MDT
Modified Double Trouble
To overcome the problem of scanning in Telechart for DT , the Modified Double Trouble method is good alternative. MDT is extremely
Telechart
friendly version of DT.
We start with the relative strength scan
(C - AVGC126 ) / AVGC126
Select the top 5% ranked by the above scan value.
Apply liquidity condition:
AVGC20 * AVGV20 >= 2500
Breakout Condition
Breakout Condition
On the universe of DT or MDT we primarily look for a breakout after 1 month slow price growth period to time entry. Studies after studies show that long term relative strength is good, but short term (1 month or less) leads to mean reversion. So we try and identify stocks which have high momentum, but had a brief pause or slowdown in momentum.
The entry condition is
( 100 * (C - C1) / C1) >= 4 AND V >= 1000 AND V > V1 AND ((100 * (C1 - C22) / C22) <= 10 AND (100 * (C1 - C11) / C11) <= 10)
Breakout Conditions
Conditions... these are must
A 4% breakout. ( 100 * (C - C1) / C1) >= 4 where c=price today and c1= price a day earlier.
Volume should be 100000 on breakout day. V >= 1000 in Telchart volume is in 100 units so 1000=100000
Volume should be higher than previous day. V > V1 where v= volume today and v1= volume yesterday.
Above three conditions form the breakout criteria.
21 day momentum condition to identify consolidation/correction or low momentum phase. ((100 * (C1 - C22) / C22) <= 10 where c1= price a day ago and c22=price 22 days ago. So this stock had less than 10% move in last 21 days or a month prior to breakout day.
Stock can have less than 10% growth in last 21 days but can recover from such correction and be up more than 10% in last 10 days. As a consequence it will be overextended on 10 day time frame. To avoid such situation we have additional condition about 10 day momentum.
10 day momentum condition to identify consolidation/correction or low momentum phase. (100 * (C1 - C11) / C11) <= 10) where c1= price a day ago and c11= price 11 days ago.
So together the 21 and 10 day conditions ensure we had a stock with less than 10% move in last 20 and 10 days.
If we put all these conditions together we get the scan ( 100 * (C - C1) / C1) >= 4 AND V >= 1000 AND V > V1 AND ((100 * (C1 - C22) / C22) <= 10 AND (100 * (C1 - C11) / C11) <= 10)
When we apply these conditions scan on Double Trouble or Modified Double Trouble list we get depending on market conditions anywhere from 0 to 20 stocks.
We add more conditions and guidelines to further narrow this list and increase our probability of success.
Guidelines to narrow the breakout list
Stock should be closer to recent high. We want a stock with minimum overhead resistance. For this I use distance from 6 month high. I prefer stocks within 8% of recent high. So let us write a scan for that. C >= (.92 * MAXC130) where c= price today and maxc130= highest close in last 6 months or 130 trading days. Under very bullish circumstances stocks within 15% of recent high also work. In which case the condition will become C >= (.85 * MAXC130).
So once you apply this additional filter your 0 to 20 list will get further reduced to handful of stocks.
In case of a IPO with less than 130 days trading history this condition should be modified to reflect number of days of trading history.
That is also the reason to not use a combined scan with all conditions like :( 100 * (C - C1) / C1) >= 4 AND V >= 1000 AND V > V1 AND ((100 * (C1 - C22) / C22) <= 10 AND (100 * (C1 - C11) / C11) <= 10) AND C >= (.92 * MAXC130). It will not show IPO's.
So instead you can sort the breakout list by (100 * ((C + .01) - (MAXC130 + .01)) / (MAXC130 + .01)) and take stock with value between 0 to -8. IPO's will have no values attached to them.
Now after applying this condition you get say 4-5 candidates, on them you apply further guidelines in the following order.
Smoothness of trend or Relative linearity in trend. This is the most important criteria for narrowing the list. You can use the Relative Linearity scan , I have discussed earlier but I prefer eyeballing this. Choose the stock with smoothest trend.
Sector in top 20-25 sector list by relative strength as per IBD list.
Volume. Given choice, you want to choose those with higher volume. Volume surge of 50% or more on 100 day average volume is preferable. In Telechart there is "Volume Surge Today" pre programmed scan which I use for this. The scan for this is 100*v/avgv100 where v= volume today and avgv100= average volume of last 100 days. The value to look for is 150% plus.
Look for a 4% breakout in a stock with narrow range bar or negative action in prior day. For this use ( 100 * (C1 - C2) / C2) <= 1or 2 scan.
Absence of too many (more than 3) 4% plus downside breakouts in last 5 to 10 days. To identify this quickly in Telechart you can overlay markers for such days in a chart pane using the "% true " function. In that you have to put ( 100 * (C - C1) / C1) <= ( - 4) AND V >= 1000 AND V > V1 and mark it in red. It will indicate days when above condition was true on the chart. See chart below.
Absence of 4% positive breakouts in immediate period of last 5 days. Ideally you would have bought then, or it was better buy then. Again to see this visually on chart you can overlay markers for such days in a chart pane using the "% true " function. In that you have to put ( 100 * (C - C1) / C1) >= 4 AND V >= 1000 AND V > V1 and mark it in green. See chart below.
Low float. Preferably below 25 million. Telechart gives you float figures.
Recent earnings/ sales acceleration. 50% plus earnings preferred.
High IBD EPS ratings. 95 plus preferred. This comes in play if you have a choice of 3-4 and you want to further narrow it down.
Catalyst. New product, industry news, sector rally, biotech drug trial/approval, earnings, earnings guidance , etc. preferred
Entry
We enter on day of breakout or next day at open. As far as possible entry on day of breakout is preferred. Entry next day should be conditional on stock not being up more than 4% at open and not being below the stop price. For very low float stock (below 10 million), the 4% condition can be increased to 6%. Low float stocks have typical trading pattern where they will go up a lot in first half an hour due to market imbalance so entry previous day is best on these.
Stop
Stop is the lowest price in the previous 2 days before the breakout day.
Scan for that in Telechart is MINL3
Exit
Exit if it hits stop
Exit next day of entry if the stock fully retraces the full 4% plus move. It indicates signal failure.
Exit after 5 days if stock does not cross the close of signal day. Again indicates signal failure. Here you have to use a discretion in case of gap ups of 8% plus on signal day. In such cases you might give the trade more time.
Exit on any day post signal day on which stock makes a 10% plus move. On such stocks as soon as it goes up 10% I move my stops to protect at least 8% of that profit. On such days, you should exit by end of day. In most cases 10% plus move days tend to go further and waiting till end of day gives you 3 to 5% more. But you must exit on the day of 10% plus move day. If you wait for next day to exit, you will often find the stock gap down at open.
Variation of this is exit anytime the stock makes 15% move in 5 days post entry.
The logic for such exits is very clear, we were not counting on such big moves and when we get such big moves we must bank them.
Exit on 20 th day after entry. In most cases by 10 th day after entry you will get a good idea of where the trade is going.
In my experience most of the time you get the 15 to 20% move in 10 to 12 days post entry.
To overcome the problem of scanning in Telechart for DT , the Modified Double Trouble method is good alternative. MDT is extremely
Telechart
friendly version of DT.
We start with the relative strength scan
(C - AVGC126 ) / AVGC126
Select the top 5% ranked by the above scan value.
Apply liquidity condition:
AVGC20 * AVGV20 >= 2500
Breakout Condition
Breakout Condition
On the universe of DT or MDT we primarily look for a breakout after 1 month slow price growth period to time entry. Studies after studies show that long term relative strength is good, but short term (1 month or less) leads to mean reversion. So we try and identify stocks which have high momentum, but had a brief pause or slowdown in momentum.
The entry condition is
( 100 * (C - C1) / C1) >= 4 AND V >= 1000 AND V > V1 AND ((100 * (C1 - C22) / C22) <= 10 AND (100 * (C1 - C11) / C11) <= 10)
Breakout Conditions
Conditions... these are must
A 4% breakout. ( 100 * (C - C1) / C1) >= 4 where c=price today and c1= price a day earlier.
Volume should be 100000 on breakout day. V >= 1000 in Telchart volume is in 100 units so 1000=100000
Volume should be higher than previous day. V > V1 where v= volume today and v1= volume yesterday.
Above three conditions form the breakout criteria.
21 day momentum condition to identify consolidation/correction or low momentum phase. ((100 * (C1 - C22) / C22) <= 10 where c1= price a day ago and c22=price 22 days ago. So this stock had less than 10% move in last 21 days or a month prior to breakout day.
Stock can have less than 10% growth in last 21 days but can recover from such correction and be up more than 10% in last 10 days. As a consequence it will be overextended on 10 day time frame. To avoid such situation we have additional condition about 10 day momentum.
10 day momentum condition to identify consolidation/correction or low momentum phase. (100 * (C1 - C11) / C11) <= 10) where c1= price a day ago and c11= price 11 days ago.
So together the 21 and 10 day conditions ensure we had a stock with less than 10% move in last 20 and 10 days.
If we put all these conditions together we get the scan ( 100 * (C - C1) / C1) >= 4 AND V >= 1000 AND V > V1 AND ((100 * (C1 - C22) / C22) <= 10 AND (100 * (C1 - C11) / C11) <= 10)
When we apply these conditions scan on Double Trouble or Modified Double Trouble list we get depending on market conditions anywhere from 0 to 20 stocks.
We add more conditions and guidelines to further narrow this list and increase our probability of success.
Guidelines to narrow the breakout list
Stock should be closer to recent high. We want a stock with minimum overhead resistance. For this I use distance from 6 month high. I prefer stocks within 8% of recent high. So let us write a scan for that. C >= (.92 * MAXC130) where c= price today and maxc130= highest close in last 6 months or 130 trading days. Under very bullish circumstances stocks within 15% of recent high also work. In which case the condition will become C >= (.85 * MAXC130).
So once you apply this additional filter your 0 to 20 list will get further reduced to handful of stocks.
In case of a IPO with less than 130 days trading history this condition should be modified to reflect number of days of trading history.
That is also the reason to not use a combined scan with all conditions like :( 100 * (C - C1) / C1) >= 4 AND V >= 1000 AND V > V1 AND ((100 * (C1 - C22) / C22) <= 10 AND (100 * (C1 - C11) / C11) <= 10) AND C >= (.92 * MAXC130). It will not show IPO's.
So instead you can sort the breakout list by (100 * ((C + .01) - (MAXC130 + .01)) / (MAXC130 + .01)) and take stock with value between 0 to -8. IPO's will have no values attached to them.
Now after applying this condition you get say 4-5 candidates, on them you apply further guidelines in the following order.
Smoothness of trend or Relative linearity in trend. This is the most important criteria for narrowing the list. You can use the Relative Linearity scan , I have discussed earlier but I prefer eyeballing this. Choose the stock with smoothest trend.
Sector in top 20-25 sector list by relative strength as per IBD list.
Volume. Given choice, you want to choose those with higher volume. Volume surge of 50% or more on 100 day average volume is preferable. In Telechart there is "Volume Surge Today" pre programmed scan which I use for this. The scan for this is 100*v/avgv100 where v= volume today and avgv100= average volume of last 100 days. The value to look for is 150% plus.
Look for a 4% breakout in a stock with narrow range bar or negative action in prior day. For this use ( 100 * (C1 - C2) / C2) <= 1or 2 scan.
Absence of too many (more than 3) 4% plus downside breakouts in last 5 to 10 days. To identify this quickly in Telechart you can overlay markers for such days in a chart pane using the "% true " function. In that you have to put ( 100 * (C - C1) / C1) <= ( - 4) AND V >= 1000 AND V > V1 and mark it in red. It will indicate days when above condition was true on the chart. See chart below.
Absence of 4% positive breakouts in immediate period of last 5 days. Ideally you would have bought then, or it was better buy then. Again to see this visually on chart you can overlay markers for such days in a chart pane using the "% true " function. In that you have to put ( 100 * (C - C1) / C1) >= 4 AND V >= 1000 AND V > V1 and mark it in green. See chart below.
Low float. Preferably below 25 million. Telechart gives you float figures.
Recent earnings/ sales acceleration. 50% plus earnings preferred.
High IBD EPS ratings. 95 plus preferred. This comes in play if you have a choice of 3-4 and you want to further narrow it down.
Catalyst. New product, industry news, sector rally, biotech drug trial/approval, earnings, earnings guidance , etc. preferred
Entry
We enter on day of breakout or next day at open. As far as possible entry on day of breakout is preferred. Entry next day should be conditional on stock not being up more than 4% at open and not being below the stop price. For very low float stock (below 10 million), the 4% condition can be increased to 6%. Low float stocks have typical trading pattern where they will go up a lot in first half an hour due to market imbalance so entry previous day is best on these.
Stop
Stop is the lowest price in the previous 2 days before the breakout day.
Scan for that in Telechart is MINL3
Exit
Exit if it hits stop
Exit next day of entry if the stock fully retraces the full 4% plus move. It indicates signal failure.
Exit after 5 days if stock does not cross the close of signal day. Again indicates signal failure. Here you have to use a discretion in case of gap ups of 8% plus on signal day. In such cases you might give the trade more time.
Exit on any day post signal day on which stock makes a 10% plus move. On such stocks as soon as it goes up 10% I move my stops to protect at least 8% of that profit. On such days, you should exit by end of day. In most cases 10% plus move days tend to go further and waiting till end of day gives you 3 to 5% more. But you must exit on the day of 10% plus move day. If you wait for next day to exit, you will often find the stock gap down at open.
Variation of this is exit anytime the stock makes 15% move in 5 days post entry.
The logic for such exits is very clear, we were not counting on such big moves and when we get such big moves we must bank them.
Exit on 20 th day after entry. In most cases by 10 th day after entry you will get a good idea of where the trade is going.
In my experience most of the time you get the 15 to 20% move in 10 to 12 days post entry.
posted by Rajaram Pai at 7:12 PM
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