Stock Trading Guide


Opening A New Account


Smaller Versus Larger Accounts


Small accounts (under $50,000)

Less emotional attachment.  
With a smaller account, one may take on an amount of risk which they are willing to tolerate.  Using money which isn't life-changing gives you more clarity in your decisions, allowing you to make decisions from an outsider perspective.

Less trade participation (T+2 Cash Account or Pattern Day Trader Under $25,000)

Smaller Profit Per Trade
Some experience the need to "get rich quick."  We must understand that a smaller account will yield smaller gains.  The expectation for profit in which you have for yourself must be reasonable.  Think about 10% gains every 1-2 days on your position.  You won't be making six figures your first year building a smaller account.  Don't allow this to pressure you into "Going All In." or going against your risk/reward strategies.

Beware of the beginners luck
Trader makes 100% on one trade, holding through a large move, leading to a win from bad practices (luck).  Trader's brain is now attuned to believe they can yield these level of gains each time they enter a position.  This will cause the trader to get greedy and potentially become stuck holding the bag hoping for another miracle

Flexibility In Lower Volume Stocks.
Smaller accounts can scale into lower volume traded stocks with a higher % of their account.  Too much volume into a low volume stock can move price and cause other traders in that sphere to notice you and trade against you.  Having a small account allows you to stay unnoticed while you profit on the low volume movements.

Cheaper Learning Lessons.
This is my favorite advantage that smaller account users have over larger account users.  The ability to make trades, experience, and learn the market hands-on while taking on less risk.  Time and time again I see users begin their trading career using their life savings to start.  It's better to use an amount that you saved up over only a few months and try from there.  The key here is not to be eager to multiply your wealth instantly, but rather preserve your account through slow and consistent growth.  To do so, you must be confident in your abilities and certain that you have reached this defined level of knowledge.  Trading small until you reach there is ideal in case anything goes wrong.

Large Account ($50,000+)

Able to take additional and add to current positions even with drawdowns.

A future bankrupt company like ACI or MNKD spikes 120%.  I'd short into that spike because I believe in the longterm the stock will go back to prior lows.  We then experience a situation where the stock then jumps another 100%, causing a large unrealized loss on my account.  HOWEVER, with the amount of capital that I am trading with, I can withstand this drawdown and profit 40-50% over 1-2 weeks after the drawdown is finished simply because I am able to hold until this company realizes it's true value of $0 (This is in fact how institutions short, because in many scenarios they are not allowed to liquidate their position right away - so they hold through the drawdown)

More money = more room to diversify your strategies.  Instead of focusing on just one short term or long term trade, you can now mix longer term holds while making day trades.

Able to withstand more mistakes.  Theoretically, if one traded on the same size even after their account has grown 200%, their room for error has now grown by 3x.

Able to profit on smaller cent moves (0.05 - 0.07 cents on 10K shares = $700 profit)

Ability To Access Premium Brokers
Having more money allows you to take advantage of multiple PDT free brokers (as each broker provides their own advantage, you'll begin to utilize more perks from each broker to your advantage.)  More broker can also mean you have access to a larger list of stocks to short.

Exploring More Advanced Strategies
Access to premium brokers also opens the gate to being able to short hard to borrow stocks.  Penny stocks all drop exponentially in the long term and the ability to take advantage of this type of trading is only done so on very peculiar brokers which require larger deposits


Recommended Brokers by Account Size


Tier 1:  Less than $10,000


In this tier, it's not yet worth it to start paying commissions even if it's just $1 each way.  The goal here is to grow your account and reach the next Tier so you can begin utilizing more day trades.

Recommended Broker(s) Stocks and Options: Robinhood


Tier 2: $10,000 - $25,000

In this tier you’ll want to keep it simple by splitting your funds between Robinhood and Interactive Brokers. The latter is only necessary if you want to short stocks or sell options to open. At least half of our trades involve “short-selling." Although the loss potential in short-selling is unlimited,  our losses during the market hours are limited by using stop-losses.  We rarely hold shorts overnight unless we are very confident that the stock will not move against us.  Not being able to short-sell is like playing tennis using only the forehand. Being able to play the market both ways is essential to becoming a versatile, capable trader.

Recommended Broker(s): Robinhood, Interactive Brokers (for shorting and sell to open options)


Tier 3: $25,000-$50,000

Within this range you’ll have enough to open a margin account on ETrade and/or ThinkorSwim taking advantage of the advanced platform with great analysis tools like charts with built-in studies, custom studies, both of which are available in our store. With at least $25,000, you will no longer rule afoul of the Pattern Day Trader rule so these full service brokers will allow you to trade all you want.

Recommended Broker(s): Etrade Pro, ThinkorSwim


Tier 4: $50,000+

With this much capital, you should not be worried about broker fees given the size of your trades would be a much bigger factor in your success than broker fees. The only broker to recommend at this tier is Counterpoint Securities because it has the longest list of stocks available to short, allowing you entrance into a realm of advanced trading strategies that involve shorting small caps, OTC’s and penny stocks in addition to options.

Recommended Broker(s): Counterpoint Securities


Broker Comparison - A Closer Look


Introduction

There are only a few full service brokers that let you trade stocks, OTC stocks, futures, forex, options under the same platform and provide an adequate mobile app to compliment its desktop program. While most of the larger brokers have lowered their standard fees to $4.95 per a trade, ThinkorSwim, has yet to lower their fees to match. There is a reason for that: they know they have a superior platform so they don't need to compete on price.

Why Everyone Uses Thinkorswim

ThinkorSwim provides free L2 data and a powerful charting platform. To get the free data, open a ThinkorSwim account. A common question we get is: "Do we have the fund the account to use it?" The answer is no. All you have to do is log into your TD Ameritrade account. When asked to fund your account, click around for an option to fund later. Many users have been using ToS for years without any issues.

A Powerful Charting Platform

There are so many preset indicators, ability to draw your own support and resistance lines, sound alerts for buy and sell signals, it can be confusing for a new trader. Enhanced Investor developers provide free custom scripts, alerts, and indicators to our Elite Gold members. For non-Elite Gold members, we also sell our scripts in our store and also provide a custom script service.

Mobile Trading App

In addition, ThinkorSwim provides a mobile app for iOS and Android. What other platform gives you free real-time data on the go? (That's right, none!) While the mobile platform charting options are more limited than desktops, our custom indicators support both!

Additional Pros

  • Multiple re-sizeable charts on the same page
  • Excellent execution quality.
  • Free market scanner.
  • Includes futures and forex.
  • Risk profile analysis for options plays.
  • 24/5 trading in US equities.
  • No minimum account fees.

Cons

  • Difficult to get approved for futures/options.
  • Higher fees at $6.95 trader compared to $4.99 or less at discount brokers.

Pros

  • No fees for holding short overnight.
  • Excellent execution quality.
  • Includes futures and forex.
  • Free mobile app.
  • Secure login.


Cons

  • $10,000 minimum to open an account.
  • 0.005/share commissions can add up quickly especially when trading penny stocks.
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What is Robinhood and why should I care?

Robinhood is the only commission-free trading platform for traders in US equity markets. Even though large brokerages continue a race to the bottom in terms of commissions, those fees can add up quickly especially if you are starting out with a small account. Let's say you are starting out with a $1000 account. As a new trader, It is unlikely nor recommended you will or should go "all in" taking $1000 position for every trade. But for the sake of simplicity, let's say you do. Well most large brokerages charge $4.95 - $6.95 per a trade. Round-trip, that adds up to about $10 - $14 per a trade. If you took a $200 position, you are down 5% by the time you close before the stock does anything! On a $1000 position, it's a little better but being down 1% is still not favorable. It can easily change your trading behavior to start "bag-holding" or sticking with a position instead of cutting your losses.

That sounds good. Is there a catch?

Unfortunately yes. The app is only available on mobile devices such as iOS and Android (although we do have a guide here on how to setup Robinhood on desktop). When searching for momentum stocks, traders often have to shuffle between screens on a small device which is not ideal. Trading is a different game and you don't want to tax your mental capacity on mundane things like waiting for screens to load or flipping back and forth between screens to compare charts.

The lack of technical indicators can also hinder traders because it's important to put price action into perspective and indicators can help you do that. When decisions need to be made in a split second, even a small delay can turn a profitable trade into a losing one. We recommend pairing this with another platform like ThinkorSwim that has many preset indicators. For more advanced traders, the Enhanced Investor team has created custom indicators in our store. You can check out our blog to see how our custom indicators have performed.

The platform is only made to buy stocks. Users don't have the ability to short-sell. That is not a big deal in a bull market but if the market ever turns downwards, then upwards momentum will likely be much more limited.

Lastly, there is not access to after-hours or pre-market unless you sign-up for Robinhood Gold, a monthly subscription that gives you more margin and access to trading outside normal trading hours of 9:30 AM to 4:00 PM EST. Although unlike the larger brokerages, pre-market starts at 9:00 AM EST versus 4:00 AM EST and after-hours end at 6:00 PM EST versus the more standard 8:00 PM EST.

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That does not seem so bad. Are there any other downsides?

While Robinhood has gotten better lately, they have had issues with maintaining server up-time. In the past there were days in which the platform was unavailable for hours after open, causing users to lose money. For that reason alone, the platform is recommended for new traders and/or traders with small accounts. Another issue is the volatility restriction. For certain volatile stocks like the 3x ETF ones (JNUG, DWI for example), Robinhood restricts frequent trading even if you are not violating the pattern day trader rule!

Anything else I should watch out for?

Yes. A complaint we often see from new traders excited to take their first stock position, is using market orders without realizing that orders can be set to limit orders. For stocks with a large spread, it can cause your entry price to be a few percentage points higher than expected. It does not sound like much, but that is actually a lot. Some strategies hinge on taking a few percentage points and playing it safe. See our glossary for the difference in order types.

I was offered Robinhood Instant. What is that?

Robinhood Instant is a margin account. Robinhood without the "Instant" upgrade is a cash account. Cash accounts are not subject to the pattern day trading rule (described in our glossary) while margin accounts are. Margin is your broker lending you money to open new positions instead of waiting three days for stocks to "settle" and your buying power to be restored.

Takeaway

The key takeaway to this review is that Robinhood is a great tool for some traders as long as you are aware of the limitations. Overall, the positives outweigh the negatives for small accounts. If you have any other questions, join our chat and direct message any of our moderators or administrators.

Additional Pros

  • Now includes options with crytocurrency coming soon

 Cons

  • Market orders can add up to 5% of your total holding cost. Must use limit orders.
  • Subject to PDT if using Robinhood Instant.

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Pros

  • 30 branch locations in 17 states
  • $2 discount per trade and $.50 per contract on options for active traders (at least 10 trades/month)
  • Desktop or browser-based trading.
  • Only $69 for the E-Trade Pro platform versus non-Pro
  • Better quotes in the form of Nasdaq TotalView

Cons

  • $69/month platform fees.

What To Trade


Low Float Stocks


“Low float stocks” are one type of stock where we can make the most gains using a momentum trading strategy. Many traders who approach this type of stock are confused by the way it moves and the volatility behind it.  In order to fully understand the price movement and what determines how far this can go, we have to understand the fundamentals of a “ low float stock."

Every company in the stock market has a certain amount of shares that has been issued.  This is known as “shares outstanding.”  However, only a portion of this amount is actually being traded during market hours.  This is known as the “share float.”  Generally, we want to look at share float as the amount of shares that is traded intraday and LIQUID.

So what allows me to determine how far a low float stock can go?
The amount of volume at open.  And whether or not that volume is sustaining.  I am typically always measuring the amount of volume relative to a stock’s float at open or during the premarket.

 With a float of approximately only 3 million, I took my position after I saw a 4 times increase in volume at 10:02 AM.

With a float of approximately only 3 million, I took my position after I saw a 4 times increase in volume at 10:02 AM.

ESEA is a stock that recently went supernova when the Baltic Dry Index went on an exponential run 2 weeks prior. It started running up again along with all the other stocks in it’s industry.  After confirming the shipping industry hype through my observation of my trading environment, I decided to buy in at $1.90 due to my certainty this would gain more attention and thus more buyers.  With each dip, more buyers came in to support the run and that is how a stock continues.

When trading a low float stock, we have to throw our mentality of “this stock is up 50%, there’s no way it can go even further.” out the window and take a look at what’s important, and that’s whether or not the shares have exchanged hands from bears to bulls.  Do bears possess any shares left that could potentially move price down?  If not, then the price will go up!


Trade-ideas: Using A Real-Time Stock Scanner


In the market, every trader needs an edge.  Trade Ideas is one way to increase your chances of profitability in the market. Trade Ideas is fast, accurate, and flexible.

It’s an efficient system to find penny stocks and momentum stocks for day traders and swing traders.  If you have the proper settings enabled, you’ll be able to filter through the tens of thousands of companies available and focus your eyes down to the ones that matter, the ones that are running 50-100% or more on the day on high volume.

Not only this, but you’ll be able to filter out stocks that move in tandem with your own technical strategy.  

There are two variables that define what comes out of your scanner

The Filters

These are important.  Filters help us narrow the range of stocks that we are interested in down to a certain sub-group, or list.  If there are 4000 publicly traded companies, we can alter our filter to only display the stocks we’d like to be in our sub-group by certain   variables, including PPS or Shares Outstanding.  One commonly filtered variable is a stock’s Share Float.

EX: Stocks on NASDAQ between $10M Market Cap and $100M Market Cap

The Alerts

Once the stocks within our filtered list meet a certain criteria, those stocks are outputted to the list in real-time directly after the criteria is met.  This can be a stock making new highs, or even approaching it’s HOD by certain amount.  If we’d like to know whenever a stock crosses above VWAP by 3%, we can create this as an alert.

EX: $0.05/share away from HOD, or 5% cross below VWAP


Here’s the thing that I like the most about Trade-Ideas:

You can quickly insert your desired settings, or experiment with new variables directly after a trading day in which you saw desirable stocks move which you missed out on.  After you’ve completed your settings you can then backtest to see what stocks you picked up, and at what price you would have done so.  This in itself is magical in allowing us the ability to refine our scanner settings until we know that it catches a type of stock we know we’d be interested in, at a good price.

Let’s not forget that the market is constantly changing, and as the market changes, we must also refine our settings to match the market in order to find optimal set ups.

For example:

  • If most of the momentum stocks in the pump cycle are now at all time lows, extremely oversold, and being accumulated.  It’s good to tune our scanners to find reversals with momentum and volume. 
  • If the market is seeing a lot of gap up that fade out on low volume, it’s good to set our premarket scanners up to find these premarket gappers so we can potentially initiate a short position.
  • If the market is seeing sub $1 runners, we should optimize our scanners to look for a lower price range.
  • If the market is seeing activity in the Marijuana sector, we should optimize our scanners to scan for stocks within the Pink Sheets/OTC Markets
     

Can I use trade-ideas or something similar for free?
There are ways to utilize the same strategy scanner as trade-ideas through brokers such as Etrade Pro, or Scottrade Elite if you have these brokers at your disposal.  I personally have used the integrated version through Etrade Pro and was extremely satisfied with my scanning results.  Trade-Ideas offers more flexibility and customization than the Etrade Integrated version

Do I receive anything through EI if I sign up for trade-ideas?

Yes! Sign up through us herethen use code ENHANCEDINVESTOR for 15% Off your subscription price.

Elite Gold members have complimentary access to these layouts/settings ($1,300 VALUE) also available in our store.

EI 7-in-1 Complete Trader Layout
1,300.00
Add To Cart
EI Intraday Layout
1,300.00
Add To Cart
EI Before-The-Herd Layout
500.00
Add To Cart
EI Momentum Layout
500.00
Add To Cart
Pre-market Movers Add-on
300.00
Add To Cart
Post-market Movers Add-on
300.00
Add To Cart

How To Trade


Understanding Candlesticks and candlestick patterns


While it is up to the individual trader to determine what type of indicator to use on your charts, candlesticks are the most popular. By default, a green candle means the price at the close of the time interval ended higher than where it started. The opposite is true for red candles. In general, the higher the time frame, the stronger the momentum. As an extreme example, a green candle on the 1-min chart is not nearly as important as one on the daily chart.

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 At the heart of active trading, these are the trades we should make. The difficulty is recognizing which pattern the stock most closely resembles. That is where our experience can make a difference.

At the heart of active trading, these are the trades we should make. The difficulty is recognizing which pattern the stock most closely resembles. That is where our experience can make a difference.


10 Trading Guidelines To Live By


  1. Stop chasing set ups, instead, let them come to you.  Quality over quantity, and going after only plays with true money making power will increase your success over many trades.
     
  2. Be more content with making small wins and batting for the singles.  Once in a while, you'll find that your consistency has placed you in a position to hit a home run. 
     
  3. Understand that losses may happen and aiming to earn them back in one day is unrealistic.  If you've suffered a hit, keep your cool and trade your account back slowly.  Doing so is teaching yourself an invaluable lesson.
     
  4. Continue to look for your niche.  Some traders don't really understand what they are good at until 1-2 years into experimenting with different set ups.
     
  5. Set Realistic Goals.  Start setting daily goals based on how good of a market day you foresee ahead of you.  If today isn't looking too great, then maybe you should aim for that $200 daily goal instead of your normal $600 daily goal.  This way you don't put too much pressure on yourself in a way that could be detrimental to your trade.
     
  6. Record information.  A lot of information can be remembered and stored in your head sub-consciously, but it's good to perform studies on the markets and generate an idea of what works and what doesn't.  This will ensure you're aiming for those high % success efforts.
     
  7. Invest in your education.  One of the biggest problems we see nowadays with anyone trying to use money to make money, is that they simply don't use any of the money to have to invest in the proper knowledge, education, and wisdom to make proper financial decisions.  
     
  8. Take advantage of your resources.  We're born in the era of the internet.  Right now communities of professionals and elite traders have formed in tandem with each other to take on one of the toughest games, the markets.  Having a team around you can greatly help you establish an idea of what's going on FAST.
     
  9. Maintain a balanced lifestyle.  Keeping a close eye on the markets is a good idea, but making sure your mental health is in tip-top shape is important for making correct decisions.  
     
  10. Don't Give Up! Resilience is an undying characteristic in those who end up successful in the markets.  One loss isn't going to throw a good trader to the ground because they know variance is part of the game.


Holding Overnight


I've noticed that many of our smaller account traders out there are having a hard time picking a good stock to buy when being restricted to three day trades a week or when having a T+2 Cash account.  Firstly, I'd like to say that there is a way to get more day trades weekly with an account less than $25,000 and that is explained in my broker strategy article.

But for those who are stuck to just one T+2 cash account or a margin account without the ability to pattern day trade, we will take a look at your options and a few strategies you can follow to ensure you're setting yourself up for the best trades that fall within your restrictions.  

For T+2 Cash accounts

There isn't much room to work with on Cash accounts except taking small positions on a broker like Robinhood.  If you're trading T+2 cash on a $5,000 account, technically you can make 5 day trades a week on $1,000 positions each trade, if done correctly.  This is because your cash settles 3 days after you sell your position, but you are not limited to the amount of "trades" you make with settled cash.  Day trades are only limited on margin accounts.  

A prime example of a broker that is useful on a T+2 Cash account would be Robinhood.  Due to the fact that Robinhood does not charge commission, this allows for smaller trades to be worthwhile.  If you have $10,000 on a Robinhood cash account you can make 3 day trades every 3 days with $3,300 positions due to the fact that your funds would settle 3 days later.  OR, you can make 10 day trades a week using $1,000 positions as you are not limited to the amount of "day trades" you can make.  

Let's not forget that having Robinhood cash allows you to size in at as small of a rate as you'd like, without worry to the amount of commission tickets you receive.

For Margin Accounts Using 3 Day Trades Weekly

These types of accounts can be used more advantageously than a T+2 Cash account due to the fact that you may re-use your capital entirely after completing a buy/sell, as long as you haven't done this 3 times within a week.  You're also allowed to make trades that are not considered "Day Trades."  Where you buy the day before and sell the next day.  Keep in mind that if you sell the next day and then buy another stock, that would be considered a day trade.  

Not always recommended, but the fact that you have a margin account would mean you can go "all-in" on one stock, sell the same day and repeat the procedure.  There's essentially a bit more flexibility on what you can do with a margin account than a T+2 cash account, but at the same time you're limited in the aspect of "day trades."

The most efficient way to use a Margin Account would be to avoid using day trades until you see a trade that would yield high potential for gains with a low chance of being stopped out.  Also look for trades that have potential to continue into the next day.  So if you do end up having to utilize a day trade, you profited nicely off the correct pick.  Being in the correct pick is CRUCIAL to efficiently getting in and out of trades in a timely manner.  Also, don't hesitate to take your 10% even if it's your last day trade.  The trend can't be fought if it says down, regardless of how many trades you have left.


Supernova Strategy


First of all, you might ask.  What is a supernova?  A supernova is any stock that has gained enough momentum and liquidity to move 100% - 1000% over the course of one or multiple days.  These are some of the most profitable stocks due to how liquid and fast moving they are.


How Often Do Supernovas Come a Year?

  • In a bull market I'd say 1-3 times a month (15 - 20 times a year)
  • In a bear market I'd like to estimate around 0-2 a month (less than 10 a year)

Should I base my strategy around Supernovas?
Sure.  In fact, it's always recommended to wait for the best plays.  The ability to distinguish the best set-ups from the rest is the most crucial skill in trading.  This combined with patience and you'll find that you're only putting your money into the market on Supernova-Like plays.  Given this, you'll have a higher % chance of succeeding in the trade, therefore giving you a higher % chance of success in trading in general.

Those who have the ability to day trade can make money through scalping.  But those who are limited to high selectivity should always aim to profit off plays that could potentially be a supernova, and ignore small-time moves due to the limit on day trades per week.

What is the best indication of a Supernova?
From my experience, relative volume.  Always look at how today's volume differs from previous trading days.  If we see a massive higher relative volume at open that stays with the stock consistently throughout the day, we are in zone for Supernova potential.  Being able to identify this relative to float is also important.

How can I get better at spotting Supernovas?
Practice and Research.  Supernovas are built off of momentum and usually have a catalyst to back it.  Get good at identifying strong catalysts and using technical's to confirm the momentum.  Aside from technical's, it's important to evaluate your trading environment (other trading chat rooms, audiences) to see if the hype has the ability to build and continue - with this information in mind, you can determine how long momentum will generally last.


Managing Leverage


  1. Never use margin when you're trading unless you are 110% confident in the direction of your trade.  A 50% loss requires a 100% gain to make back.
  2. Never invest more than you can lose.
  3. Never take a position that is larger than 25% of your account size.  If you fail, you have room to play other stocks and add / subtract from your position.  This allows you to focus on opportunity costs.
  4. Size smaller on thinly traded stocks as they require a looser stop loss.  A looser stop loss equivocates to higher risk.
  5. When sizing larger, compromise by having a tighter stop, allowing you to still keep your risk under control.  With this in mind, your entry must be timed well.

Trading Psychology


  1. Don't always follow the herd, you'll be the last sheep that squeezes through the door late.
  2. Don't always follow the advice of other traders, even those with great track records.  For the most part, you won't be able to get their price, putting you at an inferior to them in any situation.  Always look to better your own trades but take ideas that are still profitable from others.
  3. There is too much opportunity cost for you to fall in love and focus on one stock.  Never hold the bag.  
  4. Do DD before you go into a trade, your money is valuable and the more time you spend looking for a place for it to be, the better of a place you will find.
  5. Always take profit.  Don't reenter a chase if it goes higher, hit it and quit it.  There are more plays in the market, and an emotional chase is the last thing you want.
  6. Trading is a game that requires optimal decision making skills.  If you are emotionally effected by a loss, or a large unrealized loss - take a step back and refocus.  Trading on tilt will only make things worse.

Entries and Exits


  1. Never chase a stock that is at the top of it's trend.  Watch for oversold indicators and an exhaustion of momentum on level 2 and AVOID an entry.
  2. Set a tight stop when attempting to catch a stock you are expecting to reach LOD.  Failed bounces can make for dangerously new lows.
  3. Go for high success rate plays like multi-day BO on high volume.  These are "chase-able" momentum plays.
  4. When entering, know the amount of shares that you are going to buy in accordance with your stop loss.  This will allow you to know the maximum $ amount you can lose on one trade.
  5. Use limit buys off of the bid when there are high spreads.

Position Sizing


We recommend our members to trade appropriately based on their account size. One general rule to follow when growing a portfolio: Never put more than 40% of your portfolio into a single position. Doing so puts a large amount of your capital at risk in case your position moves against your trading plan. We do not recommend leveraging your trade with margin buying power unless you are an experienced trader and understand the risks. Trade according to your plan. Always know your stop loss and capital at risk. Potential rewards should be at least twice as much as your capital at risk.


Example: I go 2000 shares long on $ATV @ $7.50, with a stop @ $7.30, and looking to exit at $7.70 or higher. My risk is $400. I know my entry, exit, and stop loss.

Using confidence levels is another way to determine position size.

Level 1 Confidence

10% of buying power ($1000 into the trade)

Small position, good for volatile stocks which require looser stop-losses.  This will allow me to risk less, with more of a cushion from entry to stop-loss.  Risky plays like scalps, premarket, after-hours, and overnight plays will be sized in at this confidence. 50%-55% confidence

Level 2 Confidence

15% of buying power ($1500 into the trade)

Also a small position in which we are slightly more confident, placing a slightly tighter stop loss than that of level 1.  Same concept as level 1 confidence except we are looking to reap a larger $/share reward here.  55%-65% confidence.

Level 3 Confidence

20% buying power ($2,000 into the trade)

Momentum has a clear direction.  We’re in for a good price per share position here as well.  Medium-low volatility, these are usually longer holds than level 1 and level 2.  Normal stop loss here, not too tight, not too loose.  These are plays where we’re about 65% confident.

Level 4 Confidence

30% buying power ($3,000 into the trade)

I am lucky to receive this setup.  I am familiar with this stock, and the way it moves. I’ve been watching it for a long time now and know what price it’s under/overvalued in the short-term. I also know how to gauge where it’ll be according to any news that’s been released as a catalyst. I’ve planned this trade out and I am completely aware of my risk and potential reward. If things do not go as planned, my stop loss will save my shirt. At this level we’re about 75% confident in our trade.

Level 5 Confidence

40% buying power ($4,000 into the trade)

40% should be considered the all in. There’s no way this stock will turn the other direction anytime soon, momentum is enormous, volume is enormous, all indicators are pointing in this direction. The stock also has high liquidity so we’ll be able to get in and get out with large size using limit orders. Spread is also low here. Extremely tight stop losses here due to the amount of size we’re going in with.  We should have a clear idea on where the top/bottom is.


Risk and Reward:  Why It's Important.


What is risk/reward?

Risk / Reward is one of the most overlooked variables of trading.  Why is this so?  Because it requires math.  Some traders just simply don't want to do the math, but unfortunately - that's what this game requires.  It requires a proper understanding of what you're willing to risk and what you can potentially gain with that risk.  With proper risk/reward you can lose most of your trades and still come out profitable <- this is the key advantage to having proper Risk/Reward in a place where you can be wrong many, many times.

 

How can I apply risk/reward?

Applying Risk/Reward requires you to take necessary steps before each trade to determine whether or not the trade you are looking at pertains to your risk/reward strategies.  

EX:  I need at least 1 to 3 for my risk to reward ratio.  For every $1 I risk, there needs to be potential for $3 in winnings.
(I'm long AMD @ $13.10 with my stop @ $12.99, I'm risking 11 cents for 33 cents since my PT is $13.43)

The two primary steps include setting your immediate stop loss whether mental or hard once you are in the trade and sizing the correct amount of shares you own into the trade in order to meet this max loss and not go over.

 

How can I calculate potential risk?

Simple.  By finding normal levels of support through your own technical analysis and readings of market depth and understanding where that major support level is.  Then find the price in which you'd want to enter and subtract the difference in price.  Once you know the difference, size your share amount according to how much you are willing to risk.

EX:  I see major support @ $0.99 for this stock, and I'm planning to get in @ $1.03.  The max I'm willing to risk is $200 so I'd go in with 5K shares. 
(5K shares -$0.04/share if stopped out is -$200)

 

How can I calculate potential reward?

By utilizing the same technical analysis strategies, knowledge of share structure and market depth to determine where you would want to take profits.  At some point, price will meet a dead-end and it's best to take profit before that high is made and the stock comes back down.


EX:  I see major resistance @ $1.30 for XYZ, but it looks like smooth sailing from $1.03 - $1.29.  I'm in @ $1.03, so my potential reward is $0.26/share but obviously I'd be willing to take profit beforehand if necessary.  On 5K shares that's $1300 potential reward. (5K shares $0.26/share = $1300 Profit)

 

Proper sizing when applying risk/reward strategies.

Now that you have determined your risk before each trade - it's easy to size in accordingly.  Just remember that losing 50% on 2% of your account is a lot less painful than 50% on 100% of your account.  So if your risk happens to be 50%, obviously don't go in with 100% of your account.  a 50% loss on 2% of your account only requires a 50% gain on 2% of your account to recover.  Whereas a 50% loss on 100% of your account would require a 100% gain on your remainder capital to recover.

Good Risk/Reward Set Up

Here you can see that with VWAP being defined as my level of risk on this short, I'm only risking about $1 or less. (VWAP was never tested the entire day)  In hindsight, you can see that there was $5/share reward potential from where I shorted with my risk level never being met.  This is a good trade.

Bad Risk/Reward Set Up


Here you can see that buying into this overextended mover that's showing profit may have already been taken with the given volume circumstances, max gain potential here is probably HOD, whereas the loss potential is unending on small cap stocks like this if held long term.  In fact, I've met many traders that have experienced this kind of risk through holding too long.

Is It Just A Dip?


 Here you see a trend that is met with little resistance.&nbsp;Selling pressure is virtually unseen with resistance being easily broken.

Here you see a trend that is met with little resistance. Selling pressure is virtually unseen with resistance being easily broken.

 Here you see the immediate stretch from price below VWAP. &nbsp;It is also a large move (5-10%) away from VWAP before seeing small rebounds that are followed by further rejections.

Here you see the immediate stretch from price below VWAP.  It is also a large move (5-10%) away from VWAP before seeing small rebounds that are followed by further rejections.

Variables To Consider

Volume
How much sell volume was involved in that the downwards price movement?  Did a small amount trigger a large price drop, which was followed by higher volume into a recovery?  that most likely means it was just a dip, not a dump.

Volume / Float Ratio
This ratio is one of the most under-looked factors in trading.  A lot of traders find it annoying to deal with numbers, so they skip out on this variable.  The amount of shares being traded on a stock is highly important in determining whether current volume is enough to suffice for more of a run.

These definitions are simply estimates based off of personal experience (V/F Ratio):

  • Less than 0.2 at open (first 5-10 minutes) -> Questionable
  • 0.2 at open (first 5-10 minutes) -> Morning Spike Potential
  • 0.5 at open (first 5-10 minutes) -> Bullish
  • 1.0 at open (first 5-10 minutes)  -> Supernova Potential

 

Daily Chart (Patterns, ETC)
What does the current daily chart pattern show?  Do you see momentum continuing from this price point on?  And if so, for how long?  Determine at what point momentum will exhaust.

Other Stocks In Play?
If there are other momentum stocks that are seeing more / similar volume to a high volume stock you are interested in trading - there is a high chance that retail traders may ditch your current stock for other stocks if it does not perform right out the gate.

How Overextended is It?
A stock that has already 'gapped up' on lower volume Pre-Market, or spiked very quickly on little to no volume wiill be faced with resistance at the open, especially at higher levels (30%+).  Be careful counting on already 'Gapped up' stocks for continuation as the chances are much lower than a stock that has gathered momentum intraday, and shareholders will be eager to take profit.

A few indicators that can measure overextension intraday are RSI and VWAP


Dilution


The Dilution Process
Company files in it's 10-Q that it has issued convertible bonds or warrants that allow but do not require the acquisition of shares in the future, at a predetermined price.  Generally, the price granted will be at a much lower price than market value.  When a stock price gets pumped and dilution occurs, those who have exercise-able warrants and bonds can then sell their shares at a higher than converted price.  

Where is the money going?
The profits after exercising warrants and selling them generally go back to company's investors who received warrants for their original investment or commitment to the company.  A lot of the times, company's release BS public reports to jack up a stock's price so they can issue warrants exercisable at a lower price and sell for a profit.  For example, Joe has 10000 warrants to purchase stock at $0.02/share but the stock gets pumped to $0.10.  Later on, you find out that Joe has exercised those warrants and sold them into the market at a 400% profit, diluting the float and thus contributing to the bearish trend to follow.

How do Diluted Stocks re-attain their Low Float?
A lot of the time, these stocks undergoing dilution accumulate a high float overtime and price per share goes into the sub $0.50/share level because the float is simply too high for bulls to control price.  In order to rebalance and prepare these small cap stocks for higher potential to run, the float must be lowered.  The float is reduced through "Reverse Splits."  Generally after a reverse split, the price continues to drop back to Pre Reverse Split levels but now the float is of a smaller multiple.  This allows less momentum to bring up price on less volume, making it easier to re-pump and re-dilute a stock.

What's the best way to trade stocks that are often diluted?
Short.  A stock that is undergoing dilution which allows warrants to be exercised for shares at a price below current market prices will drag prices downwards.  Those shares can then be sold back into the market, making the float larger and the share structure biased towards bears as there are more shareholders cashing out on buyers and depleting the stock of interested buyers.  Often times, these buyers are victims of pump and dumps.

Avoid holding stocks long that are undergoing dilution, there will be no bottom for the most part as shares get sold into them market.  Also, stay away from trying to hold stocks undergoing "offerings" to receive cash.  Not only are these companies in further debt, they compensate with convertible bonds or warrants which are then converted into shares that dilute the structure.


Putting It All Together


Closing Words


All of the information we have presented is based on our years of live trading experience. We believe it can help you become a profitable traders by making the right decisions from opening your account to managing a live trade. After all, that is all active trading is: a series of good decisions. However, similar to how reading instructions in a textbook does not make you an expert without real experience, putting capital at risk after only reading about trading tips can also be daunting. That is the reason that we invite you to join our chatroom and learn live from our team and members.

Happy trading!