Nick Drendel Interview - Building A Structured Swing-Trading System
With @NickDrendel!
Today we have swing-trader Nick Drendel kindly walking us through his overall trading system, providing a deeper look into what is required to have a structured and step-wise system in the stock market.
Have no doubt this will help many of you out and I’d just like to show my appreciation to Nick for his time!
Be sure to check him out on twitter and and youtube!
Getting Started
I first started trading during my senior year of college in 2015 when the Robinhood app first came out. During college I majored in actuarial science and finance and was very excited to get started finding edges in the market. Like most traders I did everything wrong for about 5 years bouncing from strategy to strategy until I stumbled upon 2019 US Investing Champion Leif Soreide’s interview with Richard Moglen. This led me to Mark Minervini’s books and eventually the entire CAN SLIM / swing trading style.
Some of my favorite books are:
Routines
Daily: I live in Arizona, and half the year the market opens at 6:30am so I’ll typically have my focus list (3-5 names) with the potential entries, stops, position size all planned out the night before along with secondary names (5-15) to help monitor the general market. I try to get up an hour before the market opens just to check on any gaps in price and mentally rehearse the trades, I plan to take along with double checking my stops on any current positions.
I trade most often during the first 90 minutes the market is open then shift to other projects. I find that if I keep my trading platform open all day I will inevitably overtrade, so I shut Think or Swim off and monitor my positions and the market using a trading journal & market dashboard I built in Microsoft Excel.
At the end of the day is where the work starts; reviewing my positions, how the leaders are acting (post this on Twitter each day) and run my daily scans (one up on volume scan to catch any big movers, and another relative strength new high scan to keep my focus on the leading stocks and themes).
From there I’ll narrow down to two watchlists, my focus list and a secondary list and set alerts for each of these stocks. Once that’s done, I try to get out for a run or swim, spend some time with my fiance & dog, and recharge a bit before coming back to the desk for any projects I’m working on until bed.
Weekend: The weekend is where most of my screening takes place. Outside of the two previous mentioned screens I’ll also flip through the S&P 500 and the results of some general trend template screens.
I will also review the industry ranking (and changes), # of stocks making new 52-week highs, and # of stocks that have doubled in the past 52 weeks (with 500k volume requirements). This helps me identify the leading themes in the market and gauge the strength of the market.
If the # of stocks making 52-week highs or doublers are growing I know this is a market, I can continue to build exposure in. If the old leading themes got whacked last week or breadth is detiorating I mentally prepare for a “risk off” week where I spend more time managing my positions vs adding new trades.
During the extra time on the weekend, I like to review past historical winners and go bar by bar thinking how the stock could have ended up on my watchlist, where I would have entered, where would I have put my stop, and how would I handle shakeouts.
These are all hypotheticals, but they help to understand how the best stocks act and where the ideal, tight risk buy points are. I used to flip through the Russell 2000 list to train my eye (I’d suggest anyone in the first 3 years to do this each weekend), but now I find my time is better spent elsewhere. By Sunday night I’ll have my plan for the next day in place.
Identifying Potential Trades
Stocks typically enter my “Universe” watchlist from one of my daily scans (Up on Volume, RS New Highs) and I get a feel for strong themes based on the stocks making RS new highs or manually when I’m flipping through charts in my Universe.
Choosing names comes down to if I’m seeing tight price and volume action typically around the 10/20 EMAs (choose whatever timeframes you want, there’s no magic moving average), ideally in a leading name from a leading group after a strong uptrend is already underway. There’s only one setup that I’d trade a stock under the 50SMA, and never buy stocks while they’re under their 200SMA.
I’m thinking about my risk first. So, I’ll find my entry point, check where I’d have to place my stop (either the previous day’s low or the low in a pullback), and based on that % back into my position size.
Once the stock goes through my buy point, as long as the market’s not aggressively selling off I’ll place the trade, set my stop, and monitor the action at the breakout point.
Risk Management & Position Sizing
I don’t often like to risk more than 1% of my total capital on any one given trade. So, for example a 5% stop loss with a position size of 20% gives me a 1% total capital risk. Tighter stop allows for larger position size (within reason).
The 1% capital risk will drop down to 0.5% or 0.25% based on how close my account is to its highs & how the current market environment has been acting. I want to risk less when my account balance is in downtrends. Either I’m off my game, my system isn’t favorable, or the market sucks and regardless of the cause I don’t want to keep fighting with large size when things clearly aren’t working.
Trading is a game of probability and risk management. The more probability you can stack in your favor (RS new highs, accumulation volume, leading industry, indexes in uptrend above key moving averages, how tight is the stop, is my account near all time highs, etc) the larger I can size my position.
Progressive Exposure
My ultimate goal in trading is to always be putting in higher lows in my account balance. So much of my exposure levels & open risk should be less than the the difference between my current balance and the previous low.
Usually after a losing streak where eventually I go fully to cash I find more success coming back slow at first. The lighter the correction in my account/market the quicker I’ll size into trades. Worse markets pulls back the more substantial overhead selling pressure exists and I tend to start slower and take profits quicker.
Managing Positions
There are a few factors that determine my exit plan on a profitable trade:
Current account balance in relation to previous highs
The closer I am the easier it is to hold during pullbacks for larger moves. If I’m playing catchup from a losing streak, I’ll cut winners while the money’s there to slowly make progress and build confidence.
Characteristics of the stock
Is this a stock that trends smoothly or is it choppy and better to sell into extensions?
Profits vs Initial Risk
Depending on the market environment I’ll have different rules to moves stops and sell partial positions based on the R:R (reward:risk) of the trade at 1,2,5 intervals.
I often move my stops up to a higher low after a higher high has been confirmed on the chart
Ideally my initial entry is below the 20EMA and for positions with large profit cushions already I’ll usually keep the rising 20EMA as another line in the sand to reduce if the stock closes below that.
Intuition has been a killer of success
Anticipating trend changes in the market is one of the mistakes I often repeat, selling too early in a true trend thinking the market’s extended in one direction or the other.
I’d be more profitable if I acted less on intuition and more on based on rules.
I think this is a common problem of people overestimating their market “feel”. This is another trading truth I uncovered once I started journaling.
Sell signals when the trade isn’t working is easy for me. If a stock hits my stop loss at this point in my trading career I’m usually very good at taking that loss. Every once in awhile I slip up but not as much anymore.
Adjusting After Losses
This is such an important step in a trader’s journey, I think this is truly what flips a trader from a boom & bust account trend to a consistently profitable one.
Knowing when to cut down your trading size and frequency to choke off pullbacks in your account balance eliminates the need for stretches of LARGE returns to outperform the market.
I’m always trying to improve on this part of my trading because it’s so important to reduce that tail risk in your trading.
It’s cliché but true, but you need money to make money.
Maintaining Discipline & Managing Emotions
This is the thing I struggle the most with. The longer I journal the easier it is to see the mathematical proof when I start struggling, so I’ve been able to get back to cash and slow down earlier in my pullbacks.
For me, I try so hard to be a perfect trader, that when I break one rule, I feel like I have to make money off it or I would feel ashamed. So, I break another rule trying to get back the money and eventually spiral.
I think this is a downside of social media traders only posting their wins. You’re going to make mistakes, but the goal isn’t to be perfect, but to reduce the frequency and severity of those mistakes.
As for testing the waters vs staying out of the market if I’ve been pushed to cash for a long time, my first trade back is usually with one of my most confident setups. If those aren’t working, then I know quickly that it’s still time to be patient in cash.
Bouncing Back
Early on it would take massive drops in my account or complete account blow up to force me to regain focus.
Every blow up I’ve had but one (CRDO this year) came as a result of adding to a loser. It’s so much easier to grow your account when you’re not climbing back from a hole, so if I could go back and drill one rule into my brain it would be to never add to a losing position.
Trying to be perfect and breaking one rule, feeling ashamed and breaking another and another until I fully spiralled. Don’t be perfect, just try to stop the bleeding after a mistake.
Post-Trade Analysis
This has been one of my main focuses this year.
My trading journal has been helpful since it takes a daily screenshot of all my account information, trading stats, and market metrics like new highs vs lows, market breadth, and industry performance.
Reviewing my thoughts and trades from the prior week during the weekend is a great way to come back to a trade after emotionally detaching from it. It allows you to objectively look at your decisions based on the market data you had at the time you were making them. Later on this year I hope to build out another part of the journal where you can document each individual trade in detail, but that’s still in construction now.
Most Common Mistakes Traders Make
Doubling down on losers
They see social media trading and think every trade has to be a winner, so when a position starts working against them it threatens their ego, eventually leading to doubling down thinking it “has” to bounce back our way.
This includes increasing market exposure while you’re actively in a downtrend on your account balance. It’s okay to be wrong, we all are, just be wrong small.
Copying others
Instead of taking the lessons other traders on Twitter are posting, they just see the ticker mentioned and think they can beat the market by buying those stocks. You are not the same person as the people you follow. You have different entry prices, different position sizing, different stops, and different portfolios.
This may work for stretches, but you won’t be consistent until you take ownership of your own trading. Learn from others but study those lessons before putting them into your own trading plan.
Expecting too much, too soon
Your goal the first three years of trading should be to learn as much as you can, not to make money.
It’s so frustrating the type of trading content that is pushed on social media (especially TikTok). All those hyped lifestyles are fake. If you’re following someone that doesn’t post their losses, or never mentions their mistakes, I would unfollow those people.
Creating unrealistic expectations will increase the volatility of your emotions early on. It’s ultimately the difference between our expected results and actual results that drive those final costly decisions that blow up an account. Trading is not easy, even for those who have been at it for years.
Overtrading
This is a problem I am working through right now, and it’s always been my trading weakness.
The best traders can size up on the true market leaders and hold those positions for large moves. Trading for small moves to build back confidence is one thing, but constantly trading every day hasn’t been where I’ve found the success.
My retirement accounts that have day trade limits have performed better than my margin account. I have mathematical evidence that trading less would be better for me, and it’s still a struggle for some reason.
Lacking market environment understanding
This is more of an intermediate step for traders who already have the basics down. But the main lesson I took away from 2021 was understanding where in the market cycle I should size up and when to scale back after the uptrend got extended.
In 2021 we had the entire market falling apart underneath the surface while the mega cap names (NVDA, TSLA, AAPL) grinding into new highs caused so much chop in the market that year.
Minervini won the US Investing Championship that year by mastering where the market was in its price cycle. I was too slow building exposure, so I was finally sizing up and getting fully invested right when the market was finishing it’s move and pulling back hard. It wasn’t until I started working for TraderLion in November to really learn about shorter term price cycles and timing your progressive exposure plan around them.
Not journaling
The BEST way to build a profitable trading system is to journal your experiences daily.
To build consistency you need to execute a plan, gather that data (win/loss, amount, etc), analyze it, make adjustments to the plan and repeat. If you don’t have a system to review your thoughts and actions (pre market, during market, post market) you’re leaving money on the table. That’s why I build the PIP Trading Journal and Market Dashboard. Taking a snapshot of each day with a market dashboard along with your trades and thoughts throughout the day is such an advantage if you’re trying to shorten your learning curve.
Top 5 Trading Rules
Protect against tail risk, always have a stop loss.
Never add to a loser.
Don’t let what happens in the market bleed into your personal life. If it is, size down or take a break.
It’s okay to be wrong, it’s not okay to stay wrong.
Your success is directly correlated with the amount of work you’re willing to do. Never stop improving, never give up!
Recent Trade Examples
First trade sold into strength, now re-bought after quick pullback to 8EMA on light volume. First buy was 20% of my account, second one 10%.
YPF 0.00%↑ Argentine Oil & Gas name that’s been on a monster run. Quickly broke to the upside from a launchpad setup on 6/2 (missed trade) and rallied 40% before flagging out to the 8EMA.
Argentine stocks have been quietly on a tear this year but when the price broke-down through the low after a day that had a shakeout with a strong close showed a true lack of bid and the stock dropped to the 21EMA.
PLTR 0.00%↑ - this chopped me up twice while I had large size 30% then 20% after two failures to catch bids at $15.50 area before a morning shakeout under $15 and the 21EMA before a big rally + strong close without me in it.
Check out other interviews with Oliver Kell, Brian Shannon, Tom Basso and more here: