All Entries Tagged With: "Reversals"
Premature Evacuation from Trades
May 23, 2011 at 10:10 am
All of us have the occasional urge to jump ship early from a trade, but when is it the right time and how should that be done?
Let’s take a look at a conversation I recently had with a trader I was helping…
Hey Jeff,
I’m long ***, as it just looked like a nice setup. I went long 4 days ago, but it is behaving horribly. Currently I don’t see any pattern and would not make this trade now, but it is only halfway to my stop loss. I am unsure what to do. How do you approach trades you aren’t convinced of anymore, but have not been stopped out of?
Also, one of the mantras I read often is “cut losses short, let winners ride.” I am wondering how to interpret this “cut losses?” I find myself thinking, “I am not convinced in this trade anymore, but maybe it will turn around, it’s just half a position left to lose.” When my analysis of the situation shifts, and I wouldn’t take this trade anymore as of today, do I abandon my original plan and exit immediately or should I stay with the trade?
C.
==
Here’s what I told him…
C,
Let me start off by addressing the “cut losses short” question. I don’t have all the answers, but I can tell you that for me, cutting losses means having an exit plan on the downside with defined risks. We will all be wrong at times, but staying wrong is different – don’t stay wrong! Limit your losses so that they can be overcome with reasonable winning trades. Don’t dig a hole so deep you need a miracle to get out – that’s cutting your losses short.
Now let’s discuss early exits on trades like this where your conviction level has changed…
Occasionally you’ll find trades like this which don’t completely fail (stop you out), yet don’t work either (move to your targets). Instead, they just begin to stagnate and enter into a trading range where your funds are tied up. It can be a bit frustrating, simply because you’re left in limbo, wondering if the trade is in the process of failing or working. Each new red or green bar feels like the start of something meaningful, but they’re followed by the opposing color and you soon realize that price is simply showing indecision.
A key consideration to make when this happens is whether the character of the stock has changed. Stated otherwise, do you have a good reason to now lack conviction, or is it merely a mood shift for you?
A slow-moving trade is far different than one which may have just experienced an important technical event…
- Just because a trade isn’t developing quite as quickly as you would have wanted doesn’t mean it’s destined for failure.
- The stock may be building a new pattern which you simply haven’t identified yet.
- When I find myself in a trade which is starting to bore me, I know I’m overanalyzing when I start looking for signals which aren’t there.
- If I’m positioned in accordance with the overall market (ie: long in a market uptrend), and if my trading capacity isn’t restricted because of this position (I don’t need to free up capital), then what I need to do is stay with the trade until a technical reason prompts an exit. I likely need to stay patient, as this is still a trade which can pay me.
On the other hand, there are times when a premature exit may be warranted…
- When the stock has just seen a change in character as measured by a technical event (high-volume reversal, for example), an adjustment may be called for.
- If your trading funds are limited and you’d rather shift into a better idea, then you might consider closing out the trade in favor of another with more promise.
- When you find yourself positioned in opposition to the prevailing market trend (ie: long in a market downtrend), then you have grounds to at least lighten up. That can be done either by reducing your position while maintaining your original stop & target parameters for the trade, or by tightening both your risk and objective.
What else could help C. in this situation?
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Are you following me on Twitter yet?
Dealing with the Pop and Drop Trade
May 17, 2011 at 1:43 pm
This question came in from a fellow Bandit recently, and I wanted to share it (and my response back to him) with you here…
Question:
Jeff, what’s the lesson to be learned from this today. One trade I was watching (***) moved past 13.45 in a hurry this morning. By the time a trade could be executed it was already up in the 13.60s, got up as high as 13.74 and then dropped like a rock back down to where it started the day. All of it happened in about an hour. I’m thinking it would have been better to leave this one alone today. Thoughts? B
Answer:
That one did shoot quickly past the trend line, and anytime that’s the case I try to lighten up into the move. The sharper the moves tend to be, the more prone to reversal they are. So while it’s nice to see a big fast favorable move, at the same time it’s imperative to recognize that it may not last long and to use that strength to book some profits.
Another thing I’d add is that anytime you happen to get a bad fill on your order (in this case 13.60 as you mentioned when you wanted 13.45, it’s important to recognize that the risk/reward profile of the trade has just changed. You might have intended to exit around 13.30, or just about 1% from your entry, but a higher-than-intended entry necessitates raising your stop aggressively in order to offset the late buy. Otherwise, your stop is simply too far down and the risk/reward is no longer as favorable as your original plan for the trade.
The idea is to keep managing risk, keep managing risk, keep managing risk when day trading. Sometimes you get ‘slipped’ on an order like that and end up with a later-than-intended entry, so when you do, either keep a tight stop beneath it or trail it behind the trade aggressively so as to either exit with a minimal loss or book a little gain. If the trade doesn’t unfold as planned, look for the next-best alternative, which is getting out about flat or slightly better if possible.
Sometimes as you said, hindsight will show stocks which may have been better left alone, but on the fly we can still manage the situation well with some good habits.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Are you following me on Twitter yet?
4 Reasons to Be in Cash This Weekend
February 24, 2011 at 6:04 pm
Last week, I closed out a few swing trades and shifted to cash. I’m glad. I’ve day traded and it’s been a good week, and I didn’t need to roll the dice overnight in order to turn a profit.
Heading into Friday, I think there are 4 good reasons to remain in cash over the weekend:
1. Busted Patterns. Simply put, right now for most stocks it’s too late to short (for the initial selloff anyway), and it’s too early to go long. For me, the smaller the pattern, the shorter the timeframe for the trade I’ll take from that pattern. With this week’s sudden shift of direction and the intensity of this initial pullback, whatever had been looking bullish (sans energy) now isn’t, and whatever had been looking bearish has cracked like the Liberty bell. Most patterns out there are 3-bar setups, which means I’ll day trade them if they confirm but otherwise will allow them to mature further (read: sit on your hands and wait).
2. Added Uncertainty. Heading into a 3-night, 2-day stay in the heart of Uncertaintyville isn’t great for capital preservation. Holding overnight always involves uncertainty, but when we’re in an environment which is so sensitive to geopolitical events in the Middle East, it has more of an earnings announcement feel to it. One of my trading rules dictates that I avoid holding positions into earnings since I have no edge, and because it makes risk management so difficult impossible. Right now, gap risk is running higher, so when the setups aren’t there (see #1 above), why hold overnight?
3. Change of Character. Every dip has been bought…until this week, which is to say the landscape has shifted a bit. That’s not bad, and it doesn’t mean the bull market is over. What it means is that the multi-hour pullback has been stretched into at least 1 multi-day pullback. We’re getting more back-and-forth, which is more commonly associated with a trading range than a trend. The market’s taking a much-deserved breather here at the very least, and we need to respect that.
4. Better potential ahead. There are a few setups I’m watching for Friday’s session, but the truth is that I expect much better opportunity to surface next week when it comes to swing trading. A couple of bars go a long way when patterns are developing, and right now that’s just what many stocks need. I expect we’ll see that take place next week, so I’d rather have the peace of mind and lack of risk than to fret over the weekend about what a potentially hurtful gap would mean.
Once the dust settles ‘over there,’ we’ll have some better patterns and spots to pick and choose from. And the good news is that volatility is increasing, which means more movement anyway – always a great thing for short-term traders like you and me. So enjoy your weekend and rest up, next week is sure to be another interesting one and we’re going to need to show up ready!
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Are you following me on Twitter yet?
Uptrend Aside, Trading Scene Set to Improve
November 1, 2010 at 10:45 am
August seems so long ago, doesn’t it? Stocks had rebounded from their July lows, briefly, and had turned back down hard for a test. The test passed, as an important higher low was established.
From there, we all know the story of how the seasonally-weak September and October stood conventional wisdom on its head to post big gains. What’s not been spoken of much, however, is the way this 2-month rally has changed in recent weeks.
What began as a rip-roaring rise ripe with short-covering has evolved into a slower, more steady uptrend channel. The pace has cooled off a bit, while still continuing to make upward progress. In fact, new intraday highs were posted multiple times last week, despite the indecision we saw between the opening and closing bells each day. Today we’re seeing more of the same, as early strength has delivered new highs while modest profit-taking has caused the indexes to back down from their best levels.
To put it another way, the “dumb money” has had great success in recent weeks. Those who waited for strength to return before becoming confident enough to join in have been fortunate enough to chase extended markets and stocks and still profit. But for those of us who prefer to see some kind of rhythm associated with market moves, it’s been a one-way street without many ways to play the long side while still protecting the downside.
Astute traders have instead found it a bit more difficult to navigate the current environment, as anyone with an ounce of discipline has felt the uneasiness of adding long-sided exposure for overnights while simultaneously recognizing the limited opportunity of trading intraday. It has left many of us to do more scalping while waiting for more lively day-to-day price action and higher-quality bases to come along. Those bases often rely on some back-and-forth price action, which we simply haven’t seen of late.
Watch The Horizon
Any trader worth his salt knows that conditions will shift. Maybe not immediately, but eventually.
That doesn’t mean prediction is necessary, because it isn’t, but it does mean staying alert.
When trading well, keep doing what works but be on the lookout for signs the setup may be changing. When trading poorly, it’s imperative to employ some other methods which are more suitable to the conditions. At the same time, hope can be had that a shake-up in the price action will bring more opportunities.
Right now, the market is in an interesting spot. The rally has brought the spring highs into play as we’re essentially testing them in this area. That’s a logical resistance area that could prompt some selling, depending upon the news flow. The uptrend channels seen in the averages could easily be penetrated to the downside, heightening concerns of whether that’s the end of the run. The other side of the coin is that the trend is still up, and no evidence has surfaced to suggest it’s changing.
So as a trader, here’s how I’m dealing with all this. The trend is up, so I’m favoring the long side while keeping timeframes short in order to offset the risk of walking the highwire here. I’m also mindful of potential shifts which could emerge anytime. We’re in the midst of earnings season, and that could easily sour the mood. We have the November elections tomorrow and the political implications of that, which is a major event. And then mid-week we have the FOMC, and with all eyes on the economy, the attention of traders will definitely be on Wednesday’s announcement and policy statement.
We could ramp from here and take out the spring highs before a pullback begins. It’s possible. We could break the uptrend channels and see some selling accelerate as traders recognize the trend line break and move quickly to lock in profits. Several scenarios are possible, and it’s important to keep an open mind here for that very reason.
I will say this: I’m expecting volatility to pick up sooner than later, and that means more opportunities for trading multiple timeframes. That’s where the real money is made, as you can have capital working for multi-day moves while still maneuvering to catch intraday moves for profits. Look alive out there, this is no time to get lulled to sleep.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Are you following me on Twitter yet?
Leadership Has Left the Building
October 6, 2010 at 8:08 pm
I’m not the first one to recognize a big shift in leadership stocks of late, as it seems the momentum train has hit a southbound fork – hard – for several of them.
Stocks which had been running relentlessly higher have turned suddenly. What used to be a buy-on-any-dip mentality associated with them has is now more like sell-all-bounces.
If these truly are ‘leaders,’ then they may be leading to the downside. I’m certainly not one to call for a market peak, as I know momentum can stay present far longer than many expect. However, I will say some other leadership best emerge quickly if the indexes (which are subsequently at big resistance areas) are to continue their relentless pursuit of higher levels.
Let me suggest going full-screen for best quality in the video.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Are you following me on Twitter yet?
One Intraday Setup That’s Working
September 28, 2010 at 9:38 am
In a world dominated by algo’s and machines, the astute trader can still turn a profit. It’s true, despite what many losing traders might tell you.
It takes adaptation, some ingenuity, imagination, and of course, thinking outside the box. For the creative trader though, new patterns will emerge from which profitable trades can be made.
So today, I wanted to point out to you one such example. I won’t name the stock, because it doesn’t matter, but here’s the chart from the opening 50 minutes or so:
As you can see, this stock gapped higher, ran a little more initially, and then began to roll over. The selling intensified as new lows were made on the session, and the gap began to fill before a brief period of rest set in. But that wasn’t the end of the story. Conventional day trading wisdom says this gap keeps getting filled, but only if another new low is made with a break of that intraday support.
Lately I’ve noticed this kind of setup – and you can reverse it with a downside gap if you’d like – offering some good plays. I had one finger on the trigger to short sell this one upon a break of that support, but it held just above the whole number. As the stock started to catch a bid, I went long with a very tight stop – only $0.06 from my long entry. And only 10 minutes later I was flipping out my shares for a quick $0.50 winner.
** For those wondering, that’s a reward-to-risk ratio of better than 8:1.
This setup offers two things I really like…
First, it offers very minimal, defined risk. If support (or resistance in the case of a morning gap down) gives way, I’m out quick for a small loss.
Second, it offers a great pivot area where emotion is building. The battle that took place at support was really something, and once one side began to win out (in this case the buyers), it sparked a quick move away from that level.
So, keep an eye out for this setup – it’s been a great one to trade. Gaps which only partially fill before hesitating at a level just might offer you a quick, profitable reversal play like this one.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Are you following me on Twitter yet?
Are Sellers Looking for a Catalyst?
September 21, 2010 at 8:44 am
Anytime we see market streaks emerge, we know someone’s been caught on the wrong side.
Monday’s session marked the 12th advance in the previous 13 trading sessions for the NAZ, including nine straight. Breakouts happened across the board, with the summer highs being cleared on solid volume. It almost feels like stocks may never decline again – and that’s a dangerous way to think.
The market will humble traders of all kinds, including bulls who become overconfident. It may not be a life-altering lesson, but in a tape like this, it could be one slip that brings a sudden pullback – even if it’s a brief one.
The technical picture is positive, there’s no doubt about it. We just established higher lows in August relative to July, and we just made higher highs. That’s a shift of trend, not only in the short term of the past couple weeks, but in the intermediate term of the past few months. The bulls are sitting pretty.
Things start to get really tricky though when momentum begins to run a little too hot, which is where we are right now. All news has been good news of late, and the buyers have dumped cash into this market relentlessly since the start of September. It’s been an impressive run, no matter how you slice it.
For a reality check, however, it’s safe to say that all the easy money has been made for this run. The pace is unsustainable, plain and simple. We could push higher from here, there’s no rule to prevent that from happening, but it’s far more likely that we’ll see some profit-taking kick in sooner rather than later. Those who are sitting on profits will be quick to lock them in at the first sign of weakness.
When it comes to excuses, the market is excellent at finding them. Right now, my hunch is that the bulls are needing an excuse to satisfy their urge to lock in at least some of their gains. And with a few key events on the horizon, it’s important that you and I stay on our toes.
Today’s FOMC meeting may be the first possible excuse for some profit-taking. It may not even matter what the Fed does or says – what matters is how the market responds to the news. And if it isn’t today, then there’s plenty of economic news slated for this week which could prove to be a market-mover.
So, I’m on the watch for a possible pullback. If I were predicting, I’d already be short – and I’m not. Instead, I’m watching carefully to see if some selling kicks in, which would then set up a favorable risk/reward scenario for a little round of selling. Here’s my game plan:
The QQQQ has rallied big, not only in recent weeks, but on the intraday chart as well. We have steep uptrend lines on both the daily and intraday charts, and I’m watching them both for downside breaks. First, let’s take a look at the intraday chart. Monday’s advance was smooth, and a break of the rising trend line at $48.70 would likely spark some selling. I’ll go short there with a stop in the $49 area, just above yesterday’s high.
On the daily chart, there’s also a steep rising trend line. A break of that wouldn’t necessarily mean price goes straight down, but it may be a worthwhile short for the nimble to catch the first move. The rising trend line currently stands around $48.30, and a break of that level could bring into play a multi-day pullback. Traders watching the daily chart should keep that level front and center today, and it will climb daily should this market happen to continue advancing. Once it’s broken though, the move could be a swift one to the downside for a quick trade.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
