Recently, a Spike Member asked me a few questions about my approach. Alex thought it might be of general interest, so I’ll post it. It started with a question about AAPL, which is referenced in the accompanying chart.

While I think the market (1/13/2010) is short-term oversold, I don’t see a lot of potential profit left. So, I’m basically flat, having sold my inverse ETFs (QID, SSG, SKF, and a few others this morning). I also covered my shorts (except for MO) this morning as the market sold off early. I did this because I’m going to the airport and don’t want to let any profits (though some are small) slip away over the next few days. I dislike worrying about positions while I’m traveling or concentrating on my business. Over the years, I’ve accepted a style of trading that fits my personality–short-term swing trading, buy weakness and sell strength with multiple low-risk, small profit trades, and lots of action.

So, I’ve come to accept the fact I can’t really trade with trailing stops supporting cumulative profits over long holding periods. I prefer to trade ETFs, but will trade large cap stocks that have high-volume and clearly defined patterns–1,2,3 Tops & Bottoms, or similar formations. I trade in the direction of the weekly charts, and use a 2-day RSI to pinpoint oversold conditions. I typically will buy when the 2-day RSI is around 10-15 and sell when it goes above 70. After many years of experimenting, I’ve settled on a short-term MACD that is 3,10,16.

I use the MACD mostly to find short-term bullish or bearish divergences on the daily charts. I also look for higher lows on the MACD. I don’t day-trade–it makes me too nervous, but will look to enter longs during mid-morning slumps or usually at the close. I try to cut losses as fast as possible and never risk more than 1 percent of my account on one trade, usually not more than half a percent. Over the years, trading has been a fascinating hobby with enormous challenges, horrible disappointments and enough profits to keep me coming back. For 2010, I’ve managed to change my day job, and now run my business out of my house. I’m trying to concentrate more on trading these days, because I anticipate a volatile market in 2010 and look forward to the challenges. The upshot of all this is that Alex and Kerry are extraordinarily capable teachers and their ideas are practical and profitable. I’ve taken what they do and adapted it to my personality and it seems to work.