The Smart Stocks Trading System: Staying in Sync With the Market

Gauging market health, stock selection, position sizing, progressive exposure, and when to buy and sell

Written with

Kyna Kosling

from The Trading Resource Hub.

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Here at Smart Stocks:

• We focus on the strongest stocks (leading growth names) in uptrends.

• We swing trade stocks off the daily timeframe, typically holding winners anywhere from one week to two months.

• We try to capture the ‘meat’ of the move — the short/intermediate (quarter-to-quarter) trend.

• We don’t carry red names overnight. Cutting losses short keeps our capital safe, and our minds clear. Risk first, always.

• We look to make multiples of our risk — if we’re able to secure many multiples of your risk, that’s a win.

• We sell some into strength, and we use the moving averages (MAs) to keep us in the biggest winners.

Mistakes happen — and that’s okay.

The key is to plan your trades, and to trade your plan. Only trades planned in advance can be taken. Ignore FOMO — there’ll always be another opportunity.

We won’t buy the bottom nor sell the top. That doesn’t matter. What does matter is what happens between when we buy and when we sell.

Let’s start with the most important variable: the general market trend.

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Overall market health

Big money is made when you trade only at the right time.

We want to be:

• Long when the indexes are surfing the MAs

• In cash or short when the indexes are trading below the MAs

Patience is key. Trading with the wind in your back significantly increases your profitability.

This is why every daily report (example) starts with market indexes, market indicators, and market breadth.

Market indexes

Indexes are ideally above the 10/21 EMA, with both MAs rising.

(QQQ is the most important, but we also look at IWM and SPY.)

Market indicators

Our market and Qullamaggie indicators help us gauge market environment:

• GREEN: Buy signal — be more aggressive.

• YELLOW: Caution — consider new longs, but pay close attention to portfolio and watchlist feedback for signs of trouble.

• RED: Be very careful with new buys — maintain high cash levels.

Market breadth

The trend of net highs/net lows helps gauge market health.

We’re looking for a neutral to green trend. This shows that more stocks are making new highs than new lows — a key ingredient to a durable uptrend.

We also look at the Nasdaq McClellan Summation Index (NASI), which measures the difference between advancing and declining stocks on the Nasdaq.

This shows market breadth, momentum, and trend. It also gives us clues to overbought and oversold conditions. We’re looking for the NASI to be on a buy (black) signal.

These signals help us identify the harder times, and the easy dollar environment.

We don’t have to trade every day. Keep your head above water when times are hard, so you can flourish during the good times!

Patience is key.

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Stock selection

Choosing what to buy is just as important as knowing when to buy.

Here are four things we look for:

1. Stage 2 uptrend, or digesting gains from a prior uptrend.

“The trend is your friend” is one of the oldest yet wisest sayings on Wall Street.

An object in motion is more like to stay in motion.

So, look left! We always want to be trading in the direction of the stock’s trend, which we do via the moving averages.

Stacked MAs are clear signs of a powerful uptrend:

• 50 DMA above the 200 DMA*

• 21 EMA above the 50 DMA

• 10 EMA above the 21 EMA

• All MAs are rising

Also pay attention to the weekly chart: Is the 10 WMA above the 30 WMA?**

In short, we’re looking for signs of accumulation, and for price to be respecting the MAs.

*DMA = daily moving average. **WMA = weekly moving average.

2. Group strength.

Trading stocks from leading groups significantly boosts your odds of catching a big winner.

William O’Neil’s How to Make Money in Stocks highlights the power of group strength. His research showed that 37% of a stock’s price movement comes from the industry group, and another 12% from overall sector strength.

So, focusing on the top 20% of industry groups that align with momentum market leaders, often driven by innovation and/or market trends, is critical.

3. Liquidity.

We want to trade with the institutions that control the market — and they can only trade large liquid stocks.

Such stocks also trade much smoother and typically experience less volatility, due to the sheer volume of shares transacted — someone’s always on the bid.

With rare exceptions, I look for:

• Daily volume of shares traded above 500,000

• Dollar volume above $30 million

4. Stock price above $10.

Institutions rarely trade stocks below $10, so we avoid them too.

Quality stocks are pricier for a reason.

What about earnings and sales growth?

Growing earnings and sales are important components of winning stocks, but they’re already reflected in the price.

Stan Weinstein and Jesse Livermore famously said: “Everything you need to know is right in front of you.” You’ll often see stocks with stellar fundamentals underperform, and stocks with negative fundamentals explode higher.

Fundamentals mean very little unless they’re backed up by strong technicals. The cold hard reality is that, with a nod to Brian Shannon, only price pays.

Price will always show you what institutions are accumulating. Our job is to follow the charts and trend. Strong fundamentals are just a bonus.

Is high ADR important?

High average daily range (ADR) stocks usually aren’t on my radar.

Fast, volatile stocks look great in theory, but in practice require far smaller positions due to wide stops. You can’t use a 2% stop on something moving 10% per day on average — you’ll instantly be stopped out.

My sweet spot is 2.5–7% ADR. This allows me to sleep at night while getting size on my positions.

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Buy rules

First, the most important rule of all:

“No setup, no trade.”

- Ameet Rai

My five playbook setups are:

1. EP setup

2. Trendline breakout

3. Inside day breakout

4. EMA pullback buy

5. Flat pivot

Randomness kills performance.

We can’t measure random trades — avoid them at all costs.

We only buy stocks analyzed and planned in advance, meeting our stock selection criteria.

That way, during market hours, our only focus is executing our plan.

We focus on the best setups, paying attention to:

• Bases and patterns

• Signs of accumulation

• Have there been any gap downs?

• Where, and how old, is resistance?

• Volume spikes (signalling institutional interest)

Also remember to always check when the next earnings are due. No matter what anyone tells you, earnings are a gamble — nobody knows what will happen.

Finally, stay away from stocks that had a 40%+ correction!

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Position sizing

Position size is critical to profitable trading.

It can be your best friend or your worst enemy — which is why we must carefully manage size:

• Size too small, and your winner won’t meaningfully move your account

• Size too large, and you could suffer a devastating loss

Position sizing done right is the key to compounding your account.

As your account grows, so should your position sizes. And when you experience drawdown, a strict position size calculator will force you to scale back your size as your balance decreases.

My position size is determined by my stop loss.

The tighter the stop, the larger the position. The wider the stop, the smaller the size.

I risk a fixed 0.25–0.5% of my equity on every trade, with 15–20% position sizes, unless in a losing streak. However, until I get traction in my portfolio, I only put on half positions.

(You can also use fixed size — for example, fixed 10% positions.)

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Progressive exposure

The market always speaks. Our job is to listen.

When you’re seeing traction and green days in your portfolio, remain aggressive.

But when you start getting stopped out of names, or your open longs are stalling or pulling back, take your foot off the gas and hold off on buying.

And when things start to slow down and feedback changes, or if you feel out of sync with the market, trade smaller! I reduce size after three consecutive losses (to three-quarter positions). After a fourth consecutive loss, I reduce to half positions.

Progressive exposure is vital. Always bend with the market by listening to the feedback your account is giving you.

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Sell rules

Again, we plan trades in advance.

So, before you enter a trade, know exactly where you’re getting out.

I typically have a 0.5–2% stop loss — that’s what works for me.

I take pride in accepting small losses and letting my winners work. The best trades work right away — and since risk management is crucial, we want to protect our downside when we’re wrong.

(If you use hard stops, go ahead and enter your hard stop as soon as you get filled. This will assist you when emotions run high and you may be tempted to ‘let it go a little longer.’ I use hard stops when I can’t monitor the market.)

Selling into strength is hard — because, naturally, you want to let your winners work!

But taking partial profits is the hallmark of a professional.

It means you’re treating trading as a business. And selling a piece with your P&L at highs works wonders for your physical as well as your mental capital.

So, sell into strength when presented with the opportunity:

1. At a gain of 3–4x the stock’s ADR, sell a third or a quarter of the position, and move the stop loss to breakeven.

This ensures that, no matter what, we book a profitable trade.

Why 3–4x ADR?

That’s over 3–4x my average loss. We must always seek to improve our worst-case scenario and reduce our total open risk amount when appropriate. At 3–4x ADR, I know my principal is protected.

I also like to protect breakeven at a 6–10% gain. But if an MA rises to sit at our cost basis, we give the stock the chance to bounce at that level — we don’t just sell right at support.

2. The second partial sell occurs when a ‘sell into strength’ signal is triggered.

When a stock goes on a super run, emotions can run high.

You don’t want to sell because you think it may continue…

…but you also don’t want to give back too much profit.

The cold, hard reality of trading is that the only thing that matters is what happens between when you buy and sell — and if you can secure many multiples your risk, that’s a win.

I sell a third or a quarter of my position at

Jeff Sun, CFTe

’s 10x ADR extension signal, or at my discretion (like after a big gap up on surprise news).

3. The remaining parts of the trade are managed with the 10 and 21 EMA, selling discretionarily.

I look to sell a good portion of my winners into strength and trail a remaining piece with the MAs.

MAs are integral to my process because they provide a consistent and unbiased approach to trend identification. Through studying thousands of charts, I’ve found that I can’t outsmart the MAs. Best to follow them.

When the stock closes below the 10 EMA, I sell a third of my remaining position. Unless this happens prior to an extension/ADR signal — then I sell the whole position.

The 21 EMA is a powerful moving average, because it acts as the perfect hybrid tool to turn a swing trade with cushion into a position trade. If I’m still holding a partial, I’ll trail with this MA (with my stop moved to breakeven), and sell the remainder of my position at a decisive close below the 21 EMA on volume.

(We need to see sell volume, because stocks sometimes close narrowly below the 21 EMA on light volume, only to shoot higher the next day, finding support.)

If you wanted to play for an even bigger move, I’d trail with the 50 DMA or 10 WMA, and sell on a close below those moving averages on volume.

4. All shares are sold before earnings, irrespective of cushion and where we are in our profit-taking system.

Again, earnings are a gamble — nobody knows what will happen.

Having held through earnings many times, I’ve found the pain of giving back all gains on a ferocious gap down harder to deal with than the joy of a gap up going my way. I accept that I may never bag a 200% winner — but I don’t need one for stellar returns.

We obsess over managing risk every single day on the battlefield.

So, why carry a large position, with profits, into a completely random event, where the gap risk is unknown?

I’m okay with missing a big gap up.

I’m at peace with making many multiples of my risk, and getting out while in control.

If the stock gaps up, I’ll find a way of getting back into the trade! (Possibly by stalking it for an EP setup.)

I use my discretion about when to use what sell rule.

No trade is the same.

Sometimes, we must be more aggressive. At other times, we can let a stock do its thing.

Just be sure to use a process that falls within your system, and avoid random behaviour at all costs. As long as I’m using the tools above, I’m doing my job correctly.

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Want to watch the Smart Stocks system in action?

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Every night, I outline the best opportunities in the current market:

• Where I’m looking to get in

• Where I’m setting my stop loss

• How I’m managing my open positions

Each newsletter is designed to enhance your skills and elevate your trading game.

This isn’t just a stock-picking newsletter — I want you to understand the psychology behind successful trading, advanced risk management strategies, and how to develop your own processes and routine.

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