BOR - new entry technique

Technique may be too sophisticated of a word for the entry method I'm going to describe. I'm simply going to be buying the break of the open range. This entry will be for days where I'm expecting a large momentum move in the market (i.e. European markets up or down more than 3%, our own markets gap up or down big, the Treasury just announced some new acronym to fix the market...). The price action I've seen play out over the last couple of months has been: 1.) Market gaps up or down 2.) Gap gets partially filled 3.) Price reverses and accelerates strongly to new highs or lows, slicing through the open range high or low. This usually looks likes a rounded bottom or a V bottom.

I'm calling this technique BOR because it is more boring than my normal style and doesn't require much skill, but sometimes the simplest entries are the most effective.

BOR Rules:

1. Place stop limit order two cents above (or below) market opening price at 9:50.

2. Reduce risk after successful breakout by tightening stop.

3. Move stop to break even 30 minutes after initiation of position.

4. Exit position at 11:54.

November review

My performance this month was better than last but I know that I'm missing a lot of opportunities. My win rate and expectancy were both improved. The market has traded totally different since mid-September. My entry techniques are still valid, but I'm seeing less setups. Price moves seem to be driven more by news, rumors, or just mob mentality. I'm looking for these subtle imblances between buyers and sellers, but when a move gets under way in this market you just need to jump on and enjoy the ride. While I'm scanning for nice setups the market just takes off and doesn't look back. Then I try to trade sloppy seconds. But it's unrealistic to expect continutation off of a 4 or 5 percent move. In a normal market you tend to have a couple of legs up in the morning. Most of my entries are from 10:15-10:30 expecting continuation of the initial move up. In these extreme conditions we tend to get strong moves that can last all the way until lunch without pause. So long story short, I need to come up with a new entry technique for days when I expect a major move. Now that I've seen a couple months of this new price action, I've come up with a very simple entry technique to add to my bag of tricks. I don't know how long the markets will remain this volatile, but I need to start taking advantage of it. I need to stop looking at the price action as an obstacle and start viewing it as an opportunity.

Friday skipped trade - KBH

With options expiration today and the VIX above 70, I was only going to trade pristine setups. This setup looks even better now than it did realtime, but two things that would have made it even better would be more price contraction on the third bar and if it were fully inside of the second. I was also looking at trading the ABX symmetrical triangle but it broke out too quick and I usually don't trade before 10:15. Looking back over this week I was probably a little too picky in choosing setups. There were many potential setups that were less than perfect that ended up working out.

Wednesday trade - STP

I had to choose between this descending triangle or a DRYS bear flag. In retrospect, I wish I went with DRYS, but I liked how STP broke the $10 level and was under yesterday's lows. It broke down pretty nicely, especially when it got below the 9.50 level. Then oil started going up and the market started getting real choppy midday. I thought STP would get to 9 quicker but it had a lot of trouble with the 9.20 area, so I tightened my stop to break even. STP was showing too much relative strength. It finally broke down at the end of the day and after hours.

Setup:65

Monday skipped trade - BIDU

This was the best trade I spotted all day. I skipped it though because the overall market was drifting around on low volume and was about to go bullish.

Introduction to my trading style

I've been trading full-time since September 2007. I think I'm beginning to find my style. I've borrowed elements from other influential traders like Trader Mike (position sizing) and Trader Jamie (entry techniques). I'm not suggesting that anybody tries to emulate my style, or that my style is better than another style, but it is simply what works best for my personality. I think of myself as a long term short term trader. I never hold anything overnight, but I prefer to be in a stock anywhere from 45 minutes to 6 hours. Early on I ruled out scalping as being too stressful. I had to scalp here and there in October '08 due to the frenetic nature of the market and the VIX hitting 90, but I didn't much care for it. I've read four books on trading just to give me a solid base, the rest I expect to learn from the market. Here are the books though: Trade Your Way to Financial Freedom by Van Tharp, Technical Analysis of Financial Markets by John Murphy, Trading in the Zone by Mark Douglas, and Market Wizards by Schwager. Education is important. At the same time, if you want to learn Spanish, you could take 4 years in high school, or 2 years and then live in Mexico for 6 months to pick up the rest. I think immersion is the best way to learn any subject.

I'll try to run you through a typical day. I start by looking at the European markets, which are highly correlated with our own. I look at whether they are choppy or trending. I glance at the Asian markets, but they mostly reflect what happened in our markets the day before. I look at the top headlines. If there is a mix of good and bad, and European markets were choppy with little movement, then I will probably form a loosely held expectation that our markets will be choppy that day. If European markets were down big and all our headlines our negative, then I might expect a downward trending day here. It's important not to have too much bias though and to look for early confirmation of your bias. I never trade before 10 EST, so that gives me time to look at the open range to gather evidence for sticking with my expectations. You have to be prepared to throw your bias out the window and be open to what the market is telling you. From 9:30 to 10:00 I look at the stocks on my watchlist to see what is moving the most and getting the most volume. I have about 10 stocks that I like to trade and I'll rotate stocks in and out. I have a Trade-Ideas unusual volume type scan going throughout the day but I don't often trade those stocks. It can be useful to see which stocks are getting investor's attention though. Throughout the day I watch the following using 15 minute candlesticks: QQQQ, USO, XLF, XHB, VIX, AAPL. When I narrow in on a particular sector I will bring up the charts of similar stocks. If I'm trading CF, I'll also be looking at MOS and POT. Looking at each of these charts, I ask myself where is this stock most likely going to go. I admit that I don't know exactly what is going to happen. But looking at chart patterns and support and resistance I take an educated guess about the path of least resistance. Admitting that you can't predict the movement of any stock with 100% certainty frees up your mind. My best trades come when everything lines up. For example, QQQQ and XLF are both setting up inverted cup and handles, USO looks like it's going down and I'm trading the same C&H pattern in AAPL. Every time I put on a trade, I try to have as many factors going in the direction of the trade as possible. I trade breakouts using several different entry techniques. I look at the time and sales when a stock is breaking out and try not to stare at it too much once the trade is looking good. I also use tape reading to help pinpoint my exits. This is an art that I don't think I have come close to mastering, so I won't even try to explain it right now. Just like with my entries, I like to have several reasons to exit a trade. I try to let my trades run until there is just too many reasons not to be in the trade any more. I have an alarm that goes off at 3:40 just in case I haven't exited a position yet.

I think that pretty much sums up my style at this moment in time. It is constantly evolving so I'll probably have to post an update in six months time.

Monday trade - DRYS

This trade was more intuitive than my normal trades. DRYS just looked so weak compared to USO, similar stocks like RIG, and the overall market. There were just no buyers. The setup could be classified as a B&B or narrow range bars with volume contraction at a pivot point. I didn't get the greatest fill on the exit, so this was a 2.2R trade. Reasons for exit:

Nasdaq was nearing 1600 with a technical bounce likely

RIG and POT were showing signs of strength

High volume on hammer at 2:50 in DRYS (sign of strength)

Setup:65

Thursday trade - ACI

Today was a good day to be trading. There were many stocks that made nice linear moves down just like this one. The nearest support level on the S&P was 900, and the index moved down there like being drawn to a magnet. After seeing the European and Asian markets down around 7%, there wasn't any doubt that I wanted to be short. I entered on the break of the ORL. You can see the two narrow range bars with the 5 period SMA directly above the NR7. The only thing that bothered me was that the NR7 had slightly more volume than the previous bar. This was a 2.6R trade. I exited for the following reasons:

3R target was approaching

USO looked like it would find support at 50, started going sideways

Approaching lunch hour where mass covering often occurs, didn't want to hold through lunch

Related stocks like CF and PCX were building bases

Setup:70

Market observation

I noticed today that the volume was more evenly distributed throughout the day which is an anomaly. Normally, there is greater volume in the morning and afternoon, with an inverted bell shape. I'm guessing that this is a sign of mutual fund redemptions or hedge fund liquidation.

Wednesday trade - FWLT

Missed it by that much. I traded this as a bull flag. The setup was a little messy but I liked the volume contraction on the narrowest, 4th bar. It was very slow to break out while oil and all the other commodity stocks were plunging. FWLT was holding up at 30.3, there must have been a large buy order there. I tightened my stop since it was showing too much relative strength. I got stopped out to the penny, before the stock made it's move down. Frustrating, but I don't think I would have played it differently. I might still be in scalp mode after last month.

Setup:60

Tuesday missed trade - GDX

This was a really nice setup for several reasons. The US dollar was down big today, ABX and GDX had a nice daily chart, ABX showing nice volume contraction in a bull flag, and GDX had nice volume contraction before the breakout. My only reservation was that the 5 period moving average was too far away on the 15 minute chart. If I had been looking at the 5 minute chart I would have been quicker to take the trade.

The market appears to be stabilizing at least in the short term. The VIX is coming down and I feel like I can let trades go for more than 15 minutes now. I became reluctant to trade after last month, so I need to become a little quicker to trade now.