Category: Basics of Stock Trading

In this post, I will cover many of the reasons you should think twice before blindly following daily stock picks.

For some of you, this may be a hard pill to swallow because you may have just purchased a daily stock picking service. I promise I will not bash all daily stock picking services because I have not seen them all.

However, I will make a case as to why you need to do your homework and not solely rely on these services.

Trading is Work

I firmly believe in working smarter and not harder. However, if you are going to trade with money, you need to understand the markets.

This does not mean you need some advanced economics degree, but you need to become a master of your trading strategy.

If someone is literally telling you what stocks to pick, how are you taking the right steps to gain the experience required to make real progress in your trading?

No Accountability

For new traders, you will make more mistakes in the beginning than you will want to keep track of. This level of pain is part of the process which helps you weed out poor behaviors that lead to unnecessary losses.

Well, when you receive daily stock picks, how do you take accountability for bad decisions?

Let’s say you subscribe to a service and you receive the morning email of the top five stocks of the day. In this email, there are clear instructions for each play.

Now, you pick one to trade and just by chance it’s the only one that doesn’t work out.

What will be your next steps? Do you dig deep and figure out where things went wrong or do you just pound the table and blame the service?

No Post Mortem

If you watch any weather service they do a great job of telling you the forecast and what is expected to happen. But how many local news stations perform a review of their forecast against actual numbers. Let me help you, it never happens.

Well, daily stock picking services are no better. You will get an email blast of a handful of stocks to keep an eye on but will the service send you a post mortem of each setup?

Likely not. What you will get is a recap of the trades that worked out.

So, how do you grow as a trader if you these services do not dissect every trade suggestion? Reviewing your trades daily and journaling is what you need to do to take you to the next level.

Best Action is No Action

The other thing is you may feel the need to place a trade just because you have seen a stock in some daily stock picking service. This can lead you to feel like you have to do something. At times the market will literally have no clear setups.

This can happen around holidays or during dull trading days in the summer.

You have to be careful that when you review the list of daily stock picks these are suggestions and not specific instructions you need to take in the moment.

Sometimes you need to mimic the cat in this photo and just take it easy.

Free Daily Stock Picks versus Paid Services

Free Services

I will reiterate I am not here to bash any particular service, but I do want to caution you against free daily stock picks. These services do not provide you any real trade information in terms of entry levels and exits.

For example, do a search for daily stock picks and you will likely get a list of stocks like the one listed below.

Do you see how many results are in the table? That’s right – a whopping 59. What can you possibly do with that many options?

Ratings

Some of the free services will attempt to minimize the size of this list by placing letter ratings on each symbol. You will see ratings of A through F which will anchor you back to your school days.

The only challenge again with these ratings are they don’t tell you how to actually trade the position.

Delay

When I say delay this speaks to the slowness of the dissemination of information. With the free services and daily picks from larger institutions which are broadcast publicly on websites, the plays are posted at the beginning of the day.

Now, if you are swing trading, this isn’t a big deal because you have time to watch the position and for the trade to work out.

However, if you are day trading, the slowness of information can be a killer to your trading performance.

For example, if you receive notice of a long play, what happens when market internals change that invalidates the buy signal? That’s right, you will not get a revised daily stock list because it’s posted first thing in the morning.

Paid Services

Now for paid, you will at a minimum get more information on the picks in terms of how to trade them. What you can do if you are interested in using a daily stock picking service is to signup and monitor the service. This way you can measure the quality of the stock picks to see if they are valuable.

But please do not make the mistake of just buying or selling because you received an email.

Don’t Put All Your Eggs in One Basket

Instead of looking to daily stock picking sites as your golden ticket. You can use these services to help you with your morning prep work. Again, it’s a matter of shifting your focus from just blindly following picks versus using these as inputs.

If you don’t take my word for it, think about all of the investors that blindly invested with Manny Buckus and his daily stock picks. According to the SEC, not only was Buckus not making the trades, but he also paid another person to post trade recommendations and that person wasn’t making any real trades either. ^[1]

The SEC has even gone as far as releasing an official statement warning retail investors against the risks of investing in stocks based on stock picking services. ^[2]

All Picks Are Not Created Equal

Since I day trade, if I follow daily stock picks from a swing trading site, what do you think will happen? That’s right, I will likely be disappointed with the results.

You have to apply this same logic to daily stock picks. If you are going to leverage this is a tool, you have to ensure the supplier of this information is aligned with your stock screening process.

This way the picks help ease the amount of research required on your end versus giving you a way out from doing the hard work.

How Tradingsim Can Help?

Within Tradingsim we provide the hot stocks of the day for the last two years right within the platform. This way you can practice trading the respective stock on the move.

Without this lookback capability, you essentially have no way of knowing the hot stocks of the day, weeks, months and years in the past.

External References

1. Stock Trading Whiz Kid” to Pay $1.5 Million to Settle Stock Newsletter Fraud Charges. sec.gov
2. Investor Alert: Investment Newsletters Used as Tools for Fraud. investor.gov

In this post, I will cover why manual is better when it comes to backtesting my trading ideas in Excel. I know for some of you, this is a deal-breaker but hear me out before you judge so quickly.

What Does it Mean to Backtest a Trading Strategy?

If you are new to trading, backtesting trading strategies can sound pretty intimidating. First, you may not have even landed on a strategy, so figuring out what to backtest can feel like a daunting task.

Essentially, backtesting trading strategies involve inputting a number of parameters for trade entry, profits, indicators, and stops and then testing this over a set period of time.

This will then produce trade results which provide you insights as to whether the strategy is profitable.

Once you run the simulation, depending on the service you are using, you will see a report like the image below from Amibroker.

You can then further dissect your results to see if there are particular trading strategies or times of day where you are more profitable.

Automated Versus Manual Backtesting

Next, we need to dive into the question of the day of which is better – automated or manual backtesting?

This is a common debate amongst traders and again for me, manual is the clear winner. I will now make my case as to why I have come to this conclusion.

Automated Trading

The automated backtesting approach is definitely the most popular of the two strategies.

It is popular for a number of reasons.

It’s Automatic

The first reason and likely the most obvious is the testing is automated. You pick your strategy, select a duration and wait to see what the report tells you.

Also, there is a bit of glamorization around coding and using data to produce your results. This has many traders feeling they can code their way to profits.

You Get Your Numbers Fast

The other point is you get numbers and you get them fast.  You can type in a few parameters, hit start and you see how you would have performed.

This allows you to quickly cycle through a number of trade ideas in a matter of hours versus days.

Manual Backtesting

This is my preferred approach and let me tell you why.

You Execute the Trades Not the Program

I went through the painful process of creating a trading program to use with Apple. I went back a number of years on a 5-minute chart and developed a system using moving averages.

My account value looked something like the image below if I would have only used the system.

The real kicker is the chart somewhat looked realistic. What I mean by this is that the account value wasn’t straight up with no pullbacks.

The chart was up and to the right, but the chart had some bumps in the road.

This made me feel like I wasn’t retrofitting the system to market environments, but rather the strategy just held up under various market conditions.

Execution of the Strategy

For some reason, after I started placing actual trades under real market conditions, the performance graph looked nothing like the simulated one.

So, this led me to refine my strategy which would always result in another beautiful uptrend line but it would quickly fall apart once I placed real trades.

You may be asking yourself, what were the drivers that prevented me from mimicking these results?

#1 Me

The first obvious reason was me. I would find emotions getting in the way or I would hesitate on pulling the trigger because I had been burned so many times before.

The psychological aspects of trading are vast and go beyond the scope of this article, but to put it plainly, I was my own worst enemy at times.

Now you are probably thinking, well just let the program execute the trades. The problem with this approach is the market was changing so fast, the performance of my automated system would drop off the further I went forward in time.

#2 Ability to Fill My Orders

In most simulation tools, you get whatever fill you desire. Even if it’s just one tick at 50 shares, in your system it will show you entering and exiting at your desired price.

In reality, these orders do not always fill and you simply don’t get the trades.

These two things alone do not sound like much, but they are enough to throw off your results.

How To Backtest Trading Strategies Manually

Instead of trying to write some algorithm to automate all of your trading results, just start collecting your actual trade history.

What stock did you trade, where did you enter the position, where did you exit the position. Start to aggregate this data and then perform deep analysis in Excel.

Now this means you learn by doing and not by simulating trades based on a system. Think about it, I could give you the keys to a wildly successful trading system, but if it does not fit your makeup, you will not be able to successfully trade the program.

This is a snapshot of just a few of my trades for two of my strategies: pull back and breakout.

These are the types of spreadsheets you need to start collecting and you need far more data than the few columns in the above snapshot.

Some of these columns should include data specific to your trading style or things that you find important.

More Data Doesn’t Mean Better Results

Your initial reaction to this approach will vary, but you are likely thinking things like, “I won’t have enough data”. You may think, well this is going to take too long for me to draw any meaningful conclusions.

Well, you are right in some regards, but what’s the point of collecting all this data? Is it just to produce a winning portfolio graph which gives you confidence in your trading system?

Is it for you to have something compelling to talk with friends over dinner?

At the end of the day, no matter how sound your system, will you lose faith after getting slapped in the face by the market on a bad trade?

Trading is work. Not in the normal sense in that you are sitting there for 12 hours looking at monitors. But more about the time you put into mastering your trading system offline and then applying those principles as best as humanly possible during the trading day.

AI Will Outperform Your Models

Not to further depress you, but creating a great system that looks back at old data is essentially dead the minute you start using it. That’s because you are basing your trade decisions on previous market activity.

Well, I’m assuming everyone reading this article is well aware of how artificial intelligence (AI) will play a part in the trading world over the next decade.

All of the big firms have started hiring really smart quants and engineers to help build the traders of the future. Bridgewater Associates went as far as to hire the lead developer for Watson to build their own in-house money management machine.

A Newsweek article on AI went as far as to say the AI will not only be able to ingest stock data but also tweets, blog posts, books, news articles, and international monetary policy to make trade decisions.

I’m not one to say humans can’t make a living trading, but if you are going to get in the coding/algorithmic trading world, you need to know what you are up against.

Past Results Disclaimer

One last reason I will give you to not get overly caught up in historical data is the disclaimer we all have read at some point in our lives. This disclaimer is on any pamphlet or television ad we see from trading services.

The language will read something like this, “Past trading performance is no indicator for future trading results”. There is nothing like a nice cold glass of water being thrown in your face right after you have just been sold on some grand idea of how to make money.

This same logic of being weary can and should be used when discussing backtesting trading strategies. Check out this awesome blog post from Medium where Joshua Kennon goes into great detail about why you have to protect yourself against possible losses.

How Can TradingSim Help?

Tradingsim can help you by giving you a platform where you can test and collect data based on your trading results.

In this article, I am going to discuss the concepts centered around range-bound trading. There are approximately 7 key topics to discuss, so please make it through the entire article.

Overview of Range Trading

Range trading is where a trader seeks buying and selling opportunities within a defined boundary of highs and lows. ^[1] Ranges can materialize on any timeframe and with all types of securities.

Ranges are Not Exact

As you can see in the chart above CHTR traded in a range with a high in the low 380s and low in the mid 370s.

One of the key items to call out in this chart is the fact the high and low ranges are not exact. Meaning the candlestick may breach the high and low zones by a tick or two, but this does not mean the trading range is invalid.

Range Trading Indicators

If you are going to trade in ranges, oscillators are going to be your best friend. This is because oscillators are in a constant dance, shifting from overbought to oversold levels.

Ultimate Oscillator

Above is a chart with the ultimate oscillator at the bottom. Each high in the range can literally be traced to an overbought reading in the ultimate oscillator. Conversely, each low is linked to the oversold readings with green circles.

Stochastics Oscillator

The next chart has another oscillator, the stochastics oscillator. As you can see, the stochastics produces far more signals within the trading range than the ultimate oscillator.

This is because the ultimate oscillator factors in more input periods into its calculation – three to be exact (7,14,28).

Different Indicators – Different Results

This is the challenge when applying oscillators and other technical indicators to charts. You are simply going to receive different buy and sell signals.

So, how do you handle this paradox?

The easy way; pick one indicator and master it. Learn how stocks trade within a range and how your chosen indicator is able to lead these buy and sell signals.

Price Action – Old School Way of Trading Ranges

If you are not big on oscillators, another option is to analyze the price action within a trading range. Let’s zoom into the action on CHTR to further dive into this method.

Sell Signal

In the above chart, you can see how CHTR poked its head over the recent swing high by a hair. The stock then reversed on a dime and broke the recent swing low before the failed attempt higher.

The subsequent selloff resulted in the stock falling back to the low of its trading range.

Buy Signal

As CHTR hit the bottom of its trading range, the stock began to consolidate. Things then took a turn for the bullish after the stock was able to shoot out of this consolidation range with strength.

The entry is right on the break with a stop right below the range. Guess where you should place your target? That’s right, the top of the range.

Great Risk-to-Reward Ratio

What gravitates traders to ranges is the risk-to-reward ratio. As a trader, you will constantly hear gurus and educators speak of a 3 to 1 ratio when trading securities. ^[2]

Calculating this ratio can be tricky when the market is moving at such a rapid pace and each strategy or chart pattern requires a different calculation.

As we stated in the above example, you wait for a reversal sign and then place your stop right above or below the recent swing point. Your target is then the top or bottom of the range.

Where Can Things Go Wrong?

Up to this point, the picture for range trading has been rosy. Well if you have placed even just ten trades, you will know that there is no perfect system.

At the end of the day, you have to protect your position with stops in order to avoid taking unnecessary losses.

Range Trading in the Morning

If you are day trading, the one time of day you need to demonstrate extreme caution is in the early morning. This is because stocks will make strong moves with volume on the open. This is due to the pent up energy from any news releases or earnings announcements from the previous night or before the open.

These extremes can push stocks beyond their ranges with ease and even if it’s for a temporary period of time, it increases your risk on the trade.

In the above chart, anyone range trading NUS that entered a long position on the open would have been caught in the selloff.

As you can see the stock inevitably rebounded, but what if it didn’t rebound? What if the stock just continued lower throughout the entire day and then gapped down the next day again.

Not to say a break like this couldn’t happen later in the day, but the odds are increased in the morning that things can get rapidly out of hand.

Range Trading Penny Stocks

Now, I’m not going to start bashing penny stocks. For the 100th time, I don’t trade them, but that doesn’t mean other people can’t have a wildly successful career with these types of securities.

However, I do want to touch on range trading these volatile securities.

Let me be the first to say when you nail trading ranges with penny stocks, it’s a beautiful thing. This is because the ranges are so huge. Now with this increased level of reward, there is also more risk.

The other challenge with range trading penny stocks is their level of volatility. If the stock were to break the range, there is a possibility it will not look back.

The problem with this is if you are short and the stock gets going, it can place you in an unfortunate position.

Let’s look at a chart example to further illustrate this point.

The above chart is of the penny stock IMGN. The stock was in a clear trading range and ultimately broke out to the upside. Unlike the other patterns mentioned in this article where the stock may go against you 2% to 3%, IMGN screamed 21% higher.

Again, please do not take this example as a scare tactic. I am merely demonstrating that the moves at times can be sharp and unpredictable.

Therefore, if you are range trading penny stocks, stops are mandatory, not optional.

How Tradingsim Can Help?

If you are interested in range trading but don’t know where to start, give Tradingsim a try.  You may find trading breakouts or another pattern better suits your need, but you won’t know until you test it out.

External References

1. Heikin Ashi Trader. (2018). How to Trade A Range. DAO Press. pg. 10
2. Get a Grip on Risk/Reward Ratios. (2019). mytradingskills.com