Time flies. We come to Part IV of this series and I would like to discuss using ProfitSource to build a market scan of your own.

If you recall in our 2-day intermediate class, trading involves the following steps:

• Identify an opportunity
• Select an appropriate strategy
• Create a trading plan and follow through the trade.

With regard to Step 1 “Identify an opportunity,” our instructors introduce how to use ProfitSource to look for potential Wave 4 and Wave 5 set-ups. However, I confess that not all of us would be Elliott Wave traders and some of you may wish to apply other directional trading techniques. The immediate question is “Hmm…the instructors do not teach me how to do that. So, what should I do?” 

What will do is to demonstrate some of my thought process in building a market scan in ProfitSource. I would encourage you to understand my thought process, and learn how to build your own market scan. Of course, if you need further assistance, I strongly believe the 3-day Interactive Technical Trading [ITT] Class would be one of the solutions.

ADX Trend Trading Market Scan

In my humble opinion, building a market scan requires you to have some basic understanding of technical analysis. For instance, if you are building a trend-trading scan, make sure you know how to apply certain technical indicators relevant to trend trading, such as Directional Movement Index [DMI] and Average Directional Movement Index [ADX].

Now, the second thing would be to formulate your hypothesis, test it out and re-test it until you are completely satisfied with the result. Here is an example of a hypothesis:

“I want to look for optionable stocks in the US market which made a 20 day new high. The latest ADX should be 25 but below 40. DM+ should be rising over the last 3 days, indicating some strength on the buy-side of the stocks.”

So, how do you translate this into ProfitSource language?

Step 1:  Click Scanner and select “Market Scan” (See Chart 1)

Chart 1: Market Scan in ProfitSource
(Source: ProfitSource)
Click here for larger view

You will be asked to name the scan and save it. Let’s name it “ADX Uptrend scanner” and save it.

Step 2: Build the filters

After Step 1, you will need to build your filters. Here are a couple of points you should note:

1. Since I am looking for US optionable stocks, my search will be restricted to US optionable stocks. If you have read Part III of this series, you will recall how I save a list of liquid US optionable stocks. I am going to use this list as my ‘coffee beans.’
2. Next, since I am looking for a stock that made a new 20 day high, I am going to “Chart” section on the left column, and click “New High.” I am also changing the Number of Days to “20.” This will be the first part of my hypothesis.
3. Next, since I am looking for a stock whose ADX is above 25 but below 40, I am going to “Indicators” section on the left column, and click “DMI.” I will make the changes as shown in Chart 2 below:

 Click here for larger view

Chart 2: ADX Settings in ProfitSource
(Source: ProfitSource)
Click here for larger view

4. I hope so far so good. Do you still remember my last part of the hypothesis?  It is “DM+ should be rising over the last 3 days.” So, in ProfitSource, I am going to do something similar to Point 3 by going to “Indicators” section on the left column, and click “DMI.” I will make the changes as shown in Chart 3 below:

Chart 3: ADX Settings in ProfitSource
(Source: ProfitSource)
Click here for larger view>

Please note that as we are looking for the past 3 days’ DI+ movement, we need to repeat Point 4 twice by switching the days from “0” to “1” for First Value, and from “1” to “2” for Second Value for the first time, and repeat this step by switching the days from “1” to “2” for First Value and from “2” to “3” for Second Value.

Once you have completed Points 1 to 4, you should be able to see something similar to what is shown in Chart 4 below with the exception that in my own scan, I have built four additional filters which I am not going to discuss in this article.

Chart 4: Market Scan in ProfitSource
(Source: ProfitSource)
Click here for larger view

Step 3: Run the Scan

I ran this market scan on Jan 25, 2008 and the following list of the stocks was generated which met all of these criteria in my hypothesis (see Chart 5).

Chart 5: Scanned Result in ProfitSource
(Source: ProfitSource)
Click here for larger view

Let’s look at Agnico Eagle Mines Ltd (AEM) (see Chart 6).

Chart 6: Daily Chart of AEM 
(Source: ProfitSource)
Click here for larger view

Of course, from this point onwards you will need to apply your technical analysis and/or fundamental analysis to determine whether you would like to take this opportunity and consider what strategy you should use as a result. These are beyond the scope of this article.

I do hope that you would appreciate my thought process as discussed above, and do not hesitate to try out your own hypotheses. In the longer run, I strongly believe that you will benefit by knowing how to build your hypothesis, and test it out.

At the time when this article is published, it will be Chinese New Year Holiday. For readers who celebrate this festival, I wish you a Happy CNY, and “Gong Xi Fat Cai” (Mandarin) or “Gong Hei Fat Choy” (Cantonese).

I look forward to seeing some of you in the Singapore ITT Class (again, it will be Feb 18 to 20, 2008).

To access previous articles written by Jack Wong, please click here.

Jack Wong 
Staff Writer
Optionetics.com ~ Your Options Education Site

• Email This Article
• View Full HTML
• Digg This
• Delicious
• Subscribe

Recent Articles by Jack Wong, Optionetics.com

• December 1, 2008
  Lessons from My Grandmother, Part V: The Choice Is Yours
• November 24, 2008
  Lessons from My Grandmother, Part IV: Respect Yourself and Others
• November 17, 2008
  Lessons from My Grandmother, Part III: Taking Charge of Your Life
• November 10, 2008
  Lessons from My Grandmother, Part II: Dealing With Loss
• November 5, 2008
  Lessons from My Grandmother, Part I: Never Give Up