Trade Management
Facebook (FB) ‘unliked’ 
Well the most talked about = “talked up” IPO at least in the last decade was a complete flop, at least for today. It closed near the dead lows of the day, which was slightly above the offering price of 38.00. Not a very impressive first day of trading by any means if you were expecting to retire if you bought the stock today. Actually, if you bought into the hype (I hope you didn’t) and paid for FB at the open – You are probably not feeling so good at this point. This is not to say you made a horrible investment and you should sell your position. It could very well rip to the upside on Monday, but only time will tell. My viewpoint is strictly on a short term basis and nothing else. So with that said. Were there opportunities to trade FB on intra-day basis and make some money today? Absolutely…
The first opportunity came when FB bounced off 38.00 and consolidated at 40.00 for a couple of minutes (see chart below). This was a good place to start with a Tier 1 position size and place a stop below 39.50. The target would have been the next resistance, which is near 42.00 where all those nasty tails are located to the left of the chart. Tier 2 and 3 would have been added as denoted on the 2 min chart below. Since volume and speed was very high on FB today, you have to give it a little more room. That’s why if I am adding at Tier 3 I am giving it .20 cents of wiggle room. Otherwise, on any normal trading stock I would give it maybe .05 or .10 cents.
The last opportunity came when FB broke 40.00. This was actually when the Risk/Reward was most favorable, assuming you could get shares to short. A short below 40.00 with a stop above 40.35 (the two min pivot high) would have offered a very nice reward on just a .35 cent risk.
Expectations for next week….
If FB could get above 42.00 and hold, then we should see some fresh buying come into the stock and push it higher. But if FB trades below 38.00 and holds, then expect to see lower prices. Anything between these two levels will just be noise, so I would stay away…
These examples are for education purposes only. No trades were taken in FB today…
“Fade” Friday…
Successful trading boils down to two things. A simplistic approach easy enough for an 8 year old to understand. And two, a method focused on minimizing risk while ensuring maximum profit is extracted from the trade.
Friday morning the SPY was gapping to fresh highs for the year with plenty of other leaders gapping to Supply levels. I had a watch list compiled to focus on at the open and Arcelor Mittal (MT) was one of them on my list to short. MT was a stock that had an extended run on the 60 min (chart not shown) the day before and was gapping into an area of Supply (see 15 min chart below). Therefore, this made MT a viable candidate to fade short at the open on the first sign of weakness.
I split my position in pieces since I was entering on a very short term timeframe, but with the bias of the longer term charts. Here is how the trade broke down…
Trade of the Day
I’m a momentum trader. I look for plays that are going to follow through instantly, or else I don’t bother. Most importantly, I look for plays that are going to offer me a minimum 3 times my initial risk. That’s not to say I won’t take trades that offer less, but I focus most of my attention on waiting for the plays that are going to offer me the highest reward.
Today I took one trade at the open that made my day. It was a long in FAZ which yielded me over 6 times my initial risk amount. For this particular trade I had a dollar stop and / or a break below 44.00, which ever came first and a wide open target. I was only focused on managing my risk and adding to the position as it moved in my favor. I knew I had to be real careful with the “adds” to keep my average cost low enough to compensate for the volatile nature of the way FAZ trades. IMO, I was too conservative and should have been more aggressive near the whole at 44.00 where I only picked up one lot.
Obviously, not all trades work out quite this way. That’s why it’s important to follow your strategy for picking and managing your trades consistently. Because over time, you are going to get the handful of trades that are going to run and reward you for your efforts!
Good Trading
David
Trade of the Day
Today’s trade of the day was a short in GILD. It was a stock that was not on my watch list because I never trade GILD. I prefer to exclude it from my list of stocks to trade. However, I was not finding much in my basket of stocks as I was scanning through my list – when GILD popped up. In looking at the 30-min chart below – It was time to give this stock a chance to make me some money. At the time I saw this stock trading, it was printing below the 37.50 level which would confirm the transition to a Stage 4 downtrend. It still needed to close below the level to officially call it a successful transition, but with the market as weak as it was and the lower high in GILD within the Stage 3 Phase, I was willing to take a stab once the lower time frame confirmed the weakness. For this trade I used the 2-min chart on the break of 37.40, which would resume the downtrend (stage 4) on the smaller time frame.
My first target was at 37.00 and I stacked my orders beginning at 37.07 with most of my lots at 37.01. The balance was covered on a BRB trail off the 2-min.
As you can see from my trade manager I also took a short in COST, which stopped out for a 2 cent loss. With a nice gain in GILD, I was not willing to give back my profits so I killed the trade early.
Staging the Market
Hello fellow traders,
It’s been a while since I’ve updated my Blog and I thought I’d post an educational piece on Stage alignment. This has been a topic of discussion in prior posts and I would like to rehash this simple, yet powerful concept I use for trading the markets.
First, what is Stage alignment? Stage alignment is taking the market on any timeframe and categorizing it into one of four phases. Accumulation (Stage 1), The Uptrend (Stage 2), The Distribution phase (Stage 3) and the Downtrend (Stage 4). How a trader goes about categorizing the market can be somewhat subjective, but with a basic understanding of Supply and Demand and Candlestick analysis – One can get a firm belief on what the market will likely do next and make a objective decision to establish a position.
So, how do we determine what stage the market is in and how do we use this information to gain an edge in the market? The first step is to understand what each Stage represents.
Stage 1 – Is referred to as the Accumulation Phase. It’s usually an extended period of a tight consolidation. The Moving Averages are sideways and volume is normally light until the end of this Phase. Volume usually increases as the MA’s begin to curl up and the transition to Stage 2 is complete – I refer to this period as Stage 1-3. It’s only when the market breaks out of Stage 1 to make a new high – Pullbacks to make a higher low and resumes the uptrend to take out the most recent high that Stage 2 is officially in place. Than other market participants begin to take notice and help fuel the stock / market higher.
Note: Stage 1 always comes at the end of a Stage 4
Stage 2 – Is referred to as the Uptrend or the Mark up. It’s a period of higher highs and higher lows. The Moving Averages are rising in an orderly fashion and containing price as the market reverts back to the mean.
Note: Stage 2 always comes after a Stage 1 and sometimes resumes the trend after a Stage 3 consolidation
Stage 3 – Is referred to as the Distribution Phase. This phase can be a bit tricky because if one gets to anxious and jumps the gun prematurely, they can be stepping into a secondary accumulation phase. But for the sake of its true definition – It’s a period of choppiness. The market usually trades in a wide range with relatively equal highs and equal lows. The Moving Averages begin to go flat and curl over. Confirmation of a Stage 3 Distribution Phase comes when the stock or market breaks the low end of the range and closes below the range.
Note: If the market consolidates through time in a Stage 3 and fails to break to the downside. Be extra cautious as this might be a momentary pause as the buyers accumulate more stock and get ready to push the stock to higher ground. I like to refer to this a subset of a Stage 3 and I call it a Stage 3-1
Stage 4 – Is referred to as the Downtrend. It’s a period of lower lows and lower highs. The Moving Averages are declining in an orderly fashion and containing the market with each retracement to the averages.
Note: Stage 4 always comes after a Stage 3 Distribution Phase
Now that we have a basic understanding of what each Phase represents and what it looks like on the charts. It’s time to apply this information to formulate a plan. The first thing I like to do is look at a longer term intra-day chart and my trading time frame chart (5 min). I use three moving averages – an 8, 20 and 200 ma. I like to look at several days of prior price action so I can bracket the market like I did in the example below. This is a 15 min chart of X and we can see that X found quite a bit of demand as it dropped to the 200 ma, evident by the uptrend that followed. As you can see when X broke the up trendline – It began to trade in a sideways range. In this example we can clearly see this was indeed a Stage 3. Now, you might make the argument that we are looking at past information and I am using a trade example from a hindsight perspective. And you would be correct, but that is exactly what we are doing when we trade off longer term timeframes. We are waiting for the completion of a 15, 30 or 60 min bar to print and using the close of those bars to interpret their messages and using that information to enter our trades once the shorter term timeframes confirm our long term bias.
Let’s look at the example of X below and break the trade down as if we were trading live. At point A just as X was coming off new highs for the day we were still in a Stage 2 uptrend. At this point you can either stand aside and wait for a buy setup on this timeframe, if you only use one timeframe to trade, or you can take a long on a shorter term time frame at a) Stage 1-3 transition or b) In a Stage 2 uptrend. The latter is my preference as the odds are increased by combining multiple timeframes. Looking back at our example chart we see that a buy setup formed at area B. This would be the perfect time to initiate a new position or add to your existing position as you are still in a Stage 2 uptrend and there is no reason to think otherwise. Your expectation is for X to take out the most recent high and resume its trend. However, at C we get a lower high, which to me signals a red flag. At this point it is wise to take profits or scale your exiting position back to minimize risk. At this point X begins Stage 3 and trading during this phase should be halted or minimized with very specific actions.
In this example the lower high tells me that Supply is greater than Demand and I can make this assessment because the lack of demand failed to push prices higher. So, it’s at that point that my bias begins to favor the short side and I begin to look for Stage 3 Breakdowns and or / Stage 4 downtrends on the smaller time frame.
Further confirmation came when X broke the Pivot low at B and closed below the range. Half the time you will probably miss the market / stock as it’s transitioning, unless you only watch one stock the entire day. But, that’s not to say you have missed the move completely. If you focus on the longer term time frames there is plenty of potential up or down. In this example, you could have waited till the next day after the breakdown occurred to make a really nice trade.
You can see X gapped down on the day of the 14th. X continues to sell off from the prior day, but I am not looking to get short just yet. I need a valid reason to enter. Either a 5 min sell setup at or near the declining moving averages while still in a Stage 4 downtrend on the 5 min chart, or a Stage 3 breakdown on the 5 min chart. As you can see the opportunity comes with the 5 min Sell setup. Textbook management is to exit the trade once the Stage 4 downtrend is broken which comes at point A.
I hope you found this example helpful and you can take something from it to add to your trading plan.
Have a good trading week!
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
Having a Plan and Sticking to it!
Trading in its RAW form is about ACCEPTING the outcome of any given trade and having RULES in place to approach the market and its environment. Once you are able to do that on a consistent basis, meaning; the amount of money you are willing to risk doesn’t cause you to lose focus of the rules you have identified in your plan, or getting stopped out on an adjusted trail stop and then watching the trade soar in your desired direction or whatever other experience that might be, then and only then will your progress as a trader be closer towards “Trading Mastery”!
I started out the day with a winner good for about a 1 R gain (1:1 Risk/Reward). The following three trades resulted in losses and I was now down a little over 2 R’s for the day. As the morning chugged along, I kept my eye on the SKF since I felt strongly of a move higher. Nonetheless, I had to pay attention to one of the most important elements of my Trading Plan – Focus and Patience! My threshold is about 3 – 5 consecutive losses. Experience has taught me this is exactly when I need to be the most focused in following the rules in my Trading Plan and having the Patience for the market to come to me. see trade manager below…
As I saw the SKF attack the prior lows (see candle A) and fail, I needed further confirmation before taking the play. What I wanted to see was another Higher Low preceding candle A and follow through of a Prior Bars High. That is exactly what the SKF did and I took the trade.
My management for the trade entailed trailing the price on a 2 min Bar by Bar up until the general area of my target, which was half a Gap fill. As this ETF got close to my target I exited on a 55% of the prior Bullish WRB (Wide Range Bar) and the trade yielded 3.5 R’s of profit.
Good Trading all!
David Guerrero
Active Trader 2011 – July Issue
Click the image below for my December 2009 Interview
