Before you read any further, take a look at these charts:

One of our edges as intraday traders comes from identifying where the money is going that day.  Each day, we can usually identify a handful of sectors, industries and individual stocks that have unusual order flow, and these tend to represent the best trading opportunities for the day.  You can trade whatever silly, hare-brained pattern you want, but all kinds of transgressions will be forgiven if you position yourself in the best stocks in the best sector for that day.  Bad entries, late entries, wrong stops, big slippage, poorly thought out patterns… none of these are good, of course, but if you’re in the right stocks you can usually even make money with these mistakes.  I tell the traders I mentor that their job is not to trade patterns, but it’s to figure out where the treasure is buried today.  What are the best stocks?

We have a tool on the desk called the SMB Radar (that, I have to be honest, I’m pretty pleased with since Joe P and I developed it together) that helps us to find these plays.  We can find the best sectors and immediately identify the stocks within that sector that offer the best opportunity.  In the case of these coal stocks I started this post with, which do you think offered the best and easiest money?  Of course, MEE was in the news and was volatile on the open, but it often happens that the sexiest stock is not the one you should be spending the most time on!  We knew that Basic Materials were strong today (today?  try for the last 2 quarters!), and that Coal was one of the strongest industries in the sector.  We saw that by noting that Coal stocks were pressing on highs every time the market upticked.

One of the advantages of sitting on a trading desk is that you have a lot of people processing information.  People knew I was looking for Coal stocks… I had a few candidates on my list, but one of our trainees pointed out that not only was ACI screaming on the SMB Radar, but it was also building a pretty attractive base for a breakout.  Once you’ve done that much work, the rest is easy, and then it’s mostly a matter of figuring out where to take your profits.

As an intraday trader, your chances for success go way up if you have some system for finding plays like this.  At a bare minimum, you need to know what sectors are strongest and weakest for the day (this can be as easy as following percent changes for XLE, XLF, etc), and some way to identify the best stocks in those sectors for that day.  Remember, as technical traders, every edge we have comes from an imbalance of buyers and sellers.  The same patterns we love to trade appear in random data, so you really only have an edge if something non-random is driving the stock that day.  When there is no imbalance, there is equilibrium, randomness rules, and you may as well flip a coin.  When you find the unusual order flow, you are very close to finding where the treasure is buried that day.

Follow me on Twitter: AdamG_SMB.  I try to tweet ideas like this through the trading day.