Tips of the Trade
Trading Journal for: June 14
Just Making Markets
Once you’ve reached a certain level of experience trading the markets, there comes a point where playing quick counter-trend moves can be quite a lucrative strategy. However, you must remain cognizant of the fact that you’re playing against the Tape and set flexible profit expectations unless the Tape begins to confirm your short-term bias while in the trade. This is precisely what happened in a short I executed in RIMM this morning.
RIMM was one of the stocks I had on my watch list. My plan was to short it based on the Gap into Supply (resistance) as labeled by the 60 min chart. I primarily look at the 15-min chart, but for illustration purposes I am demonstrating this trade on the Hourly. I identified the 60.50-ish area as the high end of the resistance zone and was looking for a trigger on the smaller time frame to get me short. I was willing to scale into this trade with multiple lots all the way up to 60.50.
As you see from the 1-min chart below my entry trigger was hit and I shorted 3 lots at 60.29. My first target was the 8 ma, which was right around the “fig” at 60.00. RIMM actually traded down to 60.00 and bounced very quickly off the level. When RIMM made a second attempt down to 60.00, I covered half my position in the low 60.00’s. Then RIMM bounced again and I exited the rest of my position at 60.08.
I was through with RIMM for the moment and proceeded to trade some of the other stocks on my watch list. I took a long in QCOM around the 35.50 level and sold in the mid 35.70’s, for about a .25-cent gain. I was also nibbling on JPM around the 37.50 level, anticipating the Demand level to hold. I bought some shares in the low 37.40’s, but clearly was a little early in the play. I ended up exiting this trade for about a .04-cent gain as my focus was back on RIMM.
I noticed RIMM was back at 60.30 and ticking up to 60.40, staying in a .10-cent range. This was also the level from where I shorted the stock at the open. So, my thinking was “Trap”! If RIMM could break out of the early morning range, it could be poised for a move higher. So I watched the Tape closely. When I saw the amount of volume done on the Bid at 60.30, I hit the offer to get long at 60.38 for 3 lots. My entry was not the greatest, but nonetheless I was long some RIMM. I then watched the highs get taken out and it was “GO Time”, as RIMM pulled in some. When 60.40 held the Bid, I hammered the Offer at 60.48, as I had more confirmation for a greater up-move. From that point forward, it was off to the races. I took profits on the way up with the last few lots at 61.20 based off the 50% wipeout as seen on the 1-min chart below.
As you can see from the 15-min chart below — RIMM had been in a multi-day uptrend with the Higher Lows more prominent then the Higher Highs. For some traders, this is not a viable strategy because you are going against the trend – And that’s ok. Your odds for success and longevity in this business are trading with the trend. But, as I said before once you have acquired some trading experience and have a solid plan, taking counter-trend moves with reasonable expectations is just part of making markets.
I hope you have enjoyed this lesson/journal of my trading from this morning…
Best
David Guerrero
Trading Journal for: Fri June 11
The markets gapped down Friday morning setting up a lot of opportunities on the long side if you were patient. I personally had several stocks on my watch list and quite frankly, to many to focus on as many stocks from my universe (iFT 30) were gapping into Support. So I decided to focus on SNDK and X – I was also looking at RIMM, but I unfortunately missed the entry and RIMM never pulled-back to give me an entry.
Instead, I was keeping a close eye on SNDK as it began to sell off right from the open. In looking at the 15-min chart below you will notice my targeted buy zone was the Support area. I was essentially waiting for a few things to occur before I took a position. One, the “fig” holding at 43.00 – and Second, a buy Set-up in that general area. Ideally, I wanted the Set-up to occur as close to 42.50 as possible at which point I would have hammered the Bids and Offer, but as you can see from the chart that didn’t happen.
So, I bought one lot at 42.96 after closely observing the action on the Tape and the BT that was developing on the 1-min chart (not shown). Once SNDK traded back through 43.00 I bought another lot at 43.05 in hopes that 43.00 was going to hold. As SNDK broke 43.00 again I needed more Bullish confirmation before adding more shares. When 42.81 held, which was the high end of my Support area, I put some bids out at 42.92, which I was filled on. I then bought one more lot at 43.09. With a very nice average price in place, I took profits on most of my position in the .20’s.
________________________________________________________________________________________
My next trade was in X. As X blasted through 43.25, I instantly focused on its price action and waited for a pullback to the level. Unfortunately, like RIMM that didn’t happen, so I watched the next major Supply level, which was right around 43.80 – 43.90 (not shown on this chart). When X began to consolidate in that area (see 2 min chart below), I began to really focus in on its price action as I was now getting Bullish confirmation of further upside potential. The reason for this was the consolidation that was developing at the prior Supply area. This told me the Supply imbalance that was present on the chart wasn’t strong enough to sustain the amount of Demand at the given level.
I bought one lot at 44.07 and the bulk of my position in the high .80’s, which was the prior Supply level. I took off a portion of my position in front of “the Fig” (44.00), because I wasn’t seeing the type of move I wanted to occur. So, I basically took some profits to remove some risk from the trade.
As you can see from my Trade Manager, I traded “in and out” of the trade, resulting in a decent scalp.
Have a good weekend
David Guerrero
Trading Journal for Thursday June 10
This trading journal is for Thursday. I wasn’t able to post it yesterday, but here it is. I will be posing my trading journal for today (Friday) later this evening.
As I was going through my morning routine to identify the levels in the stocks I was going to focus on, I came across my two favorite stocks – RIMM and X. In looking at the 15-min chart of RIMM, I identified the 57.25 to 57.50-ish level as my targeted buy zone. But, because we were gapping closer to Resistance (Supply), I was not interested in buying RIMM at the open. I either needed to see RIMM blast through the Supply area and then pullback and give me a Buy Set-up, or it needed to come down to my price of 57.25 – 57.50.
As you can see from the charts, RIMM did in fact sell off at the open from the Supply area I highlighted, into the Demand level. So, I began my position with 3 lots at 57.45. RIMM continued to trade lower and I Bidded for 2 more lots at 57.32, which I was able to get filled on. This brought my average cost down to 57.40. My first target was a 50% retracement of the morning down move, which was right around 58.00. I sold a 1/4 at 57.92 and another 1/4 at 57.98. I wanted to hold the back half to 58.50 – the Supply area, but trailed out at 57.81 based on what I was observing on the tape. Nonetheless, a nice chop!!!
_____________________________________________________________________________________
X on the other hand was a little bit more of an advanced play, due to the risk involved. If you look at the 15-min chart above, you will notice I drew in my demand level (green dotted line). This was basically the area from where X began its self-off the prior day, so I was anticipating that level to become a new Support (demand) level. “A change in Polarity if you follow Steve Nison”. Therefore, I placed some bids in the .60’s and got filled as you can see from my trade manager. As X began to bounce off the level, I proceeded to hit the offer pretty aggressively on the way up. Knowing 43.00 was going to be a focal area; I began to offer some lots at 42.97 -42.96 and began to hit the bid at .94 down to .88, when I noticed the offer was holding at the whole number. I kept about 1/3 of my position and exited in the low 43’s.
My target on this trade was much higher. I was looking at 43.25 and it was one of the reasons I was hitting it aggressively. But in trading we have to constantly make decisions that may or may not change the scenario for the given trade.
As another week goes into the record books. I am very pleased with my trading this week. I have had really nice trades, which have increased my confidence in my trading quite a bit. My plan for next week is to keep my *confidence in check* and not allow it to get the best of my. I will also take a few more trades before increasing my average share size to further capitalize on my strategy.
Good Trading
David Guerrero
Discipline – A long term focus on our goals!
I wanted to re-post this terrific article I found on Discipline on my quest for finding pertinent information to trading. As we know trading is an endeavor of Self-Discovery. It is a Highly-Competitive performance based business, which only rewards the mentally strong. Therefore, to improve and become elite performers, we must work on ourselves.
Our Goals – Our Plan – Our Process to achieve our dreams!
I have linked this image to its original root. So if you want to give any credit to the author of this article please refer to this post. You will also find a lot of valuable “non-trading” related information, but very applicable to our success as individuals.
http://www.eruptingmind.com/cultivating-trait-self-discipline/
Enjoy
David
Trading Journal for June 4
With the markets gapping down below yesterdays major demand level (Support), my bias was to the short side, but I needed to wait for an opportunity to present itself. What opportunity you might ask? A rally into yesterdays demand level. The reason for this is the simple concept of; “Once Support is broken, it becomes Resistance”, unless proven otherwise. In the examples below you will see the two trades I took, which are my “Bread and Butter plays” and I will demonstrate how I combine important technical levels with reading the Tape.
The first trade I took was in RIMM. It was a long based off the 60.00 handle holding. Unfortunately, I didn’t execute this trade the way I would have liked and actually resulted in a higher risk trade. My plan was to buy RIMM on a pullback to 60.00 after the initial run it made from the open. Unfortunately, RIMM didn’t provide me the ideal opportunity, so I hit the Offer for 1 lot at 60.30. I added 2 more lots on the way up and sold out of the entire position in the .70’s for a nice scalp to start the day.
I’ll admit this trade could have been managed differently for a much larger gain, but I allowed my perception of the morning bearishness get the best of me. I also wasn’t carrying a lot of size to begin with and I think this messed with my head because of the potential downside risk, which was down to 60.00. ____________________________________________________________________________________
The second trade I took was a Scalp short in X. As you can see from the 15-min chart 44.00 was the level I was focused on. Why? Because the 44.00 handle was a level where Demand exceeded Supply. How do we know that? Well, look at the advancement in Price that emerged when X touched 44.00. So when X gapped below the level (44.00), it absorbed all of that prior demand as traders were caught exiting their positions (longs) in essence causing the bounce in X at the open. When 44.00 was tested I became interested for an opportunity to test X to the short side. However, I needed to wait for further confirmation by closely observing the Tape and my trigger to take place, which is a Sell Set-up on the chart near 44.00.
As you can see from the charts the shift from Prior demand to New supply was pretty evident. When 44.00 failed to hold the Bid, I hit the Bid for two lots and got filled at 43.98. I noticed 43.90 was holding the Bid, so I covered one of my lots based on this information. My “Out” for my last lot was at 44.09 in case I was wrong. When X finally cracked 43.90, I hit the Bid again for another lot and covered my entire position down in the .50’s for a nice Chop!
The reasons for my exit were two fold. One, the markets were basing near the highs of the day and the last thing I wanted was to give back a nice profit in X. In addition, the Tape was holding 43.50 — So at that particular moment X was showing signs of a potential bottom. Second, I was planning on trading lightly today since I had to be finished trading by 7:00 am PST. Therefore, I had to be flexible with my expectations and take what the market gave me.
Enjoy your weekend and good luck trading!
David
Having a Process
Identifying a strong or weak stock early in the day (preferably at the open) can be an integral part of a traders success. The challenge however, falls upon the traders ability to trust his/her analysis and having a detailed plan for the specific trade ideas found early in the morning. One way to do this is to have separate targeted watch lists. They can be as simple as; “Bullish watch” and “Bearish watch”. The objective is to have your best trading ideas, long and short at your immediate disposal so you can refer to them frequently. The second challenge is not losing focus of your plan and succumbing to the many distractions we are faced with once the market opens. One of the solutions I can offer is to give yourself plenty of time in the morning, so you can conduct your research with a clear head and have plenty of time to create a larger watch list of stocks. I think one of the reasons we might lose focus once the market opens is due to not having enough stocks (trading ideas) to focus on, so we tend to go out on a mission to find plays, instead of waiting for them to come to us.
In the example below, we can see US Steel Corp (X) was a picture perfect trade for the prepared and patient trader. It could have easily been placed on a “Bullish watch list” based off its gap and monitored every 5 minutes or so. Once we get through the first 15 – 30 minutes of the trading day we can start to weed out the “Bad Apples” of our watch lists and focus on the higher quality (Relative Strength and Weakness) stocks.
The thing(s) to notice in X were:
It gapped into supply (note the 5-min chart), but failed to come off this level not even filling a partial of its gap. This tells us the amount of Supply that was at the current level was absorbed by an over flux of demand.
- We grinded higher after price was finally able to stabilize above – what was prior Supply (resistance).
- Once we hit the secondary Supply level, it was time to monitor the pullback.
As you can see we got our first pullback at area 1 (see chart) and coincidentally at the rising 20 ma, which also falls in line with Minor Support. We could have easily taken this buy set-up and sold a portion of our position near the prior high and waited for the next buy set-up to add to the trade. As you can see we got a secondary entry at area 2 and the upside at that point, well, you can see by the chart.
If you find yourself losing focus of your trading ideas throughout the day, try the “Watchlist” suggestion. You would be surprised how much structure you can add to your trading. Just make sure you stay focused on the process. There is nothing wrong with adding or deleting stocks throughout the day of your “targeted watch lists” once there patterns no longer meet your criteria.
David | davidguerrero@architrader.net
A Supply and Demand lesson
Identifying when a former Strong Demand level
The first step in identifying whether a prior demand level has lost, or is in the process of relinquishing it to the sellers is to identify the prior demand level (s). In this case we have to levels of interest; A) Shows a strong thrust higher from 41.00 to 42.50-ish after a consolidation. We then came off the highs and revisited the prior demand level, which briefly broke through the 41.00 level, only to close with a strong 15 min BT (B). The buyers stepped in and absorbed all the demand and squeezing some shorts along the way.
We can see we had a clear Supply and Demand imbalance at the 41 level, evident by the secondary move off this level to a higher high. But was this truly a strong demand level? In my opinion (IMO), there were a few red flags that put me on watch for a failure of the 41.00 handle. The first clue was the lack of support, or lack of follow through for that matter at areas C and D. IMO, if the commitment of traders at the 41.00 handle was real, area’s C and D would have been a good level for the buyers to step in and hold the stock higher.
This type of price action is not what we are looking for in a Bullish scenario. We want to see Higher Highs and Higher Lows with strong price advancements off the Higher lows.
_________________________________________________________________________________________
The second step is to zoom your focus down to a smaller time frame. I like to use the 5-min chart. It not only serves as my execution time frame, but it also allows me to key in on additional levels of Supply and Demand.
Here we can see the 41.75 level (denoted by the circles) had some willing buyers, as they were able to lift the stock for some pretty nice moves, relative to its time frame. We held the level twice in a very similar fashion to the 15-min timeframe did. However, and what must always raise a question when we are validating a strong Supply or Demand level is the number of times the handle gets tested. As a good rule of thumb, two times should be adequate. Any more than that and the level begins to lose its strength, because the commitment of traders at the Support or Resistance level in question, absorb the imbalance causing a shift in Supply and Demand.
In the example below, we see the stock failed to provide the type of a move it did the prior two times. But, not only did it fail to follow through, you can see the difference in the candle bodies off this level. The prior two times, you can see the candles were solid powerful candle bodies, closing at the highs of the session. But, at (E) we can see the notable difference with the tails that were produced at the close of those bars. The final give away was the Lower Low (LL) that was produced and the subsequent break of 41.75.
Once we have gathered the information for a given level, its time to wait for the trade to set-up and strike when the opportunity develops. The following morning we can see SNDK gapped down and traded strongly off the open. I’m sure many traders were going long SNDK based off the appearance of strength of the first 5-min bar. But, if you can learn to objectively quantify the Supply and Demand relationship for a stocks level (s), you will not fall for the conventional methods taught in most books and so-called trading gurus.
At first, this process may seem quite lengthy, but once you get the few basic steps down, it will become second nature. Most importantly, the benefits you will receive will be worth the effort you put into this process as the only thing worth quantifying is price.
DAS Hot Key Tutorial
This Video Tutorial on programming Hot Keys for the Das platform is no longer available. It has been moved to: http://www.architrader.net/das_tutorial/das_tutorial.html
Email | davidguerrero@architrader.net
Posts of the Week for March 1, 2010
The Last Frontier: Secular Bear Market to make final press in 2011-2013
By: Lee Vecchione
http://blog.t3live.com/2010/03/last-frontier-secular-bear-market-to_01.html
Considerations for Your Trading Journal
By: Dr. Brett Steenbarger
http://traderfeed.blogspot.com/2010/03/considerations-for-your-trading-journal.html
Trading Journals: What Format is Right for Me?
By: Dr. Brett Steenbarger
http://traderfeed.blogspot.com/2010/02/trading-journals-what-format-is-right.html
What to do when markets are in a range??
By: Keystone Trading Group
http://keystonetrading.wordpress.com/2010/02/28/what-to-do-when-markets-are-in-a-range/
The Essentials of Documenting Your Trades: Thought Journal/Trade Journal
By: Dr. M. Woodruff (“Woody”) Johnson
http://www.tradingacademy.com/lessons/20100302/specialtyskills_article.htm
Structural Changes in US Equity Markets
By: Brandon Rowley
http://blog.t3live.com/2010/03/structural-changes-in-us-equity-markets.html
Blog Posts of the Week
Wake Up and Smell the Horns
By: Oliver Velez
http://blog.olivervelez.com/2010/01/wake-up-and-smell-thorns.html
New Strategies
By: Scott Redler
http://blog.t3live.com/2010/01/new-strategies.html
Give Yourself a Trading Edge Through the Use of Anchors
By: Dr. M. Woodruff (“Woody”) Johnson
http://www.tradingacademy.com/lessons/20100126/specialtyskills_article.htm
A Technique for Defusing Trading Stress and Anxiety
By: Brett Steenbarger
http://traderfeed.blogspot.com/2010/01/technique-for-defusing-trading-stress.html
Good Trading
David Guerrero
Active Trader 2011 – July Issue
Click the image below for my December 2009 Interview
