PDF Summary:The Big Book of Stock Trading Strategies, by Matthew R. Kratter

For traders seeking a disciplined, systematic approach to the markets, The Big Book of Stock Trading Strategies lays out a clear path. Matthew R. Kratter first emphasizes the critical importance of mastering one trading technique before attempting others. He then introduces three distinct strategies—Rubber Band Stocks, Rocket Stocks, and Day Sniper—each designed to capitalize on different market conditions.

Kratter provides specific entry and exit criteria for each method, enabling traders to identify potential opportunities based on factors like Bollinger Band movements, stock momentum, and intraday pricing dynamics. With a focus on risk management and developing consistency, the strategies aim to offer structured frameworks for profitable trading.

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• Diversification across different asset classes can reduce overall portfolio risk, allowing for more flexibility in setting stop-loss levels for individual investments.

Rocket Stocks Trading Strategy

Kratter defines "rocket stocks" as those experiencing rapid and sustained upward price movements. He outlines a strategy for identifying these high-growth opportunities, focusing on stocks reaching new peaks, showing robust upward trends, and possessing characteristics that attract significant buying pressure.

Identify Stocks at Yearly or All-Time Highs

Seek Stocks at Highs for the Year or of All Time to Find Momentum

Kratter's Rocket Stocks Strategy hinges on identifying stocks hitting new peaks for the year or in their history. He argues that these breakouts often signal a shift in market outlook and can mark the start of a significant upward movement.

Other Perspectives

• It may encourage a short-term trading mentality over long-term investing, which could lead to higher transaction costs and tax implications.
• The strategy may suffer from survivorship bias, as it focuses on winners while ignoring stocks that did not hit new highs but may still offer good investment opportunities.

Confirm Breakout With Volume Surge, Strong Demand Indicated

The author emphasizes the need to confirm the breakout's validity by watching for an increase in trading volume accompanying the higher prices. This increase in trade serves as evidence of substantial buying interest, suggesting that the upward momentum will probably continue.

Other Perspectives

• Volume alone does not provide a complete picture; it must be interpreted in the context of other market indicators and conditions to accurately assess demand strength.
• A volume surge could be misleading if it occurs on a smaller time frame; it may not represent a sustained interest if the higher volume is not persistent over a longer period.

Confirm the Stock Is Trending Upward

Stock Trading Above 50- and 200-Day Average Price

To further validate the potential of a "rocket stock," Kratter uses moving averages as trend indicators. He advises traders to search for stocks trading above both their 50-day and 200-day averages. This confirms that the stock is in a well-established uptrend, increasing the likelihood of continued upward price action.

Context

• Moving averages are used to identify the direction of a trend, determine potential support and resistance levels, and generate buy or sell signals.
• This is a short- to medium-term trend indicator. It calculates the average closing price of a stock over the last 50 days, providing insight into the stock's recent performance.
• Stocks consistently trading above these averages have historically shown a tendency to outperform, as they are often in sectors or industries experiencing growth or positive news.
• This approach is part of technical analysis, which relies on historical price patterns and trends rather than fundamental analysis of a company's financial health.

Ensure the 50-Day Average Exceeds the 200-Day Average

Kratter adds another layer to his trend confirmation by requiring the 50-day moving average for the stock to be greater than the 200-day moving average. This "golden cross" pattern indicates that the near-term momentum is stronger than the long-term trend, further strengthening the case for a possible stock with skyrocketing potential.

Other Perspectives

• The concept of the "golden cross" might be considered a lagging indicator, as moving averages are based on past data and may not accurately predict future market movements.
• The pattern may be less relevant in highly volatile markets where short-term price movements are erratic and less indicative of overall momentum.
• The golden cross does not account for a company's fundamentals, which are critical for long-term growth potential.

Target Stocks With Small Market Caps and Floats

Prioritize Stocks Under $4b Market Cap For Growth

Kratter points out that equities with smaller capitalizations (under $4 billion) tend to be more volatile and have a greater capacity for explosive growth. He explains that these smaller companies often fly under the radar of large financial institutions, creating opportunities for significant price appreciation with relatively minimal capital inflow.

Other Perspectives

• While it's true that smaller cap stocks can be more volatile, this volatility does not inherently guarantee growth; it also increases the risk of significant losses.
• Smaller companies may lack the resources of larger firms, such as access to capital markets, experienced management, and economies of scale, which can limit their growth potential.
• Large financial institutions have dedicated teams for small-cap research, and they do invest in such companies, albeit with less frequency and volume compared to large-cap stocks.
• The minimal capital inflow required to move the stock price can also work against investors, as it means the stock can be more easily manipulated or affected by low liquidity.

Find Stocks With a Float Below 20% of Shares Outstanding

Kratter suggests searching for equities with a small number of shares available for trading. A low float means that even a modest increase in buying demand can significantly impact the share price, potentially fueling a rapid upward movement.

Practical Tips

• You can screen for stocks with low float using financial websites and create a watchlist to monitor their price movements. Look for financial platforms that offer stock screening tools and filter for companies with a low number of shares available for trading. By tracking these stocks, you can observe how their prices react to buying pressure and learn to identify potential investment opportunities.

Go Along With the Sentiment, Not Against It

Identify Heavily Shorted Companies for Potential Upside Moves

Kratter advises traders to analyze the short interest of stocks with potential for a breakout. Elevated short interest indicates that a significant number of investors are betting against the stock. While this can sometimes be a red flag, in the context of a security reaching new high levels, significant short interest can act as fuel for the upward move. As the share price rises, short sellers might be compelled to close their positions by purchasing shares, further propelling the price upward in a "short squeeze."

Practical Tips

• Engage with online investment communities to exchange observations about short interest and breakout potential. Platforms like investment forums or social media groups can be a source of real-time discussions and insights. Share your findings from the spreadsheet and earnings call analysis, and get feedback from other traders to refine your breakout predictions.
• Set up alerts for stocks with high short interest ratios using a stock market app. Many free and paid stock market apps allow you to set up notifications for when a stock reaches a certain threshold of short interest. This can serve as an early indicator that a stock might be subject to a short squeeze, giving you the opportunity to research and potentially act on this information.

Trade Uncomfortable Shares for Big Wins

Kratter challenges a common trading bias by encouraging traders to take into account equities they might personally dislike or find fundamentally unsound. He argues that these broadly disliked stocks often present the most lucrative opportunities. Since most investors would avoid these companies, there’s often minimal buying pressure, leaving room for significant price appreciation if opinion were to shift even slightly.

Context

• There are historical examples where companies initially perceived negatively have rebounded significantly, offering substantial returns to early investors who took the risk.
• Investors often follow herd behavior, meaning they tend to buy stocks that are popular or have positive sentiment. This can lead to overvaluation of popular stocks and undervaluation of disliked ones.
• A shift in opinion can be triggered by various factors such as positive earnings reports, management changes, industry shifts, or broader economic improvements that affect the company positively.

Day Sniper Trading Approach for Intraday Activity

Kratter presents the Day Sniper as a simple yet effective method for day traders designed to capitalize on the short-term momentum created by news events or profit announcements. The approach focuses on identifying stocks "gapping" at the open and capitalizing on the continuation of that initial momentum.

Identify Stocks Gapping Due to Announcements or Profits

Seek Significant Opening Gaps in Stocks, Often Due to Earnings or Key News

Kratter's Day Sniper approach centers on identifying shares that "gap" significantly at market open, often due to unexpected earnings or news releases. These gaps indicate a substantial shift in attitude and can create opportunities for quick profits by capitalizing on the immediate price movement.

Context

• Earnings reports are a common cause of opening gaps, as they provide new financial data that can significantly alter investor expectations.
• Traders may employ specific strategies to capitalize on gaps, such as "gap and go" or "fade the gap," depending on their analysis of the situation and market conditions.
• Traders often use market orders to ensure quick execution at the opening, taking advantage of the initial price movement before it stabilizes.

Confirm Gap Is Above or Below the 20-Day Range, Indicating Breakout

To ensure the gap represents a significant move, Kratter advises checking if the stock is trading above its 20-day high (for a gap up) or below its 20-day low (for a gap down). This confirms the security is breaking out of its recent trading range, suggesting a potential shift in the underlying trend.

Other Perspectives

• A gap above the 20-day high or below the 20-day low does not always indicate a true breakout; it could be a false signal due to market noise or a short-term reaction to news events.
• This approach may lead to late entries in a trend, as the stock may have already made a significant move by the time it breaks the 20-day range, potentially reducing the profit margin.
• A breakout confirmation should ideally be sustained over a period of time rather than determined at a single point, to account for potential retracements.
• The underlying trend of a stock is influenced by a multitude of factors, including fundamental company performance and broader market conditions, which may not be reflected by a simple price gap.

Trade Based on Initial 15 Minutes

Place a Limit Order When the Initial 15-Minute Candlestick Closes

Kratter's approach involves observing the security's behavior during the initial 15 minutes of the trading session. At the end of this 15-minute period, he recommends setting a limit buy order (for bullish setups) or short order (for bearish setups) at that candlestick's close price.

Context

• This initial period is crucial for price discovery, where the market determines the fair value of a security based on supply and demand dynamics.
• Candlestick charts are a type of financial chart used to describe price movements of a security, derivative, or currency. Each "candlestick" typically shows one day, thus providing a detailed view of price action.
• open, high, low, and close.

Use Low/High of First 15-Minute Candle as Stop Loss

Managing risk is paramount. Following the author's Day Sniper strategy, set a stop-loss order at the low of the first 15-minute candlestick (for buy orders) or the high (for sell short orders). If the stock moves against your position, this limit will automatically close the position and restrict potential losses.

Context

• Before implementing a stop-loss strategy, traders often backtest it using historical data to evaluate its effectiveness and make necessary adjustments.
• Using the low of the first 15-minute candlestick as a stop-loss is a risk management technique. It helps traders define their risk upfront and avoid emotional decision-making during the trading day.
• Selling short involves borrowing shares to sell them with the intention of buying them back later at a lower price. It is a strategy used when a trader anticipates a decline in the stock's price.
• A stop-loss order is a pre-set order to sell a security when it reaches a certain price, designed to limit an investor's loss on a position.

Exit Trade 1 Minute Before Market Close

Kratter advocates for a disciplined exit strategy by offloading shares 60 seconds prior to the market's close, regardless of the trade’s performance. This practice reinforces a mindset for intraday trading, preventing emotional decision-making and minimizing overnight risk exposure.

Context

• The last minute of trading can see reduced liquidity as market participants finalize their positions, potentially making it harder to execute trades at desired prices.
• Some traders may face restrictions or additional costs for holding positions overnight, such as margin requirements or interest charges, which this strategy helps to avoid.
• Discipline in trading refers to sticking to a predefined plan or strategy, which helps in maintaining consistency and reducing the impact of emotional biases on trading decisions.
• Emotional decision-making in trading often leads to impulsive actions based on fear or greed, rather than rational analysis. This can result in poor timing, such as holding onto losing positions too long or selling winning ones too early.
• Earnings reports, geopolitical developments, or natural disasters can occur outside of market hours, impacting stock prices unpredictably.

Manage Amounts and Risks Appropriately

Risk Only 1% of Your Capital per Trade

Kratter emphasizes the importance of determining how much to invest and managing risk, especially for intraday trading. He recommends risking a maximum of 1% of your account balance on any single trade. This practice prevents catastrophic losses and allows traders to remain in the game even after a series of unprofitable trades.

Context

• By limiting risk per trade, traders increase their chances of surviving in the market long-term, as they are less likely to be wiped out by a few bad trades.
• The 1% rule is particularly useful in volatile markets, where price movements can be unpredictable and rapid.
• This approach supports long-term trading sustainability, as it focuses on gradual growth and capital preservation rather than short-term gains.
• This approach leverages the law of large numbers, which suggests that over time, the probability of winning trades can offset losses if the risk is managed properly.

Use Stop Orders for Risk Limitation; Scale Out or Trail Stop As Trade Progresses

Kratter reemphasizes the absolute necessity of utilizing a stop loss when day trading, stating that traders should never keep an unprofitable day trade past market close. He suggests trying out various trailing strategies as trading skill progresses—such as averages, Parabolic SAR, and 3-line break—for potentially maximizing profits by letting successful trades run. The author also suggests utilizing a scale-out strategy, where shares are sold incrementally as the trade benefits you.

Practical Tips

• Partner with a trading buddy to challenge each other on stop order placements. Share your intended trades and stop order settings with each other for feedback. This peer review process can help you identify potential oversights in your stop order strategy and encourage you to consider alternative perspectives, which can lead to more effective risk limitation.
• Set a daily trading alarm to review and close any open positions 30 minutes before the market closes. This gives you a buffer to make decisions without rushing and ensures you don't inadvertently hold onto unprofitable trades overnight. For example, use your smartphone to set a recurring alarm labeled "Trading Review" that prompts you to check your portfolio and make necessary sell orders before the day ends.
• Develop a game with friends where you simulate investment decisions using trailing strategies. Each person could start with a hypothetical budget and make investment choices based on trailing averages, Parabolic SAR, and 3-line break indicators. Over a set period, track who makes the most from their investments. This social experiment can make learning about trailing strategies engaging and competitive, providing a deeper insight into their effectiveness.
• Engage in paper trading to practice the strategy of letting trades run in a risk-free environment. Use a stock market simulator to make trades based on real market data without risking actual money. This allows you to see how your trades might perform over time and get comfortable with the idea of letting profitable trades continue to run without the pressure of potential financial loss.