Professional Trader’s Series, Part I: Screening and Selection Process

March 8, 2011
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To maximize opportunity and minimize risk, the professional trader relies on a customized arsenal of streamlined, high quality tools.  In respect to swing trading, many of Mercenary Trader’s key processes and methods are built on the software and execution platforms of  TradeStation Prime Services.

Today we are going to take a deeper look at their platform and show how we use it in our own processes.  (disclosure: TradeStation Prime Services is one of Mercenary Trader’s sponsors)

This series is the first of many archived reports that will be available as part of the Mercenary Vault.  The vault will include premium resources such as interviews with top traders, tutorials on trading methodologies, and discussions on how to create a business out of your trading success.

The Vault will only be available to members of the Mercenary Dispatch – our way of sharing critical information with our community of traders.  So sign up today – it’s free!

In part I of this series we’ll take a closer look at our Screening and Selection Process.  Stay tuned for the next three reports including Trade Execution, Profit and Risk Management, and Post-Trade Analytics.

EXECUTIVE SUMMARY:

Managing information flow is critical for maintaining focus.

• Use of screening tools, broad watch lists and timely radar screens enables our ability to track major trends and drill down to specific trading opportunities.

• TradeStation Prime Services offers a comprehensive, easy to use desktop tool, allowing for broad market coverage without undue distraction.

• Today’s installment of the Mercenary Vault displays our internal process for tracking a wide assortment of securities and funneling down to individual trading opportunities.

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The problem of information management is a serious challenge for traders…

Macro trends continually shift as political, economic, and social issues create new opportunities and risks.  Individual sectors respond to both the macro environment as well as individual dynamics effecting individual businesses and investors’ perception of these dynamics.

And of course individual securities gyrate based on top down influences as well as individual trading decisions by retail investors, mutual fund managers, hedge funds and other institutional traders.

No matter how dedicated you are to tracking and trading these opportunities, there is absolutely no possibility that you will be able to effectively monitor all of the potential setups and capture profit on every pattern that emerges.

As a trader, your success depends on your ability to isolate the best opportunity set available to you, and then to devote intense focus to this particular subset of the market.

For large investment shops, this usually means hiring analysts that cover individual sectors.  One analyst covers airline stocks, while another develops expertise in consumer apparel companies.  The specialization creates some informational advantages, but the downside of this approach is that many trading decisions are made based on a pigeon-hole view of a single industry or security – completely isolated from the broad market picture.

From a trader’s perspective, this simply doesn’t make sense.   We want to be involved in areas that are actionable right now and if it takes the airline industry 18 months to give us a trading opportunity, we will need to focus on other industries along the way.

But with an impossible number of securities to monitor, and conditions in a constant state of flux, how can you consistently stay in front of the situations that are going to allow you to succeed as a profitable trader?

The key to effectively tracking a universe of securities and identifying trading opportunities revolves around two important concepts:

Use of an Effective Tool Set – To truly thrive in today’s trading environment, you must have an effective tracking and monitoring platform.  This tool set should be intuitive, efficient, clear and concise.  Like any other technology platform, you know it is effective when you spend more time thinking about the information than how to set up the actual platform.

For the Mercenary Trader platform, our choice is the TradeStation DMA (Direct Market Access) Platform.  As you will see in a minute, the interface is clean and easy to use, and the functionality is second to none…

Creation of an Efficient Periodic Process – No tool set or platform is going to be worthwhile without a dedicated plan for putting it to work.  In order to make the best use of our tools, we remain intensely dedicated to hard work – which is really the only way to achieve greatness in any worthwhile endeavor.

Both Jack and I have a planned out daily (as well as weekly and monthly) set of tasks that we work through.  While the process continues to be adjusted and refined – and probably will continue to be for years to come, – commitment to a well-defined process creates an efficient, predictable, and profitable trading environment.

So let’s dive into the Mercenary Trader screening and selection process.

Top Down Screening

To a large extent, we look at individual securities from a top down perspective.  We identify key areas of opportunity (asset classes, broad themes, individual sectors etc.) and use these categories as a starting point for selecting individual securities.  For more on this process, take a look at our Integrated Macro Analysis series.

Since we view most market movements in terms of groups, most of our research and tracking lists are organized by industry or asset class categories.

This doesn’t mean that we don’t look closely at specific opportunities such as individual equities, ETFs or commodities.  But it does mean that even when we identify a specific opportunity in one security, we want to understand how that security trades in the context of a broader basket of similar vehicles.

My information funnel begins with a broad watch list of securities organized by group.  This is essentially a “ticker dump” – a wide list of vehicles that I have some amount of interest in.

If I’m reading through an analyst report on niche energy companies, I’ll place the tickers for these companies into the broad watch list.  Even if energy isn’t on our specific radar at the moment, I may very well want to pull up these names in a few weeks when the energy sector heats up.

Below is a screen shot of a portion of my current watch list.  You can see that some groups are built out with a number of relevant tickers, while some only have one or two names that have recently caught my attention.  (click the image to see full size in a separate window)

TradeStation Watch List (click to enlarge)

Keeping a very broad watch list like this serves two primary purposes:

  • Quick Scan – Since this screen is organized by group, and includes a percentage gain or loss, it can be helpful to quickly scroll through this list to see what areas are particularly active on any given day.
  • Relevant Vehicles – There are times when an event creates a particular opportunity for a group.  An economic report on new home sales could create a stir for the homebuilders group.  In this case, it is helpful to already have a list of securities in the area as a starting point for identifying new opportunities.

Another benefit of this broad watch list is cognitive distribution.  If a particular stock or group of securities attracts my attention but is not actionable today, I don’t want to spend mental energy analyzing this group too carefully.  Instead, I can dump the tickers into this broad watch list and know that I have the names recorded and set aside for when the environment improves.  This frees up mental capital to then focus on the themes at hand.

As you can imagine, over the course of a few weeks, this watch list can grow exponentially and become unmanageable in a short period of time.  This list is very much a broad tool – one that I leaf through on a weekly basis.  There’s no way that I could carefully track each of these tickers on a daily basis.

Usually every six or eight weeks, I take a few hours over the weekend to pare back this list and take out any names that are no longer relevant or meaningful.

TradeStation Symbol Lists

Another helpful feature of the TradeStation DMA Platform is the Symbol List function.  As industries or groups come into focus, it’s often helpful to have a list of tickers ready to go.

In the screen shot below, you can see that the platform has a number of pre-loaded industry lists that can be inserted into a watch list.

Simply drill down to the appropriate group and/or sub-group and the TradeStation DMA Platform has already organized securities into the correct groups.  This can be a great starting point for which names to research when a particular news item acts as a catalyst for an industry.  With the Symbol List tool we can immediately isolate names within any industry and begin to work through the chart patterns and company fundamentals to pick out our targets.

The platform also allows you to create custom symbol lists for storage and retrieval of your own lists within the Symbol List function.

While the broad watch list and pre-loaded security lists are helpful from a screening and storage standpoint, the wide net is not appropriate for daily scanning of individual securities to trade.  For this purpose, Jack and I each use a dedicated radar list with our top actionable items that are relevant in today’s market.

Actionable Radar and Real-Time Charting

The majority of time that I spend looking through charts takes place on my radar screen – a condensed list of actionable tickers linked to a series of pre-formatted charts.

This list of vehicles (primarily individual equities and ETFs) is updated religiously each weekend in preparation for the coming week.  During the week this list can be changed as dynamics change, but at a bare minimum the list is scrubbed weekly to make sure all vehicles are relevant and new tradeable groups are added to the list.

My TradeStation DMA Platform is arranged so that each ticker is linked to a series of charts.  When I click on the ticker for GLW, for instance, the charts immediately adjust to show me the daily, weekly and 60-minute chart for Corning.  In the image below, you can see the relevant charts along with a short-term chart for the S&P futures which I keep static throughout the day. (click on the image to enlarge in a separate window)

TradeStation Radar Screen (click to enlarge)

It’s important to be able to view different time horizons to see various trend lines and support / resistance areas that will come into play.  In the TradeStation DMA Platform, if I double right click on any of the individual charts, the chart expands to the full screen, allowing me to see more detail and more perspective.

Each day after the market closes, I work through my radar screen.  I click on each symbol and take note of the charts as they are developing.  Keep in mind that this is a list of stocks identified as relevant for this week of trading.  So there is potential for a trade setup with any of these individual names.

My radar screen typically covers between 80 and 130 names. I want to have plenty of actionable names available for trading, but with too many tickers to track, the process would become tedious and eat into my research time.  The daily scan of these charts usually takes less than an hour and gives me a clear indication of what areas are setting up well and which groups are still in the “wait and see” category.

After Jack and I have both looked through our radar lists and identified trading candidates for the upcoming trading day, we hash out the exact price points, position sizes, risk points and other trade variables necessary for proper execution.

Next, we will discuss price alerts, trade execution and a few important behind-the-scenes functions that make TradeStation Prime Services our choice for both charting platforms as well as trade execution.

To your trading success!
MM

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Note: TradeStation Prime Services is one of Mercenary Trader’s sponsors.  Jack and I are very selective in who we will accept as a Mercenary Trader sponsor. Our criteria is this: If the company offers a product or service that we believe in, that we actually use, and that we could highly recommend; then (and only then) will be be willing to consider them as a sponsor.

As a TradeStation Prime Services client (I’ve used their platform for years), I can heartily endorse the company, their DMA platform, and the institutional trading services that they offer.

To contact Tradestation Prime Services or to inquire about a demo on their platform, you can learn more on their website or contact their New York office:

William Katts, Senior Managing Director
phone: (212) 847-5900
WKatts@TradeStationPrime.com

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