StockConsultant Trading Guide

Contents

Real Time Charts

Great for finding local support areas and fine-tuning trailing stops or stops on entry. Using the 10-day real-time chart above, we see the minimum price action range is 26.96, and below this area is a possible place for stops.

Real Time Chart Overlay

Real time overlay chart (8 month chart)

Detect fast opening breakouts
Investigate the daily candlestick formation with intraday price action and the buying and selling volume.

Stops And Trailing Stops

The best stop price is below support, invalidating the trade if hit.
To fine-tune/adjust the stop, use the 5 (or 10) day intraday chart to gauge the short-term intraday support area.
In the above 10-day chart (a continuation breakout watch), the 25.5-25.6 area would be considered a support area, with a stop placement just below 24.4 or lower.
A trailing stop price should only move higher.
On trade entries, the StockConsultant will initially keep stops wider and then tighten the trailing stop as the stock rallies. After a good rally, a stock may form a narrow resistance area and allow a tight stop.
Tighten stops once a day in the morning unless it is a very active stock with a significant move during the day.

Trade Tips

Keep a stock profit/loss ratio (P/L) of 3:1 or greater. If a stock has a price Target 1 (or T2) at 12% profit, the max stop loss (stop) would be 4% for a P/L ratio of 3:1. If a tighter 3% stop is available. The P/L ratio would be 4:1. With a 10-position diversified stock portfolio and a P/L ratio of 3:1 or greater, you only need to be correct 33% of the time to break even.
Look for stocks with a target profit of at least 5% or greater.
The sweet spot for profit on medium-capitalization stocks is 9 to 15%.
Price and breakout targets can be conservative, especially if the stock has had only one or two big rallies or pullbacks over the past year (low volatility/movement). The more rallies and pullbacks (volatility/movement) over the past year, the more accurate the price and breakout targets.
Use the 3, 5 or 10-day real-time chart to fine-tune the entry and trailing stops.
There is a narrow price area for optimal trades. High trade quality areas happen at support with tight stops and maximum T1 and T2 target profits.
Do not chase stocks; use support and get in before the crowd; stay consistent for each trade with a well-defined setup.
Be aware of false breakouts; some studies suggest taking the 2nd breakout attempt has more success.
After a significant price gap down (or many large down days, i.e. falling knife), it is best to wait for some stability and double or triple support areas to form before looking for trade setups, which may take one to three months.
Trade cycle: Entry on bullish indicators with an initial stop; Stock rallies higher with less than bullish indicators using a trailing stop; Exit or tighten stops near T1/T2 targets or at a short-term overbought resistance area.
Larger capitalization and higher priced stocks will generally have target profits of around 5%, while riskier stocks (under $10) have targets with up to 30% profit. For a 30% profit and P/L ratio of 3:1, the stop could run as high as 10%. In this case, to keep a constant maximum loss amount (risk), use 1/3 of the typical position size.
Example: For a $100k portfolio, with up to 10 stock positions of $10k, a 10% profit target and 3.3% stop loss for P/L ratio of 3:1 would return either a $1000 profit or a $330 loss. For a stock under $10, with a 30% profit target and a 10% stop loss, the potential loss could run 3x higher, or a $1000 loss on a $10k position, which is an unacceptable sized loss. Adjust the stock position size to $3.3k to limit the higher risk, which normalizes the loss to be the same ($330) as a standard trade (and gain the same). Make this adjustment using the StockConsultant ReCalc tool.

Trade Clean Looking Charts

Noisy Chart

Many price gaps (seen on low price, low volume or foreign stocks trading on US exchanges)
Hard to read price action

Clean Chart

Few price gaps
Easy to spot support and resistance
Easy-to-read price action

Email/Text Alerts

Find a service or brokerage that can save stock price alerts and send an email or text message when the stock rises above or drops to that price.
Set up alerts to trigger just before a stock breakout or when a stock reaches a support level.

Stock Options

Use options instead of buying stock to avoid the "I got stopped out," then the stock goes your way because of noisy price action or a temporary overnight/open gap down in price.
Stock Option Basics
Call Options
For example, if you have a stock stop loss of $300 (3% of a $10k position), you would buy a call option worth the same amount. No matter how far the stock drops, your maximum loss (risk) would be $300.
On a good breakout (or momentum/bottom long rally), you may profit 70% ($210) to 400%+ ($1200+).
Options expire a week, 1, 2, or 3+ months out. If the stock does not rise above your option strike price by expiration, it will expire worthless, and you will have a $300 loss. You are switching from a level-based loss to a time-based loss.
Options let you worry less about very short-term stock movements. Expiration dates 1.5 to 3 months out (vs. a month or less) leave more time for cases when the breakout or momentum/bottom trade takes longer to develop or fails and then makes a comeback (2nd breakout success).
With options, you cannot stop out with a large loss. If bad news happens overnight and the stock gaps down on open, in our example, the maximum you can lose is $300, but for owning a $10k stock position, this could be much greater (up to $10k loss).
Screen for stocks that can hit the breakout or price target 1 or 2, with good option profits, within the expiration timeframe (make sure to pad a little extra time to option expiration).
Best to avoid options near upcoming news and earnings since they are more expensive, resulting in low option profit at target and a low profit/loss ratio.
Stay away from low volume stocks with wide option buy(ask)/sell(bid) spreads (these will have low option volume). Buying an option at the ask, you immediately lose 30% selling at the bid. Larger stocks and ETFs/indexes have better pricing on options with higher option volume and narrow spreads.
You should apply the same stock profit/loss principles (minimum 3:1 option profit/loss) to options.

Contents

Chapter 4

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Disclaimer: This is NOT investment advice, just general help and opinions. Please check with a registered investment advisor before making any investment decisions. This document may contain errors. Chapman Advisory Group LLC employees are not investment advisors. Please review: https://www.stockconsultant.com/disclaimerpage.html