built upon the market structure and the volatility for the day. All stocks move throughout the day. But for me, I prefer to only pick those that are going to move well.

This is found by using volatility, sector selection for the type of market structure that is currently being found in the general market, and individual stock price action from previous weeks, which must be cyclically positive, for bullish scans, and a quick check will provide that assurance. A trained eye for cyclicality is necessary to make this assumption. Theres a difference between a few charts that dont perform well in the sector because they were not performing well recently, in a bearish market or cyclically pointing down, compared to others with increasing weakness  over the recent market bearishness.

The key with day trading like this, is to be ready at the open, as price goes above premarket trading, you can put your stop below the premarket. If you are watching sector strength immediately at the open, it is possible to get a scan going fast. 

A hint, that Ive found, is that stocks can pullback to premarket and stop for other buyers to come in. Usually around the 30 and 60 minute mark after the NY open. This is because there are people that get in late. There is no rush to choose stocks like this, because remember, I am looking for stocks that will run the whole day, and can be held to a larger target above opening prices. Otherwise I wouldnt bother to trade. 

After there has been a recent bullish cyclicality in the general market, check which sectors are doing strongest at the open, and around the open, then scan for those that have the strongest  chance of continuing through the day. When a critical cycle has been seen in the market as having started, its time to trade stocks already doing well. The key is you already know the market has changed cyclically, so its time to go long good stocks. Now, since it has been running to the upside, even in an uneasy market like that of March 2022, it is still a profitable and perfect strategy to use to see where all traders are going with their capital that day.

All you need to do is wait for the cycles to align and start moving in the indexes, and then just go into ThinkorSwim or comparable Free scanner, pull up your scan for stocks that have cyclical bullishness and "scan in weeklies" and "intersect with whatever sector is strongest THAT MORNING”.

If the market is to continue, you will see order flow in the morning that will push prices higher. 

Watch your scans continuously, and check to see what market leaders are doing in each sector.

When they are moving the sector, that is a good sign, other stocks in their sector will follow or lead much more clearly.

This can be used right at the open and throughout the day as long as the market is holding strong and the stock is receiving volume and sector is strong.

I prefer to use this scan and strategy on WEEKLY optioned stocks for clear reasons including liquidity and market favoritism. But it works just as well on all stocks.

7 steps to a solid scan and trading plan for daytrading

1. Make a solid assumption of the cyclical position of the market, whether bullish, neutral or bearish, thru cyclical analysis.

2. Think of what type of scan to use for the type of day youre seeing in the first 30 to 60 minutes.

3. Look at the internals of the market and the heatmap of the Weekly stocks, and their sectors, and make a note.

4. Start using your scans to check for stocks that are doing really well with alot of volume and vice versa for shorts.

5. Keep scanning as more data comes into the market, as some stocks are simply late to have their ticker come up on the scan.

6. Look for stocks that are in deep red and or deep red sectors as a whole to trade, bonus for when the leaders are leading the sector.

7. Add your professional flavor.

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Until next week,

Derek Frazier