Criteria to determine the strength of a trade

1. Price action
a. Analyze key levels of a stock and see how it reacts when it touched a particular support and resistance
i. Strong price action example: AMZN tests 1900 5 times, and holds, then continues to print higher lowers for the next 5
days. This can indicate a bigger move is coming. Each dip is being bought meaning bulls are in control
b. How does a stock react to key resistance levels?
i. If a stock continues to fail at a certain resistance area more than 3-5x, You will have an idea of when to take profit or when
to short a stock. All trades are based on probability and the risk-reward ratio.
ii. Weak price action example: NFLX testing 366 over 20x and failing… If you’re entering a trade around 364, full-sized
position and not realizing that 366 is a strong resistance area, you are not managing your trades properly. You need to
calculate where certain support levels are to create your entries and maximize the amount of room a stock can run before
hitting the next resistance

2. News
a. Positive news
i. When entering a trade, Do your research and see if there is any positive sentiment already surrounding the stock. Is there
positive news being anticipated? Is there positive news that was just released? Were there recent upgrades in the stock?
Did the stock recently beat earnings with good guidance? This is a big factor in determining how strong a trade can
potentially be.
1. If the answer is yes to any of these questions then this reinforces the strength of a trade
2. If the answer is no, then the trade would be more neutral ( not necessarily a weaker trade)
b. Negative news
i. When entering a trade, find out if there is negative news released within the past 2 weeks. Use mainstream financial news
resources to do research on this. Ex: Look for downgrades, high ranking members of a company being fired, quitting,
selling stock, etc.
1. Any of these criteria can hinder the move of a stock even in a bull market. Even if SPX is up 20-30 points, if a
stock is hit with negative news, then it will not move in sync with SPX. Be aware of this.
3. Technical analysis
a. Is the chart pattern a pattern YOU are comfortable with? Not all chart patterns work all the time but it’s more important that you
find the few that are higher probability for YOU.
b. Chart patterns that I use: Bull flag/pennant Bear flag/pennant, Ascending/descending triangle, Falling/rising wedge
c. Do not trade counter-trend. If a stock is in a strong bullish/bearish formation on multiple time
frames(intraday/daily/weekly/monthly) There is no reason to buy the opposite trend and attempt to guess the top or bottom. This is
a one-way ticket to blow up your account.
i. So make sure you look at a stock on multiple time frames to get the BEST idea of the direction of where a stock can be
heading

4. Correlation with SPY/SPX

a. Are the ratios aligned? Examples will be provided at the end of the document.
b. Deviations from SPY/SPX with an individual stock
i. Positive deviation: The individual stock is moving up, while SPX/SPY is moving downward or neutral indicates that the
stock is stronger and can potentially run. This can also mean that news may be coming soon. This can depend on how
strong the deviation is.
ii. Negative deviation: The individual stock is moving downward, while SPX/SPY is moving upward indicates the weakness
of an individual stock. Even if SPY is moving up with strength, the individual stock may move less than 50% of what it
should. This can indicate a negative sentiment on the stock and that people are trying to get out.
1. Always have SPY/SPX on your setup while looking at individual stocks. This is vital for any trader

5. Risk/Reward ratio
a. Based on support and resistance levels you must determine the R/R ratio.
i. Example: If AMZN support is at 1800 and has tested 5x and holds over a multiple week period. And AMZN is hovering
around 1805, with the next resistance at 1850, The R/R ratio is heavily in your favor. You are willing to see a 5-10 point
downside risk to potentially seeing 50 point+ move… the R/R here is 5:1 in your favor.
1. For each trade you enter, calculate this by finding out where the strong support and resistance levels are
 6. Social Media buzz from seasoned traders
a. This factor is not as important but can help confirm your hypothesis on certain stocks.
b. If you see 3+ seasoned traders confirm the same pattern or sentiment, this can be a positive sign for a trade
c. Be careful to not “look” for confirmation of a bias if you’re in a losing trade. You must try to be as objective as possible.
d. This is more of a gut feeling type of factor

7. Sector leader
a. If the individual stock you are trading a sector leader or emerging leader?
b. Does the stock influence the stock market in general?
i. If the answer is yes to either of these questions then it can be a trade you invest more of your time in. It can be a stock
you can learn to master and trader over many years.
ii. If the answer is no, then learn what you can from it within a month and move onto the next trade.

Scoring system to determine the strength of a trade

For Criteria #1-5 : if the answer is yes = 2 points | if No = 0 points

For Criteria #6-7 : if the answer is yes = 1 point | if No = 0 points

Number of points Strength of trade Size of position

10-12 points Strong trade Full position

7-9 points Moderately strong trade ½ position

4-6 points Average trade ¼ position

0-3 points Weak trade 1/10 position