When Time is Scarce

Guide to Longer-term and part-time Trading Strategies

Day trading is not for everyone, and not necessarily for risk considerations or even personal preference. In many cases, one might have a trading account but is unable to watch stocks closely enough to make rapid trades on a daily or intra daily basis. People have various responsibilities, employment, etc., that prohibit using some of the trading techniques outlined in the previous chapters.

If this is your situation, then this chapter is for you. However, before you get overly anxious to venture into longer term trading, there is one salient rule to remember: Holding stock during a bear market or a downturn is generally prone to failure. Hence, longer holds should only be considered during a strong uptrend or a bullish market.

Hence, the proper strategy for longer holds is to pick up a few positions when the market is strong, but avoid making longer trades during downturns or corrections. In the case of a bear market or bearish cycle, you can either revert to quicker (day) trades, or stay out altogether until conditions improve.

Adjustments

For the best possible trading results, one thing to consider is whether or not you have any time to watch the market at all, even for 30 to 60 minutes. The reason this is important is that you can still make a few trading gains if you are able to spend an hour or so when the market first opens in the morning and/or when it closes in the afternoon, especially in market conditions that are otherwise poor for longer holds.

For instance, some people might say they can’t day trade because they work in the morning, or have other responsibilities, etc. Yet there are specific strategies that can be applied once in the morning at 9:30AM-eastern time, perhaps demanding your attention for all but 20 minutes, and there are other methods that require you to watch a few stocks during the final 15 minutes before the close at 4PM-eastern. Many people discover that they can “fudge” their schedule to follow the market during one or both of these periods of time, even if only a couple of times per week.

Hence, consider a hybrid solution to your trading schedule: Trade longer term when the market is strong, then revert to rapid, in-and-out strategies that require your attention once in the morning and/or once in the late afternoon (see the section on Winning Patterns for all of these short-term strategies as well as the two recommended techniques in this section, "Part Time Trading").

Longer Term

There are two trading strategies that work reasonably well for multi-day holds: The Breakout and a variation of the Trend Reversal called MACD Tracking. And, assuming that you have little or no time to watch the market during the day, I might also assume that your trading account is relatively small as well. Hence, let’s review these two longer-term strategies, with cheaper stocks serving as examples. However, the higher priced stocks will work equally as well if not better.

The Breakout

The chart for SIRI (above) is a storybook Breakout, and one that fell into the “penny stock” category in November of 2004. Note that all the factors are in place. First, the stock shows a sideways, narrow base (1) that occurred from October through early November. Next, it suddenly broke out of that range in the second week of November (2). Third, the breakout was confirmed with very heavy volume (3). Hence, all three criteria occurred---a narrow base, breaking through the range, and with heavy trade. Note that the stock soared into the stratosphere, producing nearly a 100% gain. But even more to the point, this magnificent run occurred over a period of 2 to 3 weeks---far from a rapid day trade.

The chart (below) shows another example of the mighty breakout, in this case, the stock LOUD, definitely in the “penny” category. I chose this particular chart because it also illustrates a false alarm. Note that the stock formed the required sideways base (1), and it appeared to break out of its range in early November (2). However, notice that volume was poor (2a), indicating a false Breakout. LOUD promptly failed, but later that month, it broke through again (3), but this time with very heavy trade (3a). This was the genuine article, and notice how it took off like a rocket. Within one week, your gains would have topped a stunning 100%. This was far from a 10-minute day trade.

Market Sentiment

One thing you should carefully note is that both examples above broke out around the same period of time. This is not a coincidence, as the market was flashing some very bullish strength during the same period, as shown below for the Dow Composite Average (a fairly reliable market indicator).

The Dow Composite Average (above), forming a relatively sideways base (1) through much of the summer, suddenly broke out in early November (2). Also notice that the volume increased substantially, and in fact, hit the highest point of the chart. Hence, it was no surprise that stocks would follow the market’s lead and begin breaking out as well.

The breakout, longer-term trades, and “penny” stocks each have the same golden rule: They follow the market’s lead. Never trade the breakout or go longer-term unless the market shows sufficient strength to back up your position.

Delayed Response

One advantage of penny stocks is that they tend to produce the strongest breakouts shortly after the market breaks out of its own sideways base. This is because the general public (and not institutions) is the primary backer of these cheapies. Hence, they tend to chase performance, driving them higher after the market has proven its mettle. This delayed response can be used to great advantage if you keep your eyes open for this follow-the-leader phenomenon.

MACD Tracking

Part Time Trading

No two personal schedules are alike. Some people can dedicate several hours per day watching their trades and following the action in the market. Others can rarely tune in for the opening or closing bells, if at all. In this section, we will explore the concept of part-time trading---people somewhere in the middle ground.

As discussed earlier, longer-term holding is only effective in strong or bullish markets. If you have elected to go longer-term because of your schedule (that cannot demand a lot of attention to the market), then what are you to do during market corrections and downturns?

One solution is to consider part-time strategies, methods that demand some---but minimal attention to the market. There are two excellent choices to trade if you only have small amounts of time you can devote to your portfolio.

Part Time Technique 1: The “DMGD”

This is one of my favorite part-time strategies, and it requires less than an hour of your time in the morning, between 9:15 and 10:15AM, eastern. This is particularly effective during bear markets or long corrective cycles (where the best stocks downtrend for weeks or months), hence, it is an ideal alternative to longer-term trading when the market heads south.

The “DMGD” (abbreviation for Dumb Money Gap Down) was discussed in detail earlier, but let’s review it here, using cheaper, “penny” stocks.

The Morning Gap

Consider the stock INSM (above). On December 20 (1), the stock gaps down sharply. Better yet, there is a large burst of volume right as the market gets underway. INSM meets all the criteria for a DMGD, which is a gap down at least ½ of its previous trading range, and the giant burst of selling indicates the “dumb” part of DMGD (no true professional would ever dump a boatload like that so early in the session). The stock immediately rebounded for a cool 10% gain in less than 30 minutes.

The next example is perhaps more typical of “penny” stocks gapping down. In this particular case with CRIS, a large and somewhat steady flow if selling crushes the stock for the first five minutes of the session (1). Carefully notice how CRIS reaches a level in which the stock rebounded before around the 15^th of the month. Usually, this is where bargain hunters step in, and in this case, CRIS went on to rebound a solid 5% from its low. With even moderately accurate timing, you could have captured a good part of that gain, if not all.

Special Consideration

For small accounts, it is often desirable to trade “penny” stocks for the DMGD (stocks below $10). While this is certainly workable, one thing I have noticed about cheaper stocks is that they tend to drop harder, further, and take a little longer to bounce than their more expensive brethren. Pay close attention to this phenomenon, and wait for a confirmation when you are looking for a bounce in this cheaper realm.

Call Options

If you are inclined to trade options versus stock, the DMGD might be unsuitable. Usually, the trade goes too quickly to trade options, and for reasons that I do not fully understand, options tend to be unstable during the first 10 to 15 minutes of the trading session. Generally, playing call options for the AM gap-down will be unsuccessful. Consider only straight stock trades for this strategy, and if necessary, limit them to the less expensive stocks.

Part Time Technique 2: The Lunar Bounce

This is one of my favorite strategies during negative markets, particularly when I don’t want to spend a lot of time studying my watch list. This method requires your attention no more than 15 minutes in the afternoon (3:45 to 4PM eastern), then once in the following morning for another 15 to 30 minutes. The theory of the Lunar Bounce is that a stock hitting a session low at the close will usually bounce sharply in the following session. Hence, if you prefer this method, make sure you can follow up your trade in the following morning.

Like the DMGD (above), the Lunar Bounce was discussed in an earlier chapter, but we will review this technique, using a cheaper stock.

In the above example for STEM, there were at least three trading opportunities in the course of a single week. I chose this particular example because of its heavy trading action (the Lunar Bounce works best on stocks that traders like to play, and STEM reflects that in its large volume bursts).

Had you played each opportunity, where the stock hit its session low at the close, the first trade (1) would have produced about +4%, the second trade (2) would have been flat, perhaps even a small loss, while the third time was a charm (3), producing a whopping +15% in less than 30 minutes.

Note that in each case, the total time requirement was about 10 minutes in the afternoon (before 4PM eastern), and about 30 minutes the following morning. Hence, the Lunar Bounce is one of the best part-time trading strategies available.

The next example below for ADSX was chosen because of its relative popularity in recent sessions (note the heavy upside action on the 15^th of December, then again in the morning of the 16^th).

ADSX sold off hard at the end of the December 20^th session (1), making it an ideal candidate for the Lunar Bounce. The real indicator here is the burst of selling volume right at the closing bell, which is what you would like to see for these kinds of trades. Needless to say, ADSX rocketed into the stratosphere in the following session (2) for at least a 5% to 10% gain, depending on long you were willing to hold the position.

Again, this storybook trade would have demanded less than an hour of your time---once in the late afternoon, then once in the morning.

Call Options

Unlike the “DMGD” strategy, call options for the Lunar Bounce are somewhat productive. However, if you decide to play a “Lunar Option,” consider the following guidelines.

1. Adhere to the rules regarding volume. Never play an option on a stock that trades less than 2,000,000 shares per day, and preferably, play only those  that trade a lot more. The reason is that the spread between ‘bid’ and ‘ask’ is prohibitive on lightly traded options.

2. Never play an option that is out of the money. By out of the money is meant that the option’s strike price is beyond the price of the stock. For example, a call with a $30 strike price is said to be out of the money if the underlying stock trades below that price. (Anything at $30 or higher would be in the money). The reason you should never play calls that are out of the money is because the stock has to make too large of a move for decent gains.

3. Try to avoid option plays on Friday afternoon, because options can decay rather rapidly before Monday’s opening bell. I find this to be particularly a problem if the current month’s options just expired (the third Friday of the month). Naturally, this won’t be an issue if your trade bounces sky high, but if it rises only a little, the premium decay in a 3-day period might make the difference between a winner and a loser.

4. After the opening bell, options tend to take 10 to 15 minutes to stabilize and trade at a reasonable level. I do not know why this is, but keep that in mind if you play call options on the Lunar Bounce. Typically, you should wait at least 5 minutes, and preferably a little longer, before taking gains.

In-and-Out

If you elect to implement either of these part-time strategies, keep in mind that they are intended to be rapid, in-and-out trades, especially if the market is bearish. In negative climates, be sure to take your money and run, because sooner or later, a falling market will sink all boats, including your otherwise successful trade. If you are unable or unwilling to do this, then it is best to stay out altogether until conditions improve.

This is because a bear market is created by a market-wide mindset that stocks are over valued, and are heading south. Hence, investors take any sign of strength as an opportunity to sell. If you are sitting on a winning position from, say, a sharp bounce, then rest assured that any continuing strength will attract sellers like hungry piranha to raw meat. It’s not worth it to ride out such trades, so take the gains when you are happy with the results and don’t look back.

Remember that no bear market lasts forever, and when the market’s mindset changes to a more positive stance, you can revert to longer-term trades and let them run for larger gains.