Steve Kleinsmith is a Wizetrader from the state of Arizona. He recently developed a system for identifying swing trades using HotScans. The following article is based upon several posts Steve made to the HotScans Users Group message board.

Steve begins using HotScans during the last half-hour of market. He uses the Advanced Filters and his scan setup is:

• Scan Period: 5 or 10 minutes; Price Greater Than .5%; Volume Greater Than 500%
• Previous Period: 30 minutes; no filters
• Daily Period: Price Greater Than .1; Volume Greater Than 50%
• Daily Volume is set to 1,000,000; Average Volume is set at 200,000; All Caps; All Markets

He finds his candidates between 3:30 and 3:45 and runs them through Wizetrade to evaluate the charts. (His settings are 2, 8, 30, 90, 130, D, W, M.) While he is checking his candidates, Steve has the NASDAQ.Com Company News running to check for news, earnings announcements, surprises, etc. (Check to make certain you are not going to hold a stock through an earnings announcement).

Steve waits until the market makers and day traders are through closing out their accounts for the day; this usually occurs by 3:45. He is then ready to trade. He says: “I may place a trade at that time with a stock that has had a strong run since 3:00 or 3:30. Many of the ones I get into at 3:50 will have sort of a spasmodic burst in the last five minutes and you can see them run more after the close.”

“Do not be concerned if a stock drops after the first half hour of the after market. Some traders may take their profits but the majority do not play extended trading and it is my guess many will place order with their brokers that evening for the next day’s open. This backlog at the open will create the next day’s gap. I have had very good results. You can too.”

Geoff Bysshe’s official title is Executive Vice President of Technology at Dataview, but he seems to have his hands in everything having to do with HotScans--development, support, sales etc. In a quick Q&A session, we look into how he views HotScans now and in the future.

How long have you been at DataView?
I’ve been here since the beginning. I co-founded DataView in 1994 with Keith Schneider (the President of DataView) while Keith and I were managing money for a hedge fund. DataView was born out of an opportunity presented to us as hedge fund managers to market the tools we were building for our own trading. HotScans is the latest product, and the first one that we have marketed to the independent trader. DataView has historically focused on the institutional and large financial information providers as its client base.

So it sounds like you were a trader before a software developer.
Absolutely, I like software development, but I love trading. I think I’ve had my eyes on the market since I could read. I spent a month during college as a NYSE floor trader’s shadow learning how the NYSE floor worked first hand; and then in 1990, I was very fortunate to meet Keith. He brought me to the floor of the New York Commodities Exchange to help him trade all the major commodities markets--gold, crude oil, coffee, bonds, S&P’s, currencies, etc. Within a year and a half of working with Keith I had a seat on one of the exchanges and I was a independent floor trader in the dollar index pit. I’ve been trading ever since.

When did you become a software developer?
In the early 1990’s, the volume in the commodities markets was drying up, and it became clear that equities were a better place to be than commodities. Keith and I moved off the floor to start trading equities using the trading knowledge we had from trading futures. One of the attractive qualities of trading stocks was you had thousands to choose from instead of the handful of commodities that a futures trader has to choose from. So I began programming the computer to find the right stocks to trade, and build tools to follow the markets.

Do other people at DataView trade?
Yes, in fact, it’s encouraged. Everyone has a trading mentality here. We can’t spend all day trading, but we share trading ideas constantly. You don’t have to worry about being reprimanded for sitting at your desk with your eye on the markets, or asking someone to wait a second while you figure out where to place an order.

Let’s talk about HotScans. As a power user of HotScans, what advice do you have for someone just getting started?
Focus and keep it simple. I talk to a lot of users and read a lot of user email. Too many people are trying to figure out how to use the whole product or how to get lots of trading ideas rather than focusing on how to get a few good ideas that fit their trading style. In the last newsletter we talked to Jeff Futrell about his mastering of the Dead-Cat-Bounce strategy. I’ve talked to Jeff numerous times. He has days where that strategy consumes 100% of his attention. That’s focus. There are dozens of ways to generate trading ideas with HotScans. Users should focus on one at a time. By focusing on one or two strategies, you learn how to quickly evaluate the stocks that HotScans is generating for that strategy. Once you can evaluate candidates quickly, then you can expand to look at more strategies.

Give me an example.
If I gave you a list of 25 stocks after the first half hour of trading and said: “a handful of the stocks on this list are going to make big moves today,” would your first question be "where can I get a longer list"? Of course not, but that is basically what many traders do. They look for more names when they should be trying to look for fewer. HotScans gives you this list. I know the list is there so I make sure that I focus on identifying three to five stocks from the list to trade all day. That is what I mean by simple: one list, and focused--5 stocks.

Here’s how it works. There are two ways to generate the list. The first is to use the HotScans “Rally Now/Opening” strategy, the second is to use the “Big Volume Now” preset scan located at the top of the HotScans page, and change the Scan Period to “Big Volume Since Open.” Running these two scans during the first half hour will give you a list of stocks that have big relative volume which means there is unusual interest in these stocks on this day. I often print the list at 10:00 so I look back at it during the day. Then I narrow the list down to the three to five stocks to focus on. The basic criteria for narrowing down the list are:

• The higher the relative volume the better; and the HotScans gauges make it really easy to spot the big relative volume candidates.
• Positive price action is a plus. For example, I prefer if the stock is up on the day, and an unfilled gap from the prior day’s close is an another big plus.
• A defined trading range is a plus. This means a stock that has traded up and down in a range for the half hour is better than a stock that has spent the whole half hour going straight up. I like to see a trading range because I use the range to determine my stop if I’m wrong.
• Depending on your style you may also want to look at the stock's trend over the last few hours and days. I use bar charts to evaluate the stock's position. If you are a WizeTrader you will have the Wizetrade charts.

After narrowing the list to five candidates, I wait to follow the momentum in these stocks. This means that when these candidates break the high of their first half hour of trading (opening range), and for as long as the stock remains above its opening range high the stock should be traded from the long side. Often I will buy the initial breakout of the opening range. Sometimes I miss it and I have to wait for a retracement or a recycle as a Wizetrader might say. There are two important points here: First, I wait for the stock to break out of its opening range! This is a verification of the momentum. Second, I have tight and disciplined stops. A stock that is going to run should not immediately reverse and trade back into the opening range. If it does I get out. I generally risk 10 to 20 cents, maybe 30 cents if it is a $75 stock. If the stock goes against me by more than that I’m out--no questions, no hoping for one more rally! I do give more thought to where I place my stops than just a fixed dollar amount but we don’t have time for that in this conversation; 10-30 cents or about a third of what you think the stock can move on a good day is a good rule of thumb. I don’t mind the loss if it's 10 or 20 cents because when I’m right I catch stocks that run for 30 to 50 cents immediately which is when I often sell half my position, and then let the other half continue to rally enabling me to turn a good day trade into a swing trade or just take the money in the afternoon. I use the market conditions, the day’s volume action of the stock, and the bigger picture of the stock’s trend to dictate that decision.

It is this process of narrowing down the list that requires focus and practice. If you are trying to follow too many strategies, you will not be able to master any of them. I have been looking at how stocks trade in the first half hour for 10 years, so I reduce a list of 50 stocks to 5 solid candidates in five minutes. This skill enables me to get my 5 candidates and move on to the next strategy. It doesn’t take 10 years of experience to learn this skill, but it may take a half hour a day at 10:00 for a couple weeks to get the hang of it.

The important point in all of this is that as a trader you’re better off focusing on making one strategy work for you than spreading yourself too thin. Jeff Futrell is much better at picking a bottom than I am so he uses the Dead-Cat-Bounce strategy. I like to trade based on the opening range so I look at Rally Now/Opening and the Big Volume Now preset scan. You pick your style, HotScans will find the stocks with the right price and volume characteristics. HotScans makes it very easy to follow many strategies, maybe too easy. Start slowly and add strategies only after you’re comfortable with the one you started with.

What can we expect to see next from HotScans?
I don’t like to hype new versions, but I’m more exited about this next release than I was about the initial release of HotScans. The next version is going to make the process I described above of evaluating the tables of HotScans stocks easier. HotScans makes it easy to find the stocks that are moving now and/or are trading unusual volume, our next objective is to make it just as easy to evaluate the condition of the stock as a day trade or a swing trade. For example, is the stock in “trend up” mode or is it waffling? Does it have momentum on an intraday, daily or weekly basis? And of course we’ll give you the ability to scan for only the stocks that are trending weekly, daily and intraday in the direction of your choice! Beyond that, we are working on portfolio functionality and the ability to save your own list of favorite scan settings like favorites in your web browser. This reflects the fact that we’ve received lots of great feedback from users and we’re working on including it in the product.

Thanks for your insights Geoff

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