A. The Indicators
For each stock I am following, I use four separate charts with four different time frames. Other than the time frames, each chart is set up identically with the same indicators, as described in
The Cat System: 5 MA, 15 MA, %K (P=14), %D (P=14) and OBV . These indicators are used to
identify direction changes.
In addition, each chart includes a 50 MA, 200 MA and Pivots, which act as support and resistance levels and help structure my trade set-ups.
The four-chart set-up takes up one entire monitor. They need to be big so I can see as much detail as possible.
This is what it looks like:
B. The Time Frames – Slugs and Scalps
I divide stocks into two categories: Slugs and Scalps.
Slugs are stocks that move a bit more slowly and narrowly. These might include SPY, QQQQ, MSFT, INTC and anything else that has a lot of liquidity and a large float. For those, I want to catch trades that are a bit longer-term, giving them a bit more room, following longer trends. The price movement is more gradual and steady, so I use charts with slightly longer-term settings.
Slug Set-up =
Upper Left - 120 Tick Upper Right - 3 Min
Lower Left - 1 Min Lower Right - 10 Min
For stocks that move more quickly, with wider short-term oscillations, I use a Scalp Set-up. These might include any news stocks, larger stocks like BIDU, AMZN, AAPL, GOOG, FSLR, or anything else that has strong momentum, including a Slug stock during very active times in unusual news-driven situations. For these trades, the short-term oscillations within the broader trend are much wider. The swings within the trend offer more trading opportunities, so I shorten the time-frame of the charts I am focusing on and play each swing within the broader trend.
Scalp Setup =
Upper Left - 15 Tick Upper Right - 1 Min
Lower Left - 120 Tick Lower Right - 3 Min
C. Direction vs. Action
The two charts on the right I consider my “direction charts”. They are a bit longer term, showing the general direction, or broader trend. These will be the 3 min and 10 min charts for slower stocks like QQQQ, and the 3 min and 1 min charts for scalps on wider-ranging faster stocks, like AAPL. The direction charts I use mostly for orienting the direction of a trade, not for pinpointing an entry or exit. Whether a trade is with or against the trend, will tell you a lot about the predictability and potential of the trade, and whether your exit should be quick and conservative or whether it’s a trade that can be held longer.
The two charts on the left I consider my “action charts”. These are faster charts, giving you a closer more detailed look at a stock’s movements. I focus on these to pinpoint turns, both tops and bottoms, breakouts and breakdowns, to signal entries and exits. For slower stocks like QQQQ, these will be 1 min and 120 tick charts. For scalps on wider-ranging faster stocks like AAPL, I will use 120 tick and 15 tick charts for timing entries and exits. Both of these entry charts need to line up to give the entry better predictability, but the faster one will lead the slower one.
Ideally we want to align trades with the direction of the broader trend to give us better quality trades, with more predictability and potential.
D. Why Use Four Charts?
As JFK once said, “A rising tide lifts all boats”. Of course he was talking about the economy, but it is very much the same in the stock market. The broader trends of both the market in general and the stock, will influence each individual movement. If you have a strong up-trend, each pullback within that up-trend will be small and quick before the stock continues back up to yet higher highs, in line with the trend. Vice versa in a downtrend.
That means that our best, highest potential and most predictable trades, will be in line with the trend. And if we are fighting the trend, trading in the opposite direction, we should at least be aware of it, with realistic expectations. In all of our trades, we also want to make the most accurate entries and exits possible, taking full advantage of the swings to capture bigger gains. The combination of slower direction charts to point the trend, and faster action charts to pinpoint more accurate entries, gives us the best of both worlds.
1. With the Tide
If the “tide” is supporting the trade, this gives me more confidence in the predictability of the trade, as well as the potential. I am then willing to give it a bit more room to develop. This means I am willing to set the initial stop a bit wider, at the previous high/low or the support/resistance barrier I am working off of. As it begins to move in my direction, I am also willing to trail the stop a bit more loosely to capture a larger move.
2. Against the Tide
If the trade is against the tide, then I need to base the exit, as well as the entry, solely on what is happening in the “action charts”. The potential gain will be much smaller (unless the direction charts later turn my way after entry), so I need to keep risk smaller as well, which means tighter stops. As the trade begins to move in my direction, I am less interested in trailing a stop and looking more to exit at the first sign of hesitation.
One might argue, justifiably, that low quality trades that do not warrant high confidence, should not be entered in the first place.