As for my previous post, as strongly as I felt about buying dips, the action on Monday and subsequently, Tuesday, has me a little worried. The market broke out to new highs briefly Monday morning and was smacked down the rest of the day. On Tuesday, the market continued with its weakness. Now, the market has done this before, where it was sold down to its range without much fervor. The difference this time, however, was that what happened in November and December were mostly a low volume moves to the bottom of its range. Volume has increased slightly this time and, as you can see from the charts above, this would be the third time the indexes would touch this level. The more times a stock/etf touches a certain price, the more likely that it would fail to hold that price (SPY 113.20s, QQQQ 45.75s). Another factor to keep in mind is that the Nasdaq has been the stronger index to lead us out of the March lows, but has reacted much weaker on Monday and Tuesday. Of course, all this means nothing without a "follow-through day," which would be a day in which the indexes would trade beneath the bottom of the range (the prices I've stated above) with high volume. If we are not presented with such a day, I would have to assume that the market is still in an incredibly boring range, slow uptrend move. As of now, I am still looking for buying opportunities until this said follow-through day comes to fruition.
Now let me show you a great trade gone wrong for me and how important it is to have stops even if you believe that you have an incredible risk to reward scenario.
Here is the entry in my trading journal about this trade. A trading journal is a journal where you write down your thought processes, your executions, your result and any other factors that affected your trade. The stock is ARST, a thinly traded cyber security stock, and my reasoning for getting long the stock was two-fold: 1. Because of the Nasdaq's overall strength at the beginning of this year and 2. Because of the cup and handle pattern ARST was exhibiting.
- I paid for 1,500 shares above 26, but could barely get any more because of the light volume. It quickly traded up to 26.75, which is the high of the pivot, and once it broke through, a buy program bought the stock all the way up for 1 point. The next logical area to add was the intraday high and tight flag at 27.75. Then for the next few days, the stock never broke below 28, a logical support area from the breakout day. I added mostly in the .20s, for fear that it would not retrace back to 28. Also, it should be noted volume in the pullback was at most 30% of the volume on the upmove, a strong sign of traders holding onto their positions. On Thursday, the stock seemed to have broken out of its Landry-type pullback with a buy program on in the morning but failed to sustain any upmove and retraced all the way to 28, which should have been my area to buy. Instead, I bought in the morning around .60s and was too gun-shy to buy more in the afternoon. Lo and behold, the day after, the strong buy program was put on in the afternoon but could not test the high of 29.20s. All was well after the Friday close, and then the market started to roll over on Monday, after briefly breaking to new highs but sold off the rest of the day. The stock then supported again in the .20s but continued selling the next day ruined the play as it broke below 28, 27.75 and even 26.50, the original pivot point. Stops at 28 was the correct move, and not selling into the upmove on Friday was also a correct move, for if the market did not roll over, the risk reward being long at 28 was incredible. This is a great example of how a great set-up can even go awry.
Don't worry yourself over the jargon you might not understand. More importantly, for those who want to become traders, the trading journal is the least you can do to follow-up on your trades that either work or do not work. It's a powerful record keeping tool and is a great way to review your thought process and reasonings, which is MORE important than your actual results of the trade.
Feel free to post comments, I will respond and appreciate every one. Also, if you would like me to discuss a certain topic in my next post, post it in the comment section as well. Until then, never leave home without a stop-loss.
Hey Henry, I know you said to not worry about the jargon, but in order to fully understand some of the intricate parts of your post, I wanted to get some clarification on a few terms.
ReplyDelete1. "It quickly traded up to 26.75, which is the high of the pivot, and once it broke through, a buy program bought the stock all the way up for 1 point."
In that quote, what exactly do you mean by a buy program bought the stock all the way up for 1 point?
2. "The next logical area to add was the intraday high and tight flag at 27.75"
What's a tight flag?
3. What's a Landy-type pullback?
Hey Steve,
ReplyDeleteFor #1, a buy program is trader jargon for a stock being bought up. You can see it from the bids and the offers being exchanged, in this case, the offers being paid higher. In this case, the stock literally went up 1 point in 1 second, since it is a thin stock, thin being not many shares exchanged.
#2. A tight flag is a technical pattern. Basically, it requires the stock to have a big upmove, in this case, 1 point, and still be bought at that higher price. This is a very strong technical pattern that makes sense psychologically: after a strong upmove and continued buying at that high price, the stock is exhibiting extreme strength, which traders can take advantage of.
#3. I named it a Landry-type pullback after Dave Landry, a great, current technical trader. A pullback is just a move in the opposite direction of the overall trend, in this case, a downmove in an uptrending stock. A pullback is the "cheaper" alternative for trend traders to enter into the stock.