Ultimate
Trading Guide
Introduction
Welcome to the TraderLion Ultimate Trading Guide.
This is the perfect resource if you are looking to take your trading to the next level.
Inside you'll find foundational topics, setups, risk management, trading psychology, and dozens
more essential concepts that will help you improve your trading, execution, and performance.
We will also be following up on this guide with additional resources sent by email that help
reinforce the most important concepts. This guide will accelerate your learning curve and help you
build a resilient and effective trading system.
The Phases of Trading
01
Building a Trading Foundation
08
An Introduction to Stage Analysis
23
Key Moving Averages
41
Relative Strength Line
46
Volume
49
3 Setups You Can Master
51
Finding Champion Stocks
69
Managing Risk
75
Position Sizing
84
When To Sell
86
Build a Champion Routine
94
Before we go any further, we want to emphasize that the single most important factor
that will determine how successful you will be at trading is your commitment to learning. Your
passion for trading and determination to improve will sustain you through the early stages of your
journey and help you persevere through any obstacle you experience.
Take a minute and get out a piece of paper and a pen. Once you have that ready, write
down the motivations you have for learning to trade and invest in the market.
Finally, write a personal commitment contract (example shown below) to yourself
declaring that you will put in the work to learn and improve your trading. We also encourage you to
tweet out this contract or otherwise proclaim it to the world. You may find this a bit ridiculous but
written goals have an interesting way of becoming true.
Remember, your choices and habits will over time form your reality. If you want to
become a fantastic trader it is fully within your power to do so. Read this guide, perform studies, do
your homework and you will be well on your way to progressing along your trading journey.
It all starts with a look in the mirror and a commitment to yourself.
I ________________ will do my utmost to make incremental improvements and put in the work that will
allow me to learn and improve as a trader. I will establish routines, read books, conduct studies, and
otherwise look for ways to extend my knowledge base and perform at my best.
___________________________
The Phases of
Trading
Along your trading journey, you will go through 4 distinct phases. This journey is nonnegotiable, but you can expedite your progress by dedicating yourself to learning from the
correct resources.
Our goal with this guide is to lay out the knowledge you need to progress from Phases 1
and 2, and into Phase 3. To enter Phase 3 takes time and dedication and most traders grow
frustrated and quit before they achieve this consistency phase and see higher lows in their
equity curve. However, with enough focus and hard work any trader can achieve Phase 3 in a
relatively short amount of time.
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Even after a trader achieves Phase 3 the work is not done. Instead, it becomes all about
incremental improvements and mastery of oneself outside of trading. There will always be
aspects of trading that you can work on and ways to refine your process.
It will take time to achieve, but once again, if you refuse to quit then there is no doubt you can
reach the performance phase and consistently see a rapid trend of higher lows and higher
highs on your equity curve. As you work continuously on your process you can reach an
additional phase: Phase 4 - The Performance Phase.
As you are reading this guide, be brutally honest with yourself about which phase you are
currently in. Armed with this knowledge, focus on our recommendations for how you can
progress to the next phase whether it be through implementing routines or running deep
dives into specific setups.
Now let’s get into more specifics of each phase so you can recognize where you currently are
at.
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Phase 1:
Unprofitable Phase
Every trader no matter how experienced they are now, initially started in Phase 1. This phase is
characterized by a volatile, down-trending equity curve. Traders in Phase 1 act randomly without a
system, acting on tips and impulses.
There is very little rhyme or reason when it comes to buys and sells and often traders in this phase
have not received any trading education outside of social media posts. They lack any cohesive plan
or trading rules with regard to entries, exits, and risk management.
Traders in this phase often begin trading during strong bull markets and achieve a few
wins before the tides change and random entries are no longer as effective. In this phase,
traders are often easily swayed by the emotions of trading, thrilled at small wins, and crushed by
losses.
Their equity curves generally trend downward with short-lived uptrends and high volatility.
Depending on how determined traders in this phase are, they may decide to leave
trading behind them. If you recognize yourself as a Phase 1 Trader, keep going!
With sound trading rules and discipline, you can quickly move past this phase and
advance along your journey. It will take a lot of hard work, but it will be more than worth it.
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Phase 2:
Boom-and-Bust Phase
In this Phase, traders have often gotten more serious about trading and have done some
research and even read a few books on strategies and setups. However, they may struggle
with consistently implementing a system and often lack proper risk management.
Traders in Phase 2 have a volatile equity curve with upswings when the market is
good and then they often give all their profits back when the market turns.
Phase 2 traders may feel disheartened when they attempt strategies they have read about
and still can’t seem to make them work. However, with just a bit more effort, tighter risk
management, and trade discipline, they can easily turn the corner and enter Phase 3: The
Consistency Phase.
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Phase 3:
Consistency Phase
In this phase, traders have fully committed to learning and have often read multiple
trading books and found a sound strategy that makes sense for them and their situation. They
may have also received mentorship from a more experienced trader using a similar style.
At this point they follow their system nearly all the time, they have improved risk
management skills, they also have an awareness of the trends in the market and react
accordingly.
The transition from Phase 2 to 3 generally occurs when traders limit noise and focus on
mastering one strategy and even just one setup. Proper risk management through position
sizing and repeatable sell rules is also crucial to progressing to this phase.
In Phase 3, a trader’s equity curve will generally be upward trending from left to right and
form higher lows as they protect their profits from one market cycle to the next.
At this point, they have started to build confidence but still require many improvements
and tweaks to start truly performing.
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Phase 4:
Performance Phase
Phase 4 may be the last phase but it by no means signifies that the learning or hard
work is done. Traders in this phase have achieved mastery of their trading system but they
are continuously looking for ways to improve edges and their performance.
Performance Phase traders have nailed down routines that keep them focused on the
highest potential stocks for their system and aware of the current market conditions. They
know when to press the gas as well as when to take a step back and limit their involvement in
the markets.
This does not mean that they avoid drawdowns or never experience setbacks.
However, they have confidence in their process and method and know when the
environment is right they can perform vastly better than the indexes.
This confidence allows them to be patient and selective when their style is not well suited for
the market environment.
In Phase 4 your equity curve will have a sharp upward trend with higher lows. What
differentiates it from Phase 3 is the steepness during uptrends and the shallowness of any
drawdown. It should stair step higher, going mostly flat when conditions are not right for your
style.
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Now that we have described the 4 Phases of Trading, take a minute and reflect on your current
trading ability and take a close look at your equity curve over the past two years. It may be helpful
to plot along with it an index so you can have a visual representation of how the market was
performing during different periods of time.
It will also be helpful to jot down your strengths and weaknesses as a trader, and be brutally honest
with yourself in this self-analysis. That is the only way you can identify your pain points and look to
eliminate them.
At TraderLion, we have seen many traders run into issues that become roadblocks to their
progress. I’m sure reading through the list you will find many familiar. Our guide is specifically
designed to address these problems and help set you on the path to overcome them.
Some examples:
System Hopping
Oversizing
Overtrading
Randomness
Overconfidence
Underconfidence
Buying Extended/Late
Generalization
Using Too Many Indicators
Lack of Risk Management
No Sell Rules
No Post-analysis
FOMO
These are common problems that many traders experience throughout their careers. However,
this does not mean that you can not accelerate your learning curve, if not avoid these problems
altogether with the help of a strong trading system.
With this in mind, let’s get to work on building your trading system starting with a strong
foundation.
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Building a
Trading
Foundation
Reading Price Action
An understanding of price and volume action is essential for judging supply and demand
characteristics. This allows you to determine whether a stock is under accumulation or distribution
and find proper buy and sell points.
This section is not about memorizing candlestick patterns but instead about understanding how
supply and demand create patterns over and over again. The stock market is an auction, and the
large buyers and sellers leave clues for us to find within price and volume.
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Let’s start by looking at one price bar. We will be using OHLC bar charts but feel free to use what
makes sense to you, as they each present the same information. A single bar can represent a
minute, 15 minutes, a day, or a year. The higher the timeframe the more meaningful the price
move.
You can view each bar as a match of tug of war between the buyers and the sellers. Buying
pressure tries to pull the stock price up while selling pressure tries to pull it down. The winner is
reflected in the closing range.
The closing range (CR) represents where the close is within the range of the high to the low. The
closer the CR is to 100% on an up day the stronger the action. After a day with a closing range in
the high 90s, the expectation is that the momentum will continue into the coming days. Here is the
formula for the closing range. Just multiply this fraction by 100.
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It is also important to compare the price action to that of the overall market. If AAPL has a daily
Closing Rand (DCR) of 85% when the SPX has a DCR of 15%, that is a clue that AAPL is
outperforming within that time frame. This is a sign of Relative Strength.
Also during a base or general market weakness, a weekly closing range of 40% or higher is a sign
of strength. You can see this in $NVDA during the March 2020 correction. During 3/4 of the down
weeks, it had a relatively strong CR suggesting institutions were supporting it. Once the correction
ended. NVDA took off.
Now with every bar, you also want to consider volume. Volume adds weight to what price is doing.
A stock up 20% finishing at the highs of the day on higher volume confirms that institutional
money is behind the move and likely to lead to a trend.
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Here is an example of a strong gap up on volume with Tesla (TSLA) in 2019.
In this case with TSLA, after the gap up you have another strong day of follow-through action, and
then an orderly pullback which tightens and forms a higher low.
With breakouts on high volume, especially on earnings gaps, you want to see follow through like
with the TSLA example or tight consolidation and then reconfirmation higher.
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What you don’t want to see is a pivot failure shortly after the breakout attempt and a strong
negative reversal either in one day or over the course of multiple ones. This is what we call a
negative expectation breaker. You have to take it day by day. Sellers were stronger here with
ROKU.
A strong breakout on volume from a potential leading stock in a leading group, when the
market is strong, should respect the pivot and show immediate strength after a breakout.
The phrase “when the market is strong” is key. In a choppy or downtrending market,
breakouts will be much more likely to fail.
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Even if the breakout day appears very strong, you might want to consider a shorter trade
duration, taking partial profits earlier, or being much more selective with trades until the overall
environment changes.
In 2022 during the bear market, we saw many strong breakouts ultimately lead to failed moves.
In general, however, a strong bar on high volume usually leads to a short-term uptrend.
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The same is true on the downside. A large down day finishing near the low on high volume is a
bad sign and suggests further downside in the coming days.
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However, a down day with a decent CR or "low volume" suggests supply is being absorbed,
especially if the price action is tight. Even a vicious bar that ultimately closes strong can be
considered constructive since it “shakes out” weak holders.
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But how do we define “low volume”? You can judge volume based on the average of the past 50
days or also compare it to the previous 10 days. If a positive day has volume that is higher than
any negative day's volume within the past 10 days, that’s a subtle sign of accumulation.
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Now let’s zoom out just a little and go back to weekly charts. A stock will go through periods of
consolidation/price contraction and then sustained trends.
During the uptrends, especially on a weekly chart, you want to see strong weekly closing ranges,
ideally on high volume.
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And during the bases and sideways consolidations, you'd want to see lower volume and still good
closes ideally.
These pauses/bases are normal as short-term holders take profits and for the moment there is a
balance between buyers and sellers. Usually, if there are no major signs of distribution and the
stock is still early in its run, the stock will continue its trend after the base.
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During a base/consolidation, you ideally want to see price coiling tighter from left to right making
higher highs and higher lows. At the same time, you want to see volume decrease. This indicates
that institutions are absorbing supply and buying aggressively if the stock drops even
a little.
From a base like this, a stock can explode upwards very quickly because all the supply has been
absorbed and any increase in demand will drive up the stock price.
Not all bases are as clean as NIO’s in 2020, but all constructive bases do at some point show
volatility contraction as the stock moves up the right side.
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Trends from early-stage bases can last much longer than anyone believes. The most powerful
stocks, the True Market Leaders often seem “overbought”, or “over-valued”. As William O’Neil said:
This may seem counterintuitive but it’s all due to supply and demand. When a stock is hitting alltime highs everyone who owns it and is buying more is in the green. The only reason selling
occurs is to cash in profits.
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However, when a stock is well off its highs, as soon as it tries to rally upwards it hits selling
pressure from everyone who bought higher trying to sell at breakeven, this is called overhead
supply. These stocks may eventually work through this supply, but it often takes a while.
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So in summary, supply in demand is what drives price and volume action. Learning to recognize
whether buyers or sellers are in control takes time but once you can do that you increase your
odds of finding stocks under accumulation and buying when demand overwhelms supply.
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An Introduction
to Stage Analysis
To dive deeper into supply and demand and how that contributes to price action let’s now briefly
cover the concept of Stage Analysis, developed by Market Wizard Stan Weinstein.
At any given point, a stock has to be in one of four stages. With some practice, the identification
process will become second nature. To identify the stages, we want to use a significant longerterm moving average.
On a daily and weekly chart – Stan Weinstein uses 3 moving averages: a 50-day/10-week, 150day/30-week, and a 200-day/40-week moving average.
The four stages of a major
cycle, as illustrated in the
diagram are:
Stage 1. The Basing Area
Stage 2. Advancing Phase
Stage 3. The Top Area
Stage 4. The Declining Phase
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Here is a real-life example using Docusign from 2018 to 2022.
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The Stage Analysis cycle repeats over and over again. Leaders advance in Stage 2, top in
Stage 3, decline in Stage 4, and then consolidate in Stage 1.
The greatest stocks in the world make the majority of their strongest price moves in Stage 2
uptrends. All stocks eventually follow the cycle, although the strongest recover after they have
gone through Stage 4, and see new Stage 2 uptrends as they unfold down the road as the
companies innovate and outperform.
For example, here is a chart of AAPL, highlighting the many strong Stage 2’s it has experienced.
You can see how the consistency of the Stage 2 uptrends, as well as the short-lived Stage 4
downtrends, can lead to extraordinary compounded returns over time.
However, no matter how fantastic you think a company is, as Stan says — take the oath today to
never look across the valley and decide that you are going to ride out a Stage 4 decline
because there is no telling how far it will fall.
Remained disciplined and follow your rules!
Now let’s dive into each stage individually and the ideal buy points for both investors and traders.
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Stage 1:
The Basing Area
In a Stage 1 Basing Area, buyers, and sellers will start to balance each other out. This is
what leads to the slowing of downward momentum, and the start of a sideways trend.
The stock will begin to trade above support and below resistance for a long period of time.
At this point, there is an agreement between both parties, which is a sign that buying and
selling are now in equilibrium.
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The Stage 1 Basing Areas can last weeks, months, and in some rare cases even years. Until the
stock starts to show a change in character and transitions over to a late Stage 1B, focus on other
opportunities that are already in strong Stage 2 Uptrends or are nearing a Stage 2A Breakout. (A
or B denotes early or late in the stage respectively.)
For traders, there is nothing to be done at this stage until the stock is in Stage 1B and nearing a
potential Stage 2A Breakout. At that point, add the stock to a watchlist and begin monitoring it
closely along with the rest of its group.
For investors, after a stock enters Stage 1B and is showing constructive action, you can begin to
put on pilot positions, especially if the overall group is strong. However, be patient, as the stock
may continue to whipsaw for many more weeks and months. Wait until the full Stage 2A breakout
occurs before putting on the majority of your position.
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Stage 2:
Advancing Phase
The easiest way to spot a Stage 2 Advancing Phase is to analyze where the price is relative to the
30-week moving average and 200-day moving average. It is classified as Stage 2 if it is rising above
increasing long-term moving averages after breaking out from Stage 1.
The strongest moves in a Stage 2 Advancing Phase occur when the stock is above not only the
long-term MAs, but above the rising 50-day MA. Even if a stock is above its rising 200-day and it
breaks below the 50-day sharply on a closing basis, traders should immediately get out, while
even investors should do some reducing. We will get into the specifics of this later on in the Selling
Rules module.
A Stage 2 Uptrend begins when the stock breaks out through resistance on high volume, ideally
two to three times the average of the past few weeks. The stock should then begin to advance
forming higher highs and higher lows above the 50, 150, and 200-day moving averages.
This breakout is the ideal time for traders and investors to do buying. We will get into these ideal
buy points in just a minute.
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Investors should look to own shares and hold them for the majority of Stage 2 until the stock
shows signs of distribution and transitions to Stage 3.
When a Stock enters Stage 3, traders should be out of the stock completely and investors should
start to reduce. If the stock rolls over into Stage 4 investors should immediately sell their
remaining shares.
Traders should focus their attention on early continuation breakouts within Stage 2 and hold until
the stock breaks the 50-day MA. They may also look to sell into strength if the stock becomes
extended.
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Stage 3:
The Top Area
Although we would of course prefer for Stage 2 Uptrends to last forever, eventually the
momentum will slow as demand decreases and more supply is brought to market. When this
occurs, the stock will enter Stage 3.
An early warning sign that a stock may be transitioning from Stage 2 to Stage 3 is that it slices
below the 10-week (which is also the 50-day moving average) on heavy volume. As the pace of the
market has sped up over the years, this warning sign has grown increasingly relevant. Even
investors should take action when this occurs.
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Another warning sign is that price action later in the trend will become erratic with wild
swings to the upside and downside. Although the upswings may feel fantastic to those
holding long positions, these wild movements are not an indication that the stock is healthy
and under consistent accumulation.
Instead, this type of price movement is the result of aggressive selling by longer-term holders
to market participants who are joining late in the move. The volume will be higher as the
stock moves up and down and forms a range. This type of price action is called churning
(moving sideways on heavy volume).
Watch the slope of the 30-week (150-Day) moving average as well as the 40-week (200-day)
moving average. As a stock enters Stage 3, this slope will begin to flatten and slow its
advance. As Stage 3 continues, the stock will usually whip back and forth above and below
the long-term MAs, which is an important negative sign.
Traders should sell and lock in their profits when a stock goes into Stage 3 so they can begin
looking for better opportunities elsewhere.
Investors should approach a Stage 3 Topping Phase with caution and sell ½ of their position.
You don’t want to be overly active in this stage, so wait for the signs that your stock has
broken into a Stage 4 Decline (or has moved back into a Late Stage 2 phase, and this will
happen about 10% of the time) before selling any more shares.
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Stage 4:
The Declining Phase
The Stage 4 Declining Phase is the near opposite of a Stage 2 Advancing Phase. Take all of the
characteristics you’ve learned about for stocks in Stage 2 and flip them.
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After many weeks of oscillating near the long-term MAs and support zone, the selling pressure will
finally overpower the buyers and the stock will break down in a big way.
Huge volume to the downside is not a requirement for Stage 4 declines. Stocks can fall on their
own weight. However, big volume can indicate a more powerful surge of sellers, so still pay
attention to volume if you are looking for the best short-sale candidates.
Stage 4 Declines often begin when the news is still great! As the unsavvy investor continues to buy
at decreasing prices, believing in the hype and fundamental stories being thrown around in the
news, the big players are starting to unload their positions quickly.
During Stage 4, stocks will make lower highs and lower lows until downward momentum slows
and the stock begins the Stage 1 bottoming process. Keep in mind that Stage 4 Downtrends can
last for months and in some rare cases even years.
Remember to never try to pick the bottom until a valid Stage 1 base forms.
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The Ideal Buy Point
for Investors
Now let’s cover the ideal buy points according to Stan, first starting with an investor (longer-term
trader’s perspective)
From an investor’s point of view, we want to enter a promising stock right as it is making
the transition from a Stage 1 (Basing Phase) to a strong Stage 2 Uptrend.
This specific entry point provides us with an excellent risk-to-reward ratio because if we are
wrong and the stock fails, we know to exit as it undercuts the price structure, and if we are right, we
are entering with the full Stage 2 uptrend ahead of us.
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Here it is again for reference:
Notice how the stock has transitioned from a Stage 4 decline under the 30-week moving average
into a Stage 1 basing phase. When this occurs and price action starts stabilizing and forms a clear
line of resistance, we can start putting the stock on our watchlists and looking for the Stage 2A
Breakout.
Look at Point A in the diagram. This breakout is the first proper buy point for investors. On the
breakout, we want to see strong price action and an explosion of volume ideally 2-3X or more than
average.
This is the first part of the Ideal Buy Point for investors. Traders can certainly also consider an
entry here.
Point B occurs when a stock pulls back close to the breakout point or forms a higher low. This is a
natural part of price action and offers a secondary opportunity for entries. On the pullback into
Point B, you want to see a decline in volume. Then ideally, as the stock rebounds higher the
movement is accompanied by a pick-up in volume.
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The Ideal Buy Point
for Traders
Now that we have covered the ideal buy point for investors, let’s focus on the ideal buy point for
traders.
Keep in mind that although this buy point is more suited for traders, investors can certainly start
positions in this area if we are in a strong bull market and there are few fresh Stage 2 breakouts.
Take a look at the diagram below.
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This type of setup is a continuation buy point. We are looking for a stock already in an established
Stage 2 uptrend that has consolidated and pulled back towards a rising 30-week MA.
Focus on these types of continuation buy points when the Stage 2 Advance is still early in its
lifecycle. This ensures that the stock still has a strong runway and is likely still being accumulated.
As Traders and investors, the best we can do is focus on high-probability setups and execute
based on the known information. We can never be certain if a trade will be a winner or a loser but
if we are disciplined we can be “certain” that we are always managing our risk.
Looking at the consolidation, we ideally want to see an overall tightening from left to right with
volume contracting. Then a breakout through the key resistance level which forms the buy point.
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Stage Analysis Key
Points
Stan’s Stage analysis is an excellent framework to learn in order to identify the long-term trend
of a stock and learn the key turning points which can offer opportunities.
Simply plot a 10 Week and 30 Week moving average onto your charts and determine the Stage of
the stock. For going long, focus on stocks entering Stage 2 or in early Stage 2. For going short, focus
on stocks entering Stage 4 or in early Stage 4.
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Reminder: Keep it
Simple
You may have noticed that so far we haven’t mentioned any of the slightly more elaborate technical
indicators such as MACD, RSI, Fibonacci… It’s not that these indicators can’t be useful, but that many
beginning traders try to cram as many of them onto their charts as possible, often leading to
analysis paralysis.
Having multiple indicators showing conflicting signals can cause confusion and randomness in your
trading.
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We always like to point out that every technical indicator out there is ultimately derived from price
& volume, so learning how to interpret them in their purest form on a stock chart without any
other indicators is key.
Price and volume alone will tell you everything you need to know, and since all other indicators are
ultimately derived, price and volume will tell you first. Try to keep your charts clean.
As you mature as a trader, you can always add indicators on your charts but be sure that they
don’t overpower actual price and volume because you will miss the story.
Focus on only a select few indicators that match your trading style and timeframe. Study them,
their signals, what they mean, and when to ignore them.
You’ll likely find over time that your charts will become as simple as possible, likely only with 1 or
two indicators.
As a starting point, we’ll now cover a few indicators that we encourage you to begin with. This can
form your foundation as you develop your process.
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Key Moving
Averages
Key Moving Averages or KMAs are moving averages that we have found extremely useful over time
for trading high-growth stocks for pattern recognition, entries, exits, and risk management.
Daily MAs
10 DMA - This is the shortest-term moving average we use at TraderLion (TL) and frankly, one of the
least used or talked about due to the nature of our style. This moving average is much more akin to
day trading than position trading.
However, certain stocks have an affinity for certain moving averages, so in a case where you
are dealing with a particular stock that has a strong history of holding its 10-DMA on short-term
pullbacks, this moving average can be very useful.
When a stock exhibits extreme momentum and a large imbalance in buyers vs sellers, the price will
trend above the 10DMA. For active swing traders, this can be an opportunity, however, for position
traders, it is simply a show of strength exhibited by the stock.
21 DMA - The 21-DMA is used at TL as a short to intermediate-term moving average, and is often
used in conjunction with a 23-EMA (discussed below).
Oftentimes, in a strong market, leading stocks will ride along their 21DMA. This is referred to as a
“Power Trend” as long as the 21DMA is above the 50DMA.
If the price breaks below the 21DMA, watch for the 23EMA to hold. However, if multiple leadership
stocks start to retrace below their 21DMA’s, the market is considered to be under pressure.
23 EMA - The 23-EMA in conjunction with the 21-DMA is used as a short to intermediate-term level
of support in healthy uptrends.
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50 DMA - The 50-DMA is probably the most well-known and talked about moving average
among market technicians.
At TL we focus heavily on the 50-DMA, which is intermediate to longer-term.
The 50-DMA is used in conjunction with the 65-EMA. In many cases, stocks that fall below their
50-DMA, will often find support at their 65-EMA.
As a position trader, this is the average used to determine the overall technical “health” of a
stock. In most cases, a position trader is not interested in a stock trading below this key
moving average.
65 EMA - The 65-EMA is used in conjunction with the 50-DMA. They are an extremely powerful
combination when they are used together which is why we focus on both of them at
TraderLion.
Although it is not very well known, this EMA is an enormous help when it comes to holding
onto winners longer. Most eyes are on the 50DMA and the institutions know that. Many times
a stock will shake out below the 50DMA but find support at the 65EMA.
In fact, if you go through a lot of your past trades where you were stopped out using the
50DMA, I bet you will find that you could have held it a lot longer if you were watching the
65EMA as well.
200 DMA - The 200-DMA is on almost every trader’s chart. It is considered to be a staple
moving average when it comes to determining a stock’s overall long-term trend.
This moving average is often used as a general long-term guide, but since it is so slow it is best
coupled with shorter-term moving averages.
The 200-DMA is most useful when the market enters a deep corrective state similar to the
February 24 – March 19, 2020 corrective phase in the general market.
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Below is an example of a Daily chart with all of the TraderLion Daily KMAs labeled:
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Weekly MAs
10 WMA - The 10 WMA (Weekly Moving Average) is considered institutional support and coincides
with the 50DMA on the daily charts.
40 WMA - The 40-WMA (Weekly Moving Average) is similar to the 200 DMA on the daily charts and
is most useful when markets are in a deep corrective state similar to the February – March 2020
corrective phase in the general market.
Below is an example of a Weekly chart with all of the TraderLion Weekly KMAs labeled:
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Key Moving Average FAQs
Do you place your stop directly on the moving average?
No! Moving averages should be thought of as a guide and not as a line in the sand. 9 times
out of 10 a stock is going to shake out below the moving average. What is key is that it closes
above it. The close is important!
How do you know when to use each moving average?
Look at the chart and see what moving averages a stock respects historically. In a strong
uptrend, most leading growth stocks will generally trend along their 21DMA/23EMA,
although a certain stock may show a clear respect for its 17-EMA, in which case it would be
an important, relevant moving average for that stock.
It is important that you see clear respect for a particular moving average before you use it as
any sort of guide. If the stock chops above and below the 21DMA for example, you can’t
expect that “this time is different,” and assume it will finally start to act as support. You want
to see that it has been supported there previously and consistently. Otherwise, it is useless.
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Relative Strength
Line
The relative strength line tells you how strong a stock is relative to every other stock on the
market. It is a time-tested technical analysis indicator that has been effective for decades–its
longevity means it can be trusted and used with confidence and conviction.
The calculation is simple; it is the price of the stock divided by the price of the S&P 500 at that
time. Though deceivingly uncomplicated, the relative strength line is undoubtedly the key to
finding the best-performing true market leaders, especially when the market is in a correction.
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You can also add a moving average to the RS line to help identify the trend over that period. When
the line is above the MA it is colored blue, when below it is colored red.
80-90% of all new stock bases are formed while the market is in correction. The relative strength
line is one of the most efficient and effective tools to find the strongest stocks among thousands to
sort through.
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On the indicator shown above, we’ve also highlighted with dots when a stock’s RS line makes a new
high (Green Dot), and when the RS line makes a new high before price does (Pink Dot), an
indication of strength.
You can find this indicator in the Deepvue Charting Platform
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Volume
Volume plays a crucial role in understanding the strength and conviction behind market moves.
Ideally, you want to see low volume on pullbacks and high volume on breakouts.
Low volume during pullbacks suggests that the selling pressure is not strong and that the current
trend has a higher likelihood of resuming.
Conversely, high volume on breakouts indicates strong buying interest and conviction, signaling
that the breakout has a greater chance of success and continuation.
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You can define high and low volume as above or below a moving average of volume, say the 20 or
50-day MA. In addition, you can also look at recent volume bars and compare the current bar to
that one.
A key volume signature that we look for that also represents high volume is the 10-Day Pocket
Pivot. This occurs when a volume bar associated with an up move occurs on higher volume
than any volume on down days in the past 10-day period. Similarly, the reverse pocket pivot is
when a volume bar is lower than any volume bar in the last 10 days.
In the enhanced volume indicator, we’ve helpfully highlighted 10 Day pocket pivots and reverse
pocket pivots in Green and Orange
This can help you quickly identify low volume areas, and accumulation signatures within bases
and on breakouts.
You can also find this indicator in the Deepvue Charting Platform
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3 Setups You Can
Master
Now that we’ve laid the foundation for interpreting stock charts, let’s move on to the more
advanced topic of entry setups. We are going to cover the 3 main setups we use to trade
promising stocks.
First and foremost, let's discuss what an entry setup entails. An entry setup refers to a
repeatable method of entering a position in a stock.
These setups play a critical role in trading effectiveness and the ability to execute trades with
discipline. Established setups enable traders to better control their performance and manage
risk, while also allowing them to identify recurring entry patterns in the market. However, it's
important to note that entry setups have specific "pivot" points for entries.
In the following examples, we highlight the general areas where the setups have formed and are
visible on the chart. We go into more detail of the entry tactics in the email course itself.
The Three Setups We Will Cover:
1. Gapper/HVSetup
2. Launch Pad Setup
3. Up the Right Side Setup
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The objective here is to recognize each setup and its unique characteristics, rather than
focusing on pinpointing specific pivots and entry points within the provided examples.
Utilize these examples to train your eye and develop the ability to identify these setups
independently, while paying attention to the key characteristics we'll discuss below.
Note: In the chart examples provided below, we have included some "advanced" chart
indicators along with seven moving averages (five of which are TraderLion KMAs). This
inclusion aims to highlight the significance of having certain information present on the chart.
While our goal is to keep the process as simple as possible, these advanced indicators, such as
the Deepvue Relative Strength (RS) Line, Deepvue Stage Analysis Indicator, and Deepvue
Enhanced Volume, can provide us with crucial information for making informed decisions. It's
important to understand that these indicators serve as secondary confirmation tools in the
decision-making process, with price always remaining the primary driver of our decision-making.
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Gapper/HV Setup
The Gapper/High Volume setup focuses on identifying specific High Volume (HV) edges that have
positive momentum due to specific factors. These factors, known as catalysts, can include strong
earnings reports, unexpected earnings surprises, or industry news that impacts the company.
Rather than simply relying on the news, the goal is to also analyze technical indicators on the stock
chart to confirm the catalyst and predict the likely path the stock will take. One key factor is the
volume of trading on the day the stock price experiences this significant gap up day. We also want
to see the stock close in the upper half of its trading range.
By taking these ideas into consideration, the Gapper/HV setup is an effective repeatable setup.
Gappers often rely on the High Volume Close (HVC) as their go-to entry tactic. This approach
allows traders to enter stocks that have experienced a gap in the prior day’s trading session.
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To successfully execute the HVC tactic on day 2 following a gap up, traders must consider the
following criteria:
Whole Number Support: Look for a whole number that the stock price seems to respect. This can
indicate a solid base of buyers who are willing to buy at that level. Example: 100, 75, 20, 10, 7.5.
These are Psychological Levels.
Volume Support: Observe high-volume activity on the chart during the early morning of day two.
This can suggest that there is strong buying interest and momentum behind the stock.
High Volume Close: Look for the final entry point where the stock price moves back above the
prior day's close, after successfully gaining both volume support and whole number support. This
can signal a clear shift in market sentiment and a potential opportunity to buy.
After day 2, the second entry approach for gappers is to enter a stock from a consolidation period
after the gap.
This entry becomes possible when a stock has recovered after an initial burst of big volume
accumulation, and it usually happens either from sideways consolidations or traditional basing
patterns.
With this tactic, the aim is to enter a position as a stock breaks out into new highs from the
consolidation. Check out the ONON example below for a solid example of this entry tactic.
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When considering whether or not to enter into a position in a gapper name, it's important to
determine if it fits into one of the Highest Volume Edge (HV) categories. This should be a key factor
to consider before making a decision. The list below details the types of HV edges:
HVE: Highest Volume Ever
HV1: Highest Volume in Over a Year
HVIPO: Highest Volume since IPO
HVLE: Highest Volume since Last Earnings
In order to accurately assess the significance of a gap up, it is important to understand the
different types of HV edges listed above. By recognizing which type of edge you are looking at, you
can make a more informed judgment on whether or not the gap up is truly significant.
We also want to focus on the first or second Gap up in a stock's move. This ensures that the stock
is earlier in its move and likely has more runway. Like all setups, Gappers can fail which is why it is
critical to manage your risk with stop losses and proper position sizing, subjects we will dive
deeper into later on.
Here are two additional examples of what a successful Gapper/HV Setup looks like:
CDLX - November 2019
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UPST - March 2021 & August 2021
Legend:
Yellow Highlighted Circle(s) - denote the setup and the most suitable entry area
Blue Dashed Line(s) - denote key resistance/support levels
Turquoise Callout(s) - denote key information about some aspect of the chart
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Launch Pad Setup
The Launch Pad Setup is a key entry setup used by TraderLion to succeed in the stock market. It
involves entering a stock in the midst of a consolidation period before or as the price reaches new
highs.
This setup combines technical and fundamental analysis to spot "stealth" accumulation of
potential stocks. The Launch Pad Setup is most effective when you see whole groups of stocks
displaying this setup at once. This is an indication that the group is about to get directional.
The Launch Pad setup allows for a strategic approach to speculation that includes quantifying risk
and developing consistent entries.
The Launch Pad Setup is a key entry setup used by TraderLion to succeed in the stock market. It
involves entering a stock in the midst of a consolidation period before or as the price reaches new
highs.
This setup combines technical and fundamental analysis to spot "stealth" accumulation of
potential stocks. The Launch Pad Setup is most effective when you see whole groups of stocks
displaying this setup at once. This is an indication that the group is about to get directional.
The Launch Pad setup allows for a strategic approach to speculation that includes quantifying risk
and developing consistent entries.
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While the Launch Pad Setup can often be seen after traditional basing patterns, it is unique in that
it sometimes appears at the bottom of a consolidation range, following a significant correction, or
during Stage 1.
By following the essential criteria laid out below, the Launch Pad setup can help traders identify
key factors associated with appreciable runs and quick movement into new high ground. Consider
these essential criteria for successful Launch Pad Setups:
Relative Strength (RS) Line: Look for stocks with a strong RS line that is currently in new high
ground before the price action.
“Smashed” Moving Averages: TraderLion KMAs can help you identify stocks with Moving
Averages that are smashed together.
Big Volume Accumulation: Search for stocks with big volume accumulation, followed by a
volume dry up for 1-2 weeks before the advance. Ideally, the volume should remain at or
around average during the dry up.
Industry Group Confirmation: Other stocks breaking out in the same group can confirm a
stock's potential success.
Focus List Confirmation: Other stocks breaking out that are currently on your focus list can
confirm a stock’s potential success.
Key Resistance Levels: Look for stocks that have tried and failed to push through key levels of
resistance, but are now setting up with a Launch Pad below this level.
Also, consider these non-essential criteria that have a track record of showing up in successful
Launch Pad Setups:
Shorter-term moving averages should be potentially below longer-term moving averages and
turning up.
The “Twizzler”: refers to when the moving averages on a chart are organized tightly from top
to bottom: 200, 150, 50, 21, and 10-day SMAs. Then, they quickly flip to the opposite order: 10,
21, 50, 150, 200-day SMAs. It can also be only a few of these moving averages and doesn’t
necessarily have to be all of the slower-term moving averages such as the 150 and 200-day
SMAs.
Fundamental Measurements: Pay attention to sales and earnings measurements that
confirm a move's potential success.
Appreciable Run: Look for stocks that have already had a significant run in a bull period.
Corrected sharply and rebounded positively over time, and are within 10% of the old high.
Watch for an "Air Island" pattern that closes the gap between price movement and signals
strong accumulation.
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After using the Launch Pad Setup to enter a position, be on the lookout for the following nonessential criteria:
Cross of Key Moving Averages: Keep an eye out for the cross of key long-term moving
averages, such as the 150-day SMA (roughly 30-week SMA) crossing above the 200-day SMA
(roughly 40-week SMA). If the stock is currently in Stage 1, the 30-week crossover can queue
you into the start of a Stage 2 advance.
Moving Average Expansion: Following a breakout, look for moving average expansion to
provide confidence in sticking with the position.
Three strong examples of what a successful Launch Pad Setup looks like:
NFLX - October 2016
FSLR - October 2022
DICE - October 2022 & April 2023
Legend:
Yellow Highlighted Circles - denote the setup and the most suitable entry area
Red Highlighted Circles - denotes key non-essential feature
Blue Dashed Lines - denote key resistance/support levels
Orange Text Boxes - denote key information that is not present in the chart
Turquoise Callouts - denote key information about some aspect of the chart
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Launch Pad Setup: NFLX - October 2016
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Launch Pad Setup: FSLR - October 2022
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Launch Pad Setup: DICE - October 2022 & April 2023
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Up The Right Side Setup
The "Up the Right Side" Setup is a powerful strategy that shares similarities with the Launch
Pad setup. Sometimes, these setups coincide and present excellent opportunities.
The idea behind the "Up the Right Side" setup is to identify multiple entry points along the upward
trend of a stock's move. These entry points allow traders to gradually build a position that can be
held as long as the market remains favorable.
To effectively trade this setup, it is crucial to identify key levels of resistance and support based on
prior consolidation highs, lows, and closing levels. These levels serve as significant markers and
become support levels once broken, indicating potential entry points.
They also help in managing risk, as logical stop-loss levels can be set near these areas. By
following this setup, traders aim to accumulate a substantial position over time while minimizing
risk and maximizing potential returns.
When analyzing and screening for the "Up the Right Side" setup, it is crucial to consider many of
the same important criteria that we use for the Launch Pad setup. Key factors to look for include
relative strength, significant volume up days, and well-defined resistance/support levels during the
consolidation.
The focus should particularly be on identifying these resistance/support levels as they serve as
pivot entry points for traders to enter into a position.
This setup allows for the possibility of pyramiding into a position by averaging up, “Up the Right
Side” as demonstrated in the examples below. By following this approach, traders can take
advantage of favorable entry points and potentially build a successful position.
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3 Strong Examples:
NIO-2020
FVRR-2020
TSLA-2021
Legend:
Yellow Highlighted Circles: Denote the setup and the most suitable entry area
Blue Dashed Lines: Denote key resistance/support levels
Orange Text Boxes: Denote key information that is not present in the chart Turquoise
Callouts: Denote key information about some aspect of the chart
Up the Right Side Setup: FVRR Weekly - 2020
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Daily Chart:
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Up the Right Side Setup: NIO Weekly - 2020
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Daily:
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Up the Right Side Setup: TSLA Daily- 2021
For both the Launch Pad Setup and Up The Right Side Setup we are looking to find clear
consolidation pivots for entries before the stock breaks out through the top of the base
structure. We’ll discuss the consolidation pivot in the free email course.
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Finding Champion
Stocks
One of the main decisions you have as a trader is what stocks you will trade. Some traders focus
only on large caps, others small caps, some traders have tremendous success only trading the SPY.
The key is to trade instruments that match your style and fit your timeframe.
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A few important general reminders when it comes to stock selection:
Study the past
For your style, study and find stocks that had tremendous performance and excelled. Build a
blueprint from commonalities of the greatest performing stocks. You should have a mental
template of what these stocks look like at the beginning of their moves.
Be Picky
Be extremely selective with the names you decide to trade. Focus on A+ stocks and setups where
you can build conviction. The more edges and winning characteristics that a stock exhibits the
more you should focus on it. Put the odds in your favor.
Focus on a few and then execute
A follow-up on the last point. The fewer stocks you are watching for entries/position management
the more attention you can place on each one. This will allow you to intimately know how these
stocks move and behave which will allow you to better execute your plan.
Consider the character of the stock
Similarly, ignore stocks that don’t behave like your model book stocks. If you are a trend trader,
recognize that you want clean moves up and down and overall tight action.
Stocks with very wide ranges and choppy moves up and down are great for traders on lower
time-frames but they aren’t what you should be looking for.
Even if the stock has the potential to make a big move, if you can’t hold on for the ride it doesn't
matter.
Liquidity
Make sure that you can safely enter and exit a position without causing too much disturbance in
the stock price. This is especially important on the sell side. You can use Average Dollar
Volume, average volume, or the spread of a stock to judge the liquidity.
Less liquid stocks can make extraordinary moves, but that volatility can swing both ways. Again,
know your area of competence and what you can handle and perform with.
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Liquidity
Make sure that you can safely enter and exit a position without causing too much disturbance in
the stock price. This is especially important on the sell side. You can use Average Dollar
Volume, average volume, or the spread of a stock to judge the liquidity.
Less liquid stocks can make extraordinary moves, but that volatility can swing both ways. Again,
know your area of competence and what you can handle and perform with.
Screening
The purpose of screening is to reduce the number of stocks you have to analyze in order to find
high-quality trading candidates. Although you will always have to look through stocks manually,
you can use screens to dramatically reduce the number of charts you have to review.
In short, if the market environment is good, we want to focus on going long with the strongest
stocks in the strongest groups. If the market environment is poor, we want to be less active, but
can also take advantage of select shorts from the weakest groups.
We encourage TraderLion Private Members to consistently run screens on both a daily and
weekly basis. Below are some foundational screens to get you started in Deepvue:
Gap Ups on Volume
Many major moves start with a large gap up on extraordinary volume. This is a sign that the
market has been caught off guard and institutions have been forced to start/increase their
positions. As we’ve covered, one of the key setups we look for starts with a large gap up on ideally
the highest volume ever or in a year.
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3-Month Performance Screen
This screen can help you track leaders and identify the strongest groups in the market. This
screen looks for momentum.
New 52-Week Highs
Most of the strongest stocks in each market cycle make their moves in new high ground, where
there is no overhead supply holding it back and all shorts are underwater.
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Doublers
If you want to find a stock that can double, it is often prudent to track stocks that have already
done so. If the trend is still relatively new, keep an eye out for another setup.
Leading Stocks in Leading Groups
With this screen, you can look directly for the top stocks in the recently strongest industry groups.
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Recent IPOs
Many of the top performing stocks in history started their moves as recent IPOs. These young
stocks are more nimble, potentially disruptive, and under owned by institutions.
Feel free to tweak the above screens to best suit your needs. To start, you may want to alter the
liquidity and trend requirements
It’s important to remember that screening is just the first step in building a focus list. As we will
cover in the routines section, you want to then go through the results and find the strongest
setups with the most evidence of institutional accumulation.
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Managing Risk
No system is complete without a solid plan for risk management. If you are in Phases 1 and 2
as a trader, this should be your focus. You are unable to predict what a trade may yield if you are
right, but you can almost always precisely determine how little you will lose if you are wrong.
In this section, we will discuss at length how to set and manage stop losses. Cutting losses is a
crucial aspect and learned habit of professional traders. A great trader doesn't just handle their
winning trades well but is great at losing.
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Stop Losses
Stop losses are the key to managing risk. Without sound risk management in place, it is impossible
to make consistent progress in the market over time. At best you will have some booms before
you go bust, without a plan for managing risk. Never forget, stop losses are what keeps you in the
game to fight another day.
Stop losses serve to protect and preserve your financial capital, as well as your mental/emotional
capital.
It doesn't matter how good you are at picking stocks. At some point, you are guaranteed to pick
the wrong one, and without sell stops to protect you, it won't be long before your hard-earned
money disappears and your negative emotions come boiling to the surface.
Many of the best trend followers, including Market Wizards, US Investing Champions, and Hedge
Fund Managers, are only right around 50% of the time. With this fact in mind, you better make
sure you can limit your losses using stops so that your winners more than makeup for your losers.
Having a detailed plan to manage risk for the times when you are wrong is the only path to
consistent success, as well as unemotional decision-making when you are under pressure.
Now let's discuss some tips on how to use stop losses effectively:
Never move your pre-determined stop downwards. Only losers average losers.
If you have the ability to watch the market anytime during the trading day, you can use alerts
versus placing hard stops in the system.
Do not set sell stops in obvious places, like right at a moving average or whole number.
Max sell stops should never exceed 7-8% on any one trade. (I do my best to keep it to a max of
5%, or even less when it makes sense.)
The following table explains why we use a maximum stop loss of 7-8%:
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The larger you let your loss grow, the harder it will be to get back to break even. Even if you are
right just 1 out of 4 times on your stock selection, you will still survive to fight another day, which
is the most important thing.
Scenario 1
Scenario 2
The most important thing to keep in mind when you are setting sell stops is that they are tight and
logical.
As we mentioned above, we consider 1-3% to be a tight stop for your average growth stock and up
to 5% for a more volatile name. However, using a tight stop alone is not enough. It must also be
logical.
Logical, when the setup fails - For example, if a stock you own is trading 8% above its 10-DMA, using
a stop of 1-3% is not logical, especially if the personality of your stock is to pull back to its 10-DMA
on short-term pullbacks and as far as its 23-EMA when it fails to hold its 10-DMA. That would
simply result in getting shaken out of a stock for no good reason most of the time.
So, all of your sell stops must have both characteristics. First, figure out what makes logical sense
for a sell stop(s) based on a specific stock’s situation and character, and then figure out what is
considered tight based on how the stock acts in reality when you look to the left on its chart.
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Managing stop
losses
Now let’s discuss some commonly used areas of logical support where stop losses are most often
set.
Higher highs, higher lows - A series of higher lows (at least 3) is what ultimately establishes a
stock’s major uptrend line. This trendline is a key, long-term inflection point which is often used
for setting sell stops.
Key moving averages - Depending on a specific stock’s personality (look to the left) use
relevant key moving averages based on prior trading history.
Significant highs or lows of a prior base or gap - Depending on where you bought a stock,
sometimes the most logical place for a sell stop is at the top of a prior basing structure, rather
than a key moving average.
Next, let’s assume you bought a stock shortly after it gapped up on massive volume. Often, the
low of the gap will often be the most logical spot for a sell stop to be set.
Whole numbers - In many cases, just below whole numbers often serve as the most logical
area to use for a stop. Large, round numbers such as $50, $100, $200, etc. are ideal when they
are applicable.
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Immediately after you buy a stock, sell stops are used to protect your initial capital from losses
when you are wrong. However, when things work out and the stock you bought becomes
profitable, things get a bit easier because now you are technically playing with the house’s money,
rather than your initial capital.
In a trending market, my goal is to raise my sell stops until I get to the point that either the 50-DMA,
or 65-EMA, whichever is applicable, becomes a profitable trailing stop for the stock in question.
From this point, we switch over to my sell rules.
As a stock makes progress, I continually raise my sell stop(s) to the next most logical area. Assuming
it’s a potential leader, early in its overall move, you can loosen your stops a bit and if the
environment is right, you can even do some proactive selling into strength, with the intention of
replacing those shares at lower prices in the future.
Total Portfolio Risk
Another metric worth paying attention to is Portfolio Heat or Total Portfolio Risk. Total
Portfolio Risk is the potential drawdown if all stop losses and sell rules were triggered at
once.
Example: $100,000 Portfolio
Stock A:
500 shares at $30.00. Current price $29.80, Stop at $29.10.
Stock B:
250 shares at $60.00. Current Price $70.00, Stop at $64.00.
Stock C:
400 shares at $25.00, Current Price $26.00, Stop break even which is $25.00.
500 shares x $.70 = $350
250 shares x $6.00 = $1,500
400 shares x $1.00 = $400
$350 + $1,500 + $400 = $2,250
Portfolio Heat = $2,250/$100,000 = 2.25%
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Examples of Breakouts and Stops
Stop Losses - Base Breakouts
MRK - The example below is a chart showing the optimal placement of sell stops based on the
proper entry of a classic base breakout.
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Stop Losses Early up the Right Side
NVDA - The example below is a chart showing the optimal placement of sell stops based on the
proper entry of a stock early up the right side of its base before it completely forms.
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Stop Losses - Support / Moving Averages
ELF - The example below is a chart showing the utility of a stock’s key moving average
(10-WMA) as a sell stop, or to use as a guide for buying on pullbacks.
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When to Move Up Your Stops
RMBS - The example below is a chart showing how and when to raise your sell stops
as a stock makes progress from your original entry area.
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Position Sizing
A key question that newer traders ask is how many stocks should I have in my portfolio. The answer
very much depends on your personal risk tolerance. We’ll do our best below to provide a starter
template and methodology that you can tweak to make your own.
To start with, shoot for a portfolio of around 8-10 stocks. However, you don’t want to get there all at
once in one fell swoop. There are logical steps to follow for building up your total exposure to the
market. This is so that your risk is properly managed along the way, which at the end of the day is
all that really matters.
Start off with 3-5 stocks. And in the same way that there is a process for building up the total
exposure in your portfolio, there is also a process for scaling into each of your individual positions.
Remember this is all about managing risk.
So, do your buying in pieces rather than making an all-or-none decision. Buy just ⅓ to ½ of your
total desired position to begin and then only add the rest if progress is made. The idea is to either
continue adding to your best positions as they make progress or add new positions as setups
emerge and you shed the ones that aren’t working.
Keep in mind that this is a personal decision based on your style, risk adversity, your objectives, etc.
So, don’t worry about what someone else is doing. It’s truly irrelevant. So some may be comfortable
with 10-15% exposure to begin, while others may choose 30-35%. It has to make sense for you
personally.
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As you gain experience, you gain confidence, and in turn, your performance improves. This
is what earns you the right to size your positions larger and concentrate your portfolio on
fewer names. Having a concentrated portfolio of just a few true market leaders doesn’t
happen overnight. It is a process. Let’s take a look at an example.
Example:
$10,000 account
Objective: 5 positions x 20% = 100% exposure
Assumption: Follow-through day just occurred. (Positive Market Turn)
Start by establishing ½ positions in the first 3 leaders to present optimal entry areas. That
means a 10% position in each, which would bring your total exposure to 30%.
Let’s say you get stopped out of one but make progress on the other two. You continue
adding to those two positions until you reach the desired total of 20% each, or continue to
establish new positions as progress is made and you reach your total desired exposure.
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When to Sell
Although entry tactics and setups are the sexier side of trading and are often discussed much more
readily, knowing when to sell a position is the more critical skill.
In this section, we will cover the price and volume characteristics you should watch out for and how
selling rules can differ based on your style and timeframe.
One important note before we get going, like all aspects of trading, selling is an imperfect art. You
will either sell too early or too late, as it is very unlikely that you will identify the true top in a stock.
Additionally, you will likely sell a stock and it may carry on without you.
Remember that you can only operate based on the knowledge you have at the time given the price
action and the most likely scenario that could play out. To paraphrase many great traders: We are
not looking to buy the bottom or sell the top, but rather capture the majority of the trend in
between that is relevant to our timeframe.
Jesse Livermore said:
“One of the most helpful things that anybody can learn is to give up trying to catch the last eighth---or
the first. These two are the most expensive eighths in the world.”
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Late Stage Bases
There comes a time when all good things must come to an end. Your average growth stock
typically forms 3 to 4 base structures (consolidation lasting at least a few weeks) throughout the
length of its run. Therefore, we consider stage 3 and 4 bases to be late stages. This is because, by
the time a stock hits stages 3 and 4 of its run, it is already widely known to the crowd and
ultimately runs out of new buyers.
No doubt, some true market leaders go on to form many many more bases than just 3 or 4.
However, buying a stock coming out of a stage 3 or 4 base will in general, carry significantly more
risk.
Example: AMBA Daily
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During late stage bases, a stock’s price action often becomes volatile, wide and loose at the end of a
run, which is very helpful in determining the overall health of a later stage base as it is forming.
This is usually fairly easy to spot, as it typically involves a notable change in a stock’s character or
personality. For example, a stock that is trading in an organized manner, exhibiting tight ranges,
and a clear respect for its key moving averages that suddenly becomes erratic and no longer
respects logical support based on its prior trading history, stands out like a sore thumb.
Very commonly bouts of heavy volume selling appear, as upside volume dwindles which is clearly
not constructive action. So, be on the lookout for these characteristics to begin to appear.
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Breaking below Key Moving Averages
Another key sell signal to consider is the Inverse Launch Pad. This is the opposite of our launchpad
setup on the long side. It’s the point where all, or most of the moving averages have converged to
the downside in a tight bunch, right before they begin to expand. The inverse launch pad often
precedes a major price decline in a stock.
Example:
Just like with the standard launch pad, watch out for moving averages bunching up. When this
occurs late in a stock's run it could be the start of a directional move to the downside.
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Sell Rules Based on Your Trading Phase
Your sell rules will differ based on your own preferred time frame, experience, and stomach for
drawdowns.
Below in the table, we’ve summarized some key sell rules based on your current phase in the
markets.
Consistency Phase
Performance Phase
5% Rule - Sell half and raise stops to even.
Max Loss - If the price of stock breaches the max
loss you sell, no questions asked.
Moving Averages - 2 closes below a KMA
(21D,50D) - position must be closed.
Market Cycle - Early in the cycle
sell less into strength. The goal is
to capture BIG gains. Late in the
cycle, sell into strength, based on
feel and environment.
Offensive Selling - Sell on the way up, to
minimize emotion when stock reverses.
Consistency phase emotions are high.
Primary Leadership vs
Secondary Names - Knowing the
difference between owning a
leadership stock and a secondary
name.
EC Based - Doing math to achieve a higher low on Equity Curve for the current market cycle.
We are in this business to make money. Everything else is just an excuse to not be performing.
Average Winner Zones - Calculate the average winner over the past 20/30 trades to set profit
targets. This will allow you to tune into current market conditions. If the market is more risk-on your
average winner zone will be higher. If the market is more conducive to failures your average winner
zone will be lower.
In a choppier market, you may find that selling more partials and tightening your risk parameters
will serve you well.
Once the market begins trending, and your results show your average gain expanding, then you
can look to hold more of your position longer.
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Recommended Tool:
Deepvue.com
As you progress as a trader, you’ll begin to optimize your process and make your routines more
efficient. When it once took 2 hours to look through 300 charts it may soon take only 30 to 45
minutes.
A tool that we’ve developed that can help you find the best trading ideas faster is Deepvue.
Deepvue is an all-in-one screener and charting platform complete with alert management and
watchlists. You can build charts with dozens of indicators and real-time data and even create
multi-timeframe charts. It’s fast, powerful, and intuitive.
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We’ve leveraged our own trading knowledge to build workflows and customizable systems that
highlight the most important data points and patterns which allows you to complete your routines
more efficiently. This includes key scores that highlight price momentum, earnings growth, and
more!
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In Deepvue you can screen for specialized fundamental and technical criteria and quickly find the
best ideas in the market. The alert system contains the key information you need to make a
decision.
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Build a Champion
Routine
Routines are a critical part of trading and all performance-based endeavors. They allow us to stay in
tune with ourselves and the market environment. Just like an athlete preparing for a championship
game, we want to make sure that we lay the proper groundwork so that we are well prepared to
trade each day and week.
Consistently completing your routines is a large part of trading like a professional. With a well-oiled
routine, you will feel confident and relaxed, knowing that you have set yourself up for success and
are ready for anything the market can throw at you.
Depending on your trading style and lifestyle your trading routine will look slightly different.
However, we will do our best here to lay out a framework that you can modify and apply to your
personal situation. This is the framework that we recommend to our TraderLion Private Access
Members.
First, Let’s dive into the steps you can take Pre-Market, during market hours, and Post-Market to
become the best trader you can be. Then we’ll cover how to dive deeper into your analysis with a
weekend routine.
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Creating a Daily Routine
Pre-Market
A strong routine begins the night before with a good night’s sleep. This helps with decisionmaking, focus, and mental clarity.
After you wake up, the next step is to follow up on any prep work you completed the
night before and to get ready for the trading day.
Think about these questions:
Are we gapping up or down?
How will you approach the trading day as a result?
Next, you want to determine if there are any critical news events that could impact the
markets that day.
This helps build your situational awareness.
If there is a Fed announcement, options expiration, or another event, you should know
when you can expect some volatility or market reaction.
Then you should review your active positions and your game plan for each one.
Are they close to activating any sell rules? Profit Taking Rules? Or Add points?
You should be able to visualize any actions you have to take in these names during the
trading day.
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Update any stop losses and alerts.
Remember, alerts are your best friend. You should use them generously so that you do not
have to be watching the charts all day and instead will be notified when a stock is close to a
key level to the upside or downside.
Think about anything that could happen that day to each stock and determine the steps
you will take in response.
Follow a similar process for your watchlists. From the night before you should have already
narrowed down your daily focus list to the best current ideas that could be actionable.
Go through this process one more time and then determine if any ideas are moving in premarket on volume and update any alerts to the upside or downside. For each actionable
idea, you should have a plan set complete with key levels, position sizes set, and likely stop
losses.
Thinking this through when everything is calm will give you the confidence you need in the
moment to execute your edge.
Before the market opens, review your game plan one more time for the day.
Are we early in a cycle and at a spot where exposure can be increased with new positions?
Or, are we later in a cycle and it’s more of a monitoring day?
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During Market Hours
Once the bell rings it’s game time. You have your plan set and are ready, confident, focused,
and disciplined.
If it is an execution day and stocks on your focus list are pushing through alerts and activating
setups then follow your plan and enter. Manage risk right away by setting
stop losses and any downside alerts.
For any new positions, we recommend you take screenshots right after you enter the order so
that you can refer back to them during post-analysis.
If it is more of a monitoring day or you have already entered some new positions, simply watch
the market action and review alerts.
Throughout the trading day depending on how active you can/want to be, you can run screens
such as up on volume to identify rotation. You can also refer to the TraderLion trading
dashboard for breadth metrics and to monitor how the market acts versus IPs/the BP.
You can also keep notes on stocks that are breaking out/down, rotation, and any other
observations in your trading journal.
Otherwise, you can let your alerts do the heavy lifting and pursue other activities. Watching the
market won't make your stocks move any higher. Get away from the screens and do what you
enjoy most.
Most trading activity occurs during the first hour and last hour of trading. That is when it is
most critical to monitor your positions and trade ideas. Institutional investors are most active
during these times, providing the liquidity needed for directional moves.
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Post-Market
Once the market is closed it's time to prepare for the next day. The first step is to review the
market action and any trades you made that day. Make any relevant notes in your journal.
Next, you want to run your daily screens and review the curated watchlists from TraderLion.
Update your own watchlists accordingly if you come across any new ideas.
Your goal should be to refine your weekly list of potentially actionable stocks and also to set
your next daily list of stocks that could be actionable the next day.
For daily screens, we would recommend you run an Up on Volume screen, Gappers screen, and
HV screen. Please revisit the screening section of this guide for more ideas on daily screens.
Once you have your daily focus list set and your alerts are in place, get away from the screens
and spend time doing what you love. Then it will all start over again after a solid night’s sleep.
Key Points
A routine may seem tedious and boring but over time this consistent effort will have a
compound effect and you will stay in tune with the market cycles, develop intuition, and stay on
top of the current market leadership.
You should develop a series of steps that you take both before, during, and after market hours.
This routine will become second nature over time and you will find that you will become much
more efficient as a trader.
Remember that depending on your availability during the trading day, your routines may
appear very different. However, every trader can benefit from using and setting many alerts on
stocks in their portfolio and on their watchlists. This helps keep you focused and decreases the
chances that you will miss a breakout, pullback, or another entry setup in a potential leader.
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The Weekend Routine:
Now that we have covered how to set up a Daily Routine which prepares you for each trading
day and keeps you in tune with the market, we will further expand on routines as we cover the
concept of a weekly routine.
The reason why we continue to emphasize the importance of routines is that they are a critical
component of the trading process and what sets apart those who treat trading as a business
and those who simply treat it as a hobby. And so as a corollary, committing to effective routines
is what separates those who make money consistently and those who boom and bust and lose
over time.
In addition, at the bottom of this section of the ultimate guide is the TraderLion
Weekend Routine Guide. You can use it as the foundation for your weekly process.
How long should a weekend routine take?
That’s a bit like asking an English teacher how long an essay should be. The answer: as long as it
takes to answer the question. The question in our case is what is the current health of the
market, how are your holdings performing, and what are the best new opportunities available?
Depending on the week your routine could take a half hour, or if it is the start of a new uptrend
and there are many setups, it could take an hour or two. Approaching trading
like a professional takes commitment and some sacrifice.
In this section, we will cover the essential parts of the weekend routine which is where,
in essence, 95% of trading is really done. Weekends and after-hours are where the hard work is
put in to build your plan and then when the market is open it is a simple matter of executing it.
We will start by discussing how you should analyze your performance and your portfolio on a
weekly basis as well as looking at the year as a whole.
Then we will cover how to review your trades and assess your performance during the week.
Moving forward we will cover how to review the indexes and sectors to identify trends,
distribution/accumulation, and rotation.
Then we will cover at a high level how you should screen for ideas, update watchlists, and then
build your focus list. This component is crucial as many traders struggle with how to sort
through hundreds and names and select the few key ones to focus on. Finally, we will walk
through the process of putting this all together so you will have an effective plan going into next
week.
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Analyze your performance
The first step in your weekly routine should be to look at your performance at a high level
for that week as well as any other relevant time period such as on a monthly or yearly
basis.
How is your current performance? Did your portfolio outperform that week?
Underperform? Why?
Try to nail down the drivers of what is contributing to your results. We also highly
recommend that you take a look at your equity curve and identify if you are making
progress, higher highs, and higher lows.
If that is not the case, think about the reasons why. Is there something you need to
change about your routines? Stock Selection? Entries? Position Management? Or is the
environment simply not conducive to your style and you need to scale back your
exposure?
Take a look at your current holdings and rank them by performance. Which of your stocks
are the strongest and contributing the most to your portfolio? Which are the weakest? Are
there any that are extended, or nearing sell signals? Take note of any observations which
will be helpful to your weekly plan.
Also, take the time here to update any stops that need to be moved and set alerts at key
levels for each of your holdings.
Review Your Actions
The next step of your weekly routine is to review and grade any actions you made that
week. Doing this on the weekend when your mind is clear is an invaluable tool that allows
you to objectively determine if you made good decisions and followed your plan.
For each action, remember that you made it with the knowledge you had available at the
time and that your grade should not simply be based on the end result. It’s more a matter
of your execution, process, and reasoning being sound. Ask yourself if would you want to
make that same decision again 1000 times out of 1000 times.
A good decision can mean a losing trade if you are keeping losses small and managing
your risk over time. Similarly, you could still make money on a bad decision such as
holding a stock with no cushion through earnings. However, consider in the long run if that
same decision would pay off. Is your trading sustainable over a 40+ year career?
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For each of the stocks you traded that week, write or add to any notes you have. Keep
track of any key observations or interesting characteristics in the chart. This can help you
remember your thought processes later down the road.
Be sure to label buy points, sell points, spots where you adjusted your stop losses, and
also the reasons why for each of these data points. If you ended up buying late well above
the pivot point, write down the reason for the imperfect execution such as if you forgot to
set an alert. Small notes like these can help you determine small improvements you can
make to your process that can add up and dramatically alter your performance for the
better.
Be thorough with this weekly post-analysis. It will keep you in tune with yourself, the
market, and how in the zone you are. You will quickly notice both your strengths and
weaknesses as a trader since they will show up again and again in the charts and your
results.
Write down any key takeaways you have from this post analysis and save any relevant
charts and other notes in an organized fashion so you can review them in the future.
Review the Market Health, Major Indexes
At TraderLion Private Access we have a unique market edge in the Power Pivots system.
Looking at the TraderLion Dashboard and where we currently are within our market
cycle. Review the week's action on the intraday timeframes and note any important
observations/trends.
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Next, review the market indexes on a daily chart as well as any other key charts such as
stock gauges. This will inform you of the major trends in the market and the M in
CANSLIM.
Above is the Nasdaq Chart from a TraderLion Report.
As you look through these charts here is what you should be looking for:
The trends on multiple timeframes
Where we are with respect to moving averages and their slopes
Whether we are making higher highs and higher lows
Where are we in the trend? Early or are we a bit extended?
Signs of Accumulation
Strong up days closing near the top of the daily ranges.
Respect for the moving averages.
Higher volume on up days than down days.
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Signs of Distribution
Very negative days finishing near lows on large volume.
Gap downs.
Failed breakouts.
Declines through the key moving averages.
Pay special attention to clusters of distribution days.
Volatility Levels
Are the charts tight or are we seeing range expansion?
Are we trending nicely or are we directionless and choppy?
As you look through the daily charts of the indexes, you will get a sense of where there is
strength and weakness. You will notice rotation into different areas and the patterns
developing. Take note of these trends because they will point you toward where you should
search for ideas as you screen.
After you have analyzed these charts on a daily basis, it is helpful to also take a step back and
look at the weekly timeframe. Note any additional observations and keep in mind the longerterm trend and moving averages.
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Performance Charts
To further nail down the leading groups and market rotation, use the performance
charts that we provide you and determine potential leadership groups as well as the
weakest areas of the market. These may change all at once during a particular week
or you may see the same trends for multiple weeks. This is an important part of
staying in tune with the market.
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Screening for ideas
The next part of your routine is to run your weekly screens and update your
watchlists.
The specific screens and watchlists you keep should be tailored to your own personal
trading methodology. With that said we recommend you create a few screens looking
for:
Stocks that gapped up last week
Highest % movers
IPOs within the past 3 years that are setting up in bases
HV Edges
Stocks with very strong momentum (High Tight Flag
Criteria)
Strong Stocks in uptrends pulling back to key moving
averages
Throughout your screening process, add any relevant ideas to different watchlists.
For instance, over the weekends we update our Gappers, IPO, and HTF watchlists as
well as remove any names from these lists that no longer fit the criteria or have
broken down. After your own screening process, you should also take the time to
review these curated lists.
As you go through screen results and watchlists, it may be helpful to write down
names of interest that may go on your weekly focus list. You can further choose to
organize these notes based on the setup/edge that the stock is presenting.
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Assessing Leadership
Going through your screening process and watchlists not only leads to idea
generation, but it is also an important part of determining the market’s health.
You should be tracking how these leaders are acting and also taking note of how
many strong setups are out there. In addition, keep a tab on what types of setups
have been working in the current environment.
When analyzing the leaders, consider the health of the price action, where they are in
their moves, and any themes that you see developing. Look for the same criteria that
we mentioned in the analysis of the market indexes.
Your qualitative feel for the market health based on the leadership is critical for
staying in tune with the market.
Building your Focus List
After going through your entire screening process, the next step is to create your
weekly focus list. This is a list of the strongest opportunities in the market that may
be actionable in the next week.
Depending on the market and number of setups, this list may be shorter or longer,
however, the tighter you can keep this list the more focused you can be and the
better your execution.
Aim for around 10 stocks that have the best setups and are in the best leadership
groups.
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Tips for narrowing down your focus list
For many traders, it is difficult to narrow down their focus list to only a select handful
of stocks. Here are a few tips and questions to ask yourself to help you curate your
list:
Is the stock in one of the strongest groups in the market? (weakest if
shorting) Is it a part of a current theme?
Could the chart be actionable tomorrow based on your studies?
How many edges are present in the chart?
Are there significant signs of accumulation prior to this setup?
Has this setup been working in the market?
Where is the stock within its current move? Does it have life left?
Could the stock feasibly double from this point?
Does it fit the mold of a model book stock?
Is it one of the highest-quality names in terms of technicals and
fundamentals? Is this stock one of the leaders?
Would Rai, Ross, or Bill O’Neil be trading it?
After you have your weekly focus list set, for each name list out key information such
as:
The Setup and Entry Tactics you will likely use
Edges present in the setup
Position sizing, and how you will add to the stock if applicable
Anticipated stop Loss locations and expected max loss % if triggered
We highly recommend that you write all of this information down and store it in a location
where you can easily retrieve it for later reference.
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Situational Awareness
The last step of your weekend routine is to look forward to the coming week and also build
your situational awareness.
Are there any important dates coming up such as earnings reports, Economic data releases,
Fed meetings? Think about how that could impact both your holdings and your ideas.
How has the market reacted to these events in the recent past?
Consider the overall environment and your work from the routine. What in your view is the
current health of the market and how should you respond/what should your
exposure level be as a result. Will you be on offense or defense primarily next week?
Double check that you have a plan in place for both your holdings and your new ideas written
out.
Closing Thoughts
Committing to and completing a weekly routine is a critical part of performing as a trader. It
will help keep you organized, in tune with the market, and aware of the best opportunities
available.
Take this section and develop your routine so that it fits your lifestyle and trading
methodology. If you work full-time during the week you will have to do most of the work on
the weekends. However, if you can focus on the market full time then more of the work can
be reorganized into your daily routine.
The most important thing is to have a routine and to follow it. If you are struggling to find
consistency and feel like you are missing the best setups and stocks, your routine should be
the first thing you analyze to look for gaps in your process.
Weekend Routine Template
Below we've included a free template that you can use to organize your thoughts. Feel free to
make a copy and tailor it to your own process.
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TraderLion Weekend Routine Template
Analyze Your Performance
What is your yearly/monthly/weekly performance? Are you underperforming or
outperforming? Why do you think that is?
Paste your Equity Curve Below and reflect on your performance.
List your holdings in order of % Profit. What stocks are strongest/weakest? Which stocks are
contributing the most to your portfolio? Review Your Actions.
Analyze Your Actions
List your holdings in order of % Profit. What stocks are strongest/weakest? Which stocks are
contributing the most to your portfolio? Review Your Actions.
For each trading action you took last week, paste a chart below and label key levels/price
action. Journal your thoughts in a few sentences with each instance. Grade each of your actions
not based solely on the end result, but on whether you followed your game plan.
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Review the Market Health
Copy charts of the current market indexes below and label key price and volume
characteristics. Determine the trend and health of each of the charts.
Analyze the Performance Charts
Paste the current TL Performance Charts below and journal your thoughts. What areas are
leading/lagging? Where is rotation going?
Screen For Ideas
Complete your screening routine and jot down any interesting charts that you would like to
add to watchlists.
Manage Your Watchlists
Update and curate your watchlists so that they are up to date.
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Assess Leadership
Scan through the charts of your leadership list, what additional information are these charts
telling you about the market health?
What are the very top market leaders? Are there any charts just breaking out or breaking down?
Create Your Weekly Focus List
After going through your screens and watchlists, build your weekly focus list with the highest
quality and most actionable ideas.
For each idea list the setup, edges, key levels to watch, likely stop loss points, planned position
sizing… and any other key information.
Situational Awareness
Look forward to the week and think about what the current market health is. Consider what
scenarios could happen.
Are there any key news announcements that will bring new information to the market?
Plan ahead of time how you will respond to different situations.
Set your game plan
Finalize your game plan and your focus list. At this point, you should feel confident and prepared
for the week ahead. Be ready to execute.
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Conclusion
You’ve made it! Welcome to the last section of the TraderLion Ultimate trading guide. We hope
that we have helped you develop the key building blocks of a strong trading system.
Remember, your goal should not only be to simply have absorbed the information but to apply it
and create your own system that fits your lifestyle, risk tolerance, and goals.
You will not learn everything overnight, continue to review and refer back to the different
sections of the guide. Likely each time you read through and analyze the examples, especially
with more trading experience under your belt, you will take away something new.
In addition, over the next 7 days, we will be sending additional bonus resources to your email to
re-emphasize the most important concepts and to provide additional explanations and
examples.
In addition, if you want to dive even deeper, be sure to check out TraderLion Private Access. We
help our members build their systems and navigate the markets on a daily basis.
Use promo code TLUTG20 for 20% off your first month or first year.
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