An Analysis of 3 Bullish Stock Chart Patterns

When stock market is bullish, there usually are a good amount of stocks that exhibit bullish chart patterns. Quite often, we have to choose one or two best stocks to trade out of many stock charts at a given day. This is exactly what happened to me today.

My bullish portfolio allowed me to take one more bullish position. So I ran my bullish search scripts in the last few days and could not find any chart patterns that were interesting to me. One of the possible reason might be my search criteria requires estimated daily volume greater than 150% of 20 day average trading volume. But this morning I found more than 3 stocks that showed bullish chart patterns and active trading volumes.  I was interested in the following 3 stocks mainly:

• AZN (A pharmaceutical company) with a cup and handle pattern;
• WYNN (Hotel) with a bull pull back pattern;
• MU (Semiconductor Company) with a bull flag pattern.

The stock chart patterns are drawn for illustration purpose in the image below.  Note the volume shown was intraday volume around noon time. The final volume was projected to be twice as much based on my rudimentary algorithm.

I liked the 6 week cup and handle pattern of AZN. But I found its option liquidity was an issue for me since the bid & ask prices for out of the money (OTM) call strike at Delta around 0.3 were over 20%. I decided to skip this option trade since my short call usually use this type of strike if I need to leg into a diagonal spread.

WYNN was bouncing up from both horizontal and up-trending support lines. But I saw a negative divergence in its MACD line. It suggested slower momentum for WYNN since the distance between the recent highs were shorter than that of the prior one. The stock also formed some level of over-head resistance in the prior two weeks. These were not desirable bullish signs.

Therefore, I settled on the 10-week long bull flag chart pattern on MU, which had very good option liquidity as well. I bought October 20 $27 Call for $4.21 as a position trade. The mental stop loss was set to $26.28 which was slightly below the last low in more than 3 weeks. My target price was $33.98 according to my trading spreadsheet. I plan to leg into diagonal spreads when the stock shows weakness (2 days in a roll with declining MACD & price).

In summary, here is the outline of my stock option trading selection steps. Hopefully, this multi-step procedure is not a stock analysis paralysis.

1. Verify recognizable price chart pattern that you plan to trade
2. Verify option bid & ask price spreads to be less than 20%
3. Review momentum of the prices (i.e. MACD indictor)
4. Verify bullish trading volume
5. Look for good relative strength
6. Look for bullish sector behavior

Did I make the right choice among multiple stock patterns? I used to have some concerns about the right pick or not. After year’s trading activities and the application of the principles of trading psychology as posted before (Additional thoughts on the successful mindset for high probability traders), I’m much more comfortable to face this uncertainty now. By following a solid trading process, I felt the profit probability is high although it’s not a certainty. My blog readers may have other thoughts. Please share with me if any.

Overcoming weaknesses of trading personalities

I had studied the mind set of successful traders before. Recently, I've been reading a book named "Proven strategies for generating greater profits from the award-winning team at maverick trading" by Darren Fischer, et. al. This book covers a broad range of trading topics in about 300 pages, and gives an excellent introduction on how to become a professional trader.


Here, I'd like to focus my study on one of the chapters regarding how to overcome weaknesses of a trader's personality. In order to identify a trader's strength and weakness, the book presents a series of questions in the following 4 aspects to categorize trader's personality, depending on the answers of the reader:

• How does the energy come from: Introversion or Extroversion
• How are decisions made: Intuition or sensation
• What kind of attention is used: Thinker or feeler
• What kind of lifestyle of a trader: Judging or perceiving

As an example, the trader with the following set of personality has specific strength and weakness as shown in the table below.

	Strength	Weakness
Introvert	Informed decisions; thorough in analysis	Analysis paralysis; less comfortable trading with a team
Intuitive	Good chart reader; look for relationships	Deviate from rules; overuse indicators to support biases
Feeler	In tune with market; understand big picture; trade with good accuracy	Stick to losing trades; emotional; too many bearish trades
Judging	Decisive; self-starter; take action quickly; good risk management skills	Susceptible to noises; not taking advises

The book gives some other insights beyond the typical baseline solution of imposing trading discipline: create specific trading rules and environments so that the weaknesses have minimal chances to show up in the trading process. This methodology, rather than trying to correct the weakness, should help to overcome the weaknesses since trader's personality is likely to remain over a long time in the trading career.

It's stated that the root cause of all weakness is the fear and greed. The only way to remove this element completely is not to care about profit and loss. Trade the amount that is totally comfortable for you if you face maximum loss. Personally, I think we can also avoid looking at the P&L all the time, by not showing the P&L in the trading software windows during trading battles.

For intuitive decision makers who like to look for evidence to support some trading biases, this type of traders needs to simplify the indicators to just one or two. For feelers whose trading action may be clouded by emotions, they need to calm down or look for the trades opposite to the extreme mood. For the judging traders, they may get out of trades too early due to market fluctuations. So they may trade a basket of positions so that the overall portfolio does not produce extreme losses.

I don't think there are any recommendations about how to tackle the shortcomings of introversion in the book. Personally, I think the establishment of simple but specific rules would help minimize the analysis paralysis. Actively participating group discussions should also make it more comfortable for taking advises.

Overall, this book of "Professional techniques to create generational wealth" provides an extensive range of topics on trading successfully as a professional trader. If a trader would like to deep dive into any one of the individual topics, he can find other books on each specific topic with similar length.

A study of Super trader Karen's trading process

I've been interested in studying the trading process and mindset of successful traders. Today, I reviewed what I learned from Karen's interviews from the trading process perspective.

Karen treats trading as a process and manages the process all the time. As far as I can see, her trading process involves the following elements as discussed in her interviews:

o   A suitable set of strategic trading rules,

o   An advanced trading software platform,

o   A successful trading mindset and psychology,

o   A daily trading routine,

o   A trading number game management,

o   An experienced trading team,

o   A Sufficient amount of time and money for trading and learning, and

o   Others.

Karen’s daily trading routine starts from market open hour till the end. The constant watch on the market by her trading team allows them to react to market changes promptly. Karen’s trading rules help them staying away from over-trading or over-adjusting. Her high degree of confidence on the high probability trades enables her of proper trade actions in the face of market uncertainty.

Karen treats trading as a number’s game so that she can play it objectively. She enjoys playing the big game all the time and taking the market challenges as well. There are no feelings wrapped around her trades or positions, as they are just numbers to her. The ability to turn emotions and perceived risks into a set of trading numbers and to focus on the numbers helps traders to decouple themselves from emotions and irrational trading actions. The emotion and fear are the biggest obstacles in trading and they take down most traders. The focus on trading numbers takes away the feeling of heart-ripping during adverse market conditions. As a result of the application of high probability trades by going far out of the money, a heavy percentage of Karen’s positions are winners.

Karen had discussed her learning and trading improvement process. She had more failures than successes in initial years. She was willing to invest in learning knowledge with a large amount of money and time that many other people may not be comfortable with. Her education fee at Investools alone cost over 20K USD. Small traders may have this limited amount in their trading accounts.

Karen established a tremendous trading team of about 6 members. 5 of them are experienced retail traders and 1 is an accountant. She encourages different ideas from team members. They usually will listen to each other, discuss the ideas and agree as a group. From time to time, they will test water with new ideas using a small amount of capital. If the new idea is proven to be working, then they don’t hesitate to apply it in full scale. The selling of weekly option was a good example of this process of adopting new ideas.

Some traders may get extremely disturbed if the temporary position loss becomes very big. Karen does not get emotional about any of her positions. When positions are in danger, she will do whatever it takes to fix them and make them back to the original profit at the expiration date as described in Section 6 Trade Adjustment Rules. She is not bound by the future direction of market moves, but always reacts to it if the ITM probability and profit percentage of her positions indicate to her for adjustments.

Karen suggested traders to look at the profit and loss numbers of the portfolio but not to focus on the P&L. This is reflected on her trading team structure as well as there is only one accountant (vs 5 to 6 traders). With this team, the traders should be able to focus more on the other important trading numbers. Personally, I think the key numbers Karen discussed in the interviews can be summarized as the following:

·         ITM probability

o   First factor used to determine if opening, closing or adjustment is required

·         Prices and trend of the underlying

o   Second factor used to determine if adjustment is required

·         Stress-tested market crash losses vs net liquidation value

o   Critical number that indicate how many contracts to sell

·         Option premium changes and time to expiration

o   Available options for adjustments

Karen stated she is willing to take losses when necessary and she will keep existing profit in her positions also. However, there were no examples discussing when to give up positions for losses (probably after the portfolio margin runs out). It’s worthwhile noting that Karen did not indicate any rules based on position losses. She did not mention any direct trade reaction to the amount of loss of a position. Her trade adjustment rules are based on ITM probability and the current market trends.

Additional thoughts on the successful mindset for high probability traders

As noted in my last post on position exit, I need to take another look at my trading mindset with regard to position exits. I had posted the integration of successful mindset into the high probability trading rules and my understanding of successful mindset of high probability traders before. After the trading in the last few months, I finally realized that my understanding and application of the mindset need further improvement for trade exits and closures, since I did not have enough thoughts about them before.

The following winning attitude is supplemented with trade entry, adjustment and exit considerations.

1.  Any outcome is possible after a specific trading action is taken.
     Good or bad outcome is possible after a trade entry, adjustment or exit.

2. Market can give us a win or a loss at each time randomly.
    After a trade entry or adjustment, market can give us a win or loss randomly. For a trade exit, we may be exited on time to receive a good profit, to avoid a loss or we may be exited earlier before more profits are captured. It's random. It's more important to follow the exit rule to avoid unnecessary losses. The exit rules can be improved after analysis of multiple trades. We should not think about changing exit rules after a trade is in progress.

3. Market is unique every day without any exact association with its past.
    We should not let past trading occurrences affect current trading. Experiences can be incorporated into the trading rules. But we should understand market is unique every day and follow the trading rules once the trade is on.

4. The high probability rules provide a higher probability only and guarantee overall successes statistically.

    The trade entry, adjustment and exit rules provides high probability statistically. It provides no guarantee for each trade at all. But over the long run, the probability can be realized if we follow high probability rules.

5. There is no need to know market's next move to make profits. We must know what we will do next, based on any possible market moves.

    There is no way to know every market move. We just need to know the risks and reactions to every possible market moves. The reaction includes trade adjustments and exits.

I'll review my integration of the successful mindset into high probability trading rules in a future post.

The integration of the successful mind set with the high probability trading rules

A few months ago, I planned to review my integration of the successful mind set of high probability traders into my trading rules. Today, I finally got a chance to work on it. The idea is that if this mind set is incorporated into the trading rules, it's most likely the successful mind set is achieved naturally as a byproduct of the trading rules. I'll review the integration of the following actions with my trading rules one by one today and should probably come back to revisit them in the future to make improvements.

1.  Pre-define risks of every trades
The risks of my trades are controlled by my trade sizes mainly. I trade a predefined contract size of options persistently. So the portfolio risk is always predefined, although it may increase after certain adjustments. I don't assume MAX losses with my spreads since I plan to make adjustments before that. It's a challenge for me to establish a rule to insure for potential black swan event.

2. Completely accept the risk or take action to eliminate non-tolerant risk

For high probability option selling portfolio, it's crucial to ensure comfort-ability with the risks of the portfolio and corresponding adjustment trades. It's one of my trading rule that if the predefined risk is violated, the extra positions should be closed.

3. Objectively identify trading opportunities

My trading rules specify when to initiate/exit monthly trades, and when to adjust trades. I also trade indexes mainly. As long as these rules are clear, there  is no issue of missing opportunities.

4. Execute trading rules for each opportunity without reservation and hesitation

Since I have detailed rules for opening positions, I can easily open positions without any issue. The challenge is in the adjustment side. As long as my criteria to start adjustment is clear, this should be OK in general.

5. Reward ourselves as market gives a win for us

Need to encourage ourselves for successful establishment and execution of trading rules. I think it helps to nurture winning altitude as well. No plan to take profits away from trading account at this time.

6. Keep monitor trading processes and susceptibility for making errors 

Will work on trading process to establish an enabling trading environment. I have created a trading procedure to validate every trade. Some times, it's easy to make adjustment trade errors. So there is a need to follow the validation rule to minimize trading errors.

The Successful Mind Set of High Probability Traders

As part of my trading process review, I studied the trading psychology in the last couple of weeks and plan to go through two major psychological areas in a couple of my posts.

• The successful state of mind of high probability traders
• The integration of the successful mind set with the high probability trading rules

Today, I'll go through the first topic about the mind set and winning altitude. High probability means a good chance of success over a large amount of events statistically, but it does not guarantee success for any specific and single event during the process. So successful traders must have the following carefree state of mind to accept the uncertainty of each individual trade.

1. Any outcome is possible after a specific trading action is taken.
2. Market can give us a win or a loss at each time randomly. 
3. Market is unique every day without any exact association with its past.
4. The high probability rules provide a higher probability only and guarantee overall successes  statistically.
5. There is no need to know market's next move to make profits. We must know what we will do next, based on any possible market moves.

To achieve success consistently in high probability trading, we must integrate the following actions with our trading process.

1. Pre-define risks of every trades
2. Completely accept the risk or take action to eliminate non-tolerant risk
3. Objectively identify trading opportunities
4. Execute trading rules for each opportunity without reservation and hesitation
5. Reward ourselves as market gives a win for us
6. Keep monitor trading processes and susceptibility for making errors