Watching Top Gainers and Losers to Find Profitable Trades

11/12/2009 2:00 pm EST

Focus: FOREX

Tim Bourquin

Co-Founder, The Traders Expo and The Futures & Forex Expo

Toni Hansen is an experienced trader who has a unique approach for finding good opportunities each day in the markets. In this interview, Tim Bourquin talks with Toni about how she scans the market each morning for stocks she will be watching and how she uses NASDAQ Level 2 in a way that most traders don't. We also discuss her education as a trader and how she became confident in her ability to make money on a consistent basis. Finally, we discuss how she sets her profit targets on each trade.

Following is the transcript of the interview:

Tim Bourquin: Hello everybody. Welcome back to MoneyShow.com. Thanks for joining me for another show this week. We're going to be speaking with Toni Hansen of TradingFromMainStreet.com, and I've known Toni for a while here from the Traders' Expos and she's got a great Web site. We're going to talk about that, but she's a trader as well. And so, we're going to talk to her about how she finds opportunities in the markets and what she looks for. So, Toni, thanks for joining me on the show today.

Toni Hansen: I'm glad to be here, Tim. Thank you for having me.

Tim Bourquin: Well, so talk about your kind of overall philosophy of approaching the markets. Do you have kind of a way you describe your approach?

Toni Hansen: Well, yeah, I do. When I came in to trading, a lot of the focus at the time was really on fundamental analysis and online trading and technical analysis was really kind of starting to really become more popular at that time but there wasn't a lot out there as far as educational material. So, I kind of took a little bit of my own approach to it where I had ideas in mind such as things like three to five bar pullbacks and things like that. But I didn't really have a solid foundation in technical analysis at all. So, what I did was I basically started by creating a trading journal where I would write down things. I actually began with the S&P 100 and the NASDAQ 100, and I literally would go through those entire lists of stocks every night and try to find things that I thought were going to continue in an uptrend or continue on the upside. And, what eventually came from that was the realization that a lot of the building blocks that go into any pattern no matter what type of technical analysis or trading are doing, they really overlap no matter what security, what time frame, anything like that. And there are basically five things that I focus on when I'm looking at any set up no matter what market it is. And I'm looking at core things like support and resistance levels, volume, trend placements, how extended is a trend, that sort of thing, correction periods in the market, and also what the momentum is on a particular move. Because I find that that leads a really good indication of where the reaction to that move is going to go, whether it's going to be a strong pullback or it's going to fall into a trading range, that sort of thing. So, I basically use those five things in my trading even to this day where my style of analysis really hasn't changed since the very beginning. It's just kind of built upon itself around those attributes.

Tim Bourquin: So, let's start with a couple of other things and talk about support and resistance. Are you using Fibonacci or other different things? How are you deciding where that support and resistance is?

Toni Hansen: That's a good question. There are a lot of tools out there for identifying support and resistance levels. I mean, we are thinking of support and resistance basically just looking at levels and a security where you're likely to see some sort of reaction, whether it's a stall in a move or it could be a moving average, maybe there's a trading range going into moving average that's pushing higher and it serves as a support level and kicks off a new move. I don't really like to use a lot of indicators. I stick to core things like I started trading with a little bit of focus on Fibonacci when I first began trading, and I find that that works really well, particularly if you trade the index futures as well as forex. Both of those hold extremely well using Fibonacci retracement and extension levels. But other than that, I don't use much other than just basic simple moving averages. And even things like Fibonacci and the moving averages, once you follow the market long enough, you can kind of get a feel for where things are slowing down or picking up speed. So, you don't even have to keep those levels on your charts anymore. But if you like the added confirmation, it's definitely a tool that you can use for that.

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Tim Bourquin: And how about momentum? You mentioned that as a critical tool for you. How are you finding out what the momentum is of the trend?

Toni Hansen: Well, I don't use any indicator for that. Basically, I'm visualizing what took place in the security prior to the current move. So, like how fast was a move-taking place compared to an average? And I'm really just eyeballing it. So, if something is moving very slowly higher compared to previous upside moves, then the chances are that when that corrects, it's going to have a stronger correction. So, it has a higher probability of reversing quickly. That's something you would see like on a trading range breakout where, let's say, there was a stronger than average upside move and then the security fell into basically a trading range, falling, flat, going back and forth, up and down between support and resistance levels. Well, if it breaks out from that range at a slower momentum or a slower pace, then the upside move heading into that range, then there is a higher chance that it's going to be a false breakout. And if this continues to creep higher like that, then when that channel breaks and lowers the downside, usually you can get a really rapid descent where if you happen to take that breakout, you can get all of your gains basically wiped out within a matter of minutes of its intraday. So, you're really just looking at what the momentum of a current move is compared to a previous move as kind of a guideline for what could happen next.

Tim Bourquin: And does that mean that because you know what the previous move kind of look likes, are you following a basket of stocks that you are very familiar with?

Toni Hansen: No, not really. I trade a lot of different types of securities but you have to keep in mind that things like momentum and pace, they'll change even within a security itself. I mean they're going to have really high volatility days and have low volatility days like going into market holiday for instance. And so, what might be a stronger than average move in one particular type of market, maybe let's say three weeks ago, it might not be the same right now. So, that's something where when I was trying to figure out how do I apply some sort of momentum indicator to this that's going to really work for me, it was really difficult finding something that worked over time. One thing that I know a lot of traders do use, I don't use it myself, but an MACD can show you a divergence where you can see a slowdown in momentum. That's something that you can use. For instance, if there's like a strong push to highs and then you see two more pushes to highs, there's often a divergence from the MACD that will indicate that the momentum is shifting heading into that third high. So, that's something that you kind of watch for but overall, I don't use anything else other than just what is the most recent activity. And if I'm daytrading, I'm looking back over the last couple of days. If I'm swing trading, I'm looking back over the last couple of weeks and sometimes, even the last couple of months.

Tim Bourquin: And do you use NASDAQ level 2 at all to kind of get a feel for time and sales flow, that sort of thing?

Toni Hansen: Probably not the way that a lot of people think of it. I don't have like strategies that I focus on when I'm using the level 2s. You can get a feel for how quickly orders are processing and slowing down in momentum and beating up and that sort of thing. But, I don't really have a system that's based on it. It's just something that I'll use to help me with timing an entry or timing an exit. So, I'll see what I'm looking at on the chart itself and then I'll use the level 2 for actually doing the entry and exit timing. But I'm not necessarily focusing upon that order flow as a strategy itself.

Tim Bourquin: And are there certain types of stocks that you kind of favor as a technology? I know a lot of traders love the technology because they're volatile. Is there a specific stock that you kind of favor?

Toni Hansen: Usually, it's things that have been in the news a lot or are making a lot of strong 52-week highs or 52-week lows or even highs within the last couple of weeks. So, usually when I'm scanning in the mornings, I'm going through and I'm looking at pre-market gainers, pre-market losers, and basically what is the most active security showing that type of momentum. Often, I find that these will last for a couple of weeks to a couple months at a time and then other ones will start to come into favour, and you'll start to see them pop up on the scan more and more often. And so, I will try to focus mostly on those just because you can get the best intraday momentum movement. But I don't like securities where if you pull up the chart let's say intraday, and you see a lot of overlap in prices from one bar to the next on even a five or a 15-minute time frame, I try to stay away from those just because it's really to get whipped out of them. And Microsoft is a good example of something that trades like that. I don't like to trade Microsoft a lot because it does do that back and forth type of action a lot.

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Tim Bourquin: Now how long have you been trading full time?

Toni Hansen: Since '97, so let's see, about 12 years now.

Tim Bourquin: Good. So you've seen a lot of different trading environments obviously.

Toni Hansen: Oh yeah.

Tim Bourquin: You traded through that whole dot com thing and kind of succeeded through that. Are you trading a whole lot differently now than you did ten years ago?

Toni Hansen: Not really. I mean it's kind of funny as I still talk to a lot of traders that I was working with all those years ago. And the same strategies that we used for reversals back in 2000 to 2002 off of that market high are the exact same strategies that I'm using now. I mean often, I'm trading them on like an intraday time frame instead of a weekly time frame but it's the same concept. I'm still focusing on those same five building blocks. It's just that I have a better comprehension of the overall market dynamics than I did back then but it's still the same thing.

Tim Bourquin: If you had a couple of tips or ideas that you think have kind of really helped you take your trading to that next level and become successful, are there some certain time frames in the past few years or even in the whole 12 years that you think: "Does me understanding this really helped me kind of tackle the markets?"

Toni Hansen: You know, back when the market turned into early 2000, that was really kind of the pivotal point for me and a lot of like my thinking was really starting to come together at that time. I've been in the markets for several years by that point. So, a lot of like the inroads that I was seeing were really starting to click. And heading into that high, there was a lot of similar action going on in a lot of the China stocks. So, you were seeing that really rapid turn higher and then reversal off of those highs on China stocks on daily time frames. And when I saw that same thing happening on the weekly and monthly time frame, that's when it really clicked to me because I was able to time that reversal and that gave me the confidence to realize that, this took place on a monthly time frame but the same thing is happening on even a tick chart intraday. So, it was really kind of a point where everything was just starting to feel like it was really coming together for me. And, that's still something where I make that type of realization a lot especially when I'm working with other traders where we're looking at their trading journals and how they're trading and as you know, nobody trades exactly the same.

Tim Bourquin: Right.

Toni Hansen: So, when I'm looking about how somebody else trades, and trying to help figure out how to improve their skills - what they're doing wrong, looking at their strategies - then I learn new strategies by doing that too because they're often trading something that I wouldn't typically look at. So, I'm still having like those kinds of Eureka moments that come from working with other traders and just seeing things over and over again.

Tim Bourquin: Yeah, that's good that you're still learning. I think that's important for any trader, whether they've been doing it for a long time or not. And you talk to some of the best traders and they'll tell you they can learn a lot just talking with other traders no matter what their experience. I think that's interesting. You put out like a daily newsletter is it that kind of talks about the markets and your thoughts on what's happening?

Toni Hansen: Oh yeah. I do a free daily market column. It's posted on Alan Farley's site which is the "Hard Right Edge," and it's indicated in a number of sites worldwide too but that's one that I do on a daily basis and basically, it's just a technical wrap-up of the market for the day and provides an outlook of what I'm looking at from a technical standpoint. So, it's really a great way to kind of start to focus on learning more about technical analysis and how to apply it. And it's the same thing where if I wasn't doing that every single day for the last decade or so, I probably wouldn't have as good of a knowledge basis about the market, as good of an understanding of technical analysis because really, you are seeing the same things over and over again but they're not always exactly the same. There is always like some little subtle differences and the more you see them, then the more you start to see those subtle differences and you can see earlier on in a pattern development or a price development that something is forming. Whereas everybody says well you can say something, "hindsight is 20/20," right? Well, as you're seeing things over and over again, you're starting to see them sooner and sooner before the pattern completes or before the series of events unfold. And that's something that I think every trader could really learn from if they did that from themselves, do their own journal, whether writing their own thoughts about the market and what they expect.

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Tim Bourquin: Right. As I say, it's always easier to see the left side of the chart than it is the right side of the chart. So, the sooner you can see that right side forming, I guess the better edge you have over all those traders that don't see it.

Toni Hansen: Definitely and it gives you more time to think about how you're going to approach a strategy too. I mean if you're not seeing something until just before a trigger takes place, then it's easier for your emotions to really take over. And if you see something and understand how something develops from the beginning, then it's easier to actually formulate a strategy of how to play that in the first place without letting that emotion kind of override what your logic is telling you.

Tim Bourquin: Yeah. So is it just a matter of watching the market over and just time to get that experience? Is there anything we can do to kind of jump-start that ability to see the right side of the chart forming quicker?

Toni Hansen: Well, certainly there is. I mean a lot of traders they don't even keep a journal in the first place. So, if you're actually printing out charts of what you are trading that show your entries and your exit on the chart itself, then that's the first step and you can take that farther and look for other examples where you have strategies that are very similar that played out and had better than expected results as well as those that failed. And, the more you compile those and the more you look at them, then the quicker you are going to be able to move to that next step where you are starting to see things sooner and sooner. But if you don't take that first step to print it out and actually look at them, it's going to take you many, many years before you reach that level. So, you can really jump start something where it might take you a year to see something if you don't do a journal and it might only take you a couple of weeks if you're printing it out and looking and studying your journal.

Tim Bourquin: Yeah. A lot of traders I see kind of jump on the newest thing right now. Gold is the hot thing, right? Everybody is talking about gold. It's going to 1000, 1200, 1500 and they jump on that. Even though they may not have much experience trading that, they'll try to trade that gold ETF. What are your recommendations there for somebody who wants to get on a great trend but may not be familiar with market?

Toni Hansen: Well, even when you're looking at things like the next great thing or the next hottest thing, that's kind of where I focus on with stocks is I am looking for where that strongest momentum is and that strongest activity. But I'm not focusing upon it just because it's in the news. Oftentimes, by the time something hits the news, you've already missed the best entry points to it. So, a lot of times, that's kind of when it's coming into strong resistance level 2. So, you want to be really careful about that. Usually, what I will do though, is if I'm looking at something new and kind of trying to get a feel for a new market or a new type of security, then I'll start by trading the ETFs or something where I can take smaller share size as opposed to taking like the futures contract or even like a currency pair and just focus upon trading those ETFs using the smaller share sizes until you get kind of familiar with trading that type of market. Obviously, if you're just getting started, you're going to miss things like gold like this but it's going to help you down the road to be able to catch those stronger momentum stocks. And a lot of times, you can play with the momentum thing like that. You can play like breakouts or bull flags or other continuation patterns. But you want to focus upon learning how to trade those continuation patterns irregardless of whatever the market is before you just go and jump on whatever the latest, hottest thing is.

Tim Bourquin: Yeah. It sounds like you've kind of focused on continuing trends and you mentioned that at the beginning. I see a lot of traders trying to focus on picking bottoms where they're looking for reversals all the time and that seems to be the place where they just get annihilated if they're really not careful. Have you found that that's kind of a fool's game and just try to trade those reversals or is it just that you have a better chance yourself that I'm making money with these, let's just jump on a trend that's already there.

Toni Hansen: Actually, that's a good question because I don't just trade continuation patterns. I do trade those reversal patterns as well. But I'm not looking at trying to catch a falling knife basically as they say. I'm looking for something that shows that there's really exhaustion in that move. And oftentimes, I'm looking for momentums to shift at support levels where yeah, you have that strong initial drop in the market or a strong initial drop in the securities. But I'm not trying to buy that sharp drop. I'm looking for something where maybe it starts to make slightly lower lows. So, the overall channels start to shift and you'll start to see like a slower descent and then I will take it from there. So, I'm looking at volume, the trend placement. Is the trend really extended on the downside support and resistance levels? What kind of upside resistance is there going to be in that sort of thing? So, I do take reversal strategies, and I do take them but I don't like try to catch like absolute pivots all the time. A lot of times, even when I have an idea that I think that the market or security is going to turn, I'm not taking all of my position all at once. So, if I think that I'm kind of coming into that sweet spot where security is more likely to reverse but it might not quite be there, then I might take a small initial position and then start to add as there is confirmation of it.

Tim Bourquin: Good. And so, if you're scaling in the trades, not necessarily mean you're scaling out as well?

Toni Hansen: Usually, yeah.

Tim Bourquin: Okay. And do you have kind of set rule for that, "50% then I'll take it off," or what is it for you?

Toni Hansen: It's always based upon whatever strategy I'm taking. So, I've done a lot of research with my journal to know and have a good feel for what the most probable targets on each of the strategies. And so, I'll play them based upon that and, sometimes I'm going to be getting out of all of it at what I identify as the first resistance level. But if I think it's a strategy where I took the first entry in a larger trend, then I'll take some out at first resistance. I'll watch for a continuation move, add back on and then play for those higher levels. So, I will scale in and out of a position based upon that. But there's not one particular set rule like I don't look for like a 20% move or something like that. Usually though, with all of the strategies that I'm trading, I don't like to trade anything that the odds are against, getting at least a 2:1 return on my risk. So, I kind of focus on strategies that will yield that. But that's not to say that that's going to work for everybody. I mean some people might be happy getting one to one if they know that the majority of the time, that's what they're able to get. So, everybody is going to be a little bit different on that.

Tim Bourquin: All right. Well, listeners or readers, you can check this out. Toni's Web site is tradingfrommainstreet.com. We'll link to it here in the transcripts and in the notes.

Read the Transcript of Toni Hansen's Interview in .doc format

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