I have never written a blog about the trade setup I’m about to discuss. For the most part we share pretty openly the setups and techniques we use on a daily basis to make money. I have been contacted by many developing traders who actually can’t believe the amount of information we provide free of charge via our blog.

There are a few setups that I have been reluctant to discuss for fear that somehow the trades would become more crowded and impact my ability to make money. Most likely that fear is unwarranted as trading is about finding setups that work for YOU and figuring out how to best trade them. Even if I were to discuss the following trade setup during our AM Meeting 80%+ of our desk would not make the trade because either it is not part of their playbook or they would be focused on a different stock when the setup triggered.

The trade is a fade trade based on a breakout on heavy volume during the prior trading day. On the second day the stock opens higher than the prior day’s breakout price. You buy the stock when it drops to the breakout price. You are relying on the fact that those who paid on the prior day’s breakout are willing to defend the stock at that price, and those who missed the initial breakout may initiate a position at that price as well.

The example from today was FSLR. Yesterday it popped on big volume from 110. This morning when it pulled back there it was bought. There was a huge surge in volume and it traded up four points in 15 minutes. Depending on the time of day and what the box looks like when it hits your entry price will help you to determine how much size to have for the play. But this is a trade I am willing to make 100% of the time. The risk to reward is generally greater than 1:10.

I have been talking a lot to our traders recently about properly allocating their mental capital. What do I mean by this? Each stock we look at as a trader will offer a certain amount of opportunity each day. If a particular stock is likely to offer far more opportunity than another then all other things being equal the traders attention should be focused on the stock with more opportunity.

I reiterated this point to one of our better traders in a one-on-one meeting the other day. There are very specific trade setups that this trader usually crushes. We agreed that he should focus most of his energy and risk on these setups. One such setup was offered by AIG today. He crushed it. Good job by him!

Some traders on our desk myself included did not crush it. At the end of each day I go through a review of each of the important trades I have made. There are usually only a handful of truly important trades. I want to figure out what I did well and what I could have improved upon in each trade. In the case of AIG it is clear that I did not crush it because I pulled my focus away from it at a key moment around 1:27pm. I started watching RIMM at the 74 level. Huge mistake!!

The 74 level in RIMM was important but the volume surge in AIG that began at 1:00pm was a signal that it was going to have a multi-point move. I know that some of you are thinking that hindsight is 20/20. Well, this is what I said in our AM Meeting yesterday about AIG, “If I see a huge surge in volume above 29 then I’m gonna be all in for a multi-point move…” And if that wasn’t enough the only twitter message I have sent out in the past 30 days under “spencermagic” was “initiating a position in $AIG. long if it holds above 28. if breaks above 29 on volume monday lookin for a multi point move” March 5th

Based on my preparation and conviction I should have given AIG my full attention as soon as it traded above 29 and the volume picked up. I failed to execute and that is squarely on my shoulders. If I executed properly then worst case scenario I would have been up over 5K today.

There was some chatter from other traders on the desk that they did not make money in AIG because it is not in their “playbook”. That is a crock of you know what. There are no traders on our desk with more than one year’s worth of experience that don’t trade “flag patterns”. The move in AIG from 29 to 31 in about fifteen minutes was a very clear flag pattern on enormous volume. The consolidation that occurred during the next ten minutes was an opportunity for any skilled day trader to get involved.

At the end of each day you should always ask yourself if you were properly allocating your mental capital. If not, your results are not meaningful.

I am hanging out at the beautiful jblu terminal at jfk. In one hour I will be taking off for sunny west palm beach.

I decided to participate in one last am meeting prior to my vaca. Most of the stuff I highlighted were strong stock consolidating near highs. Two of them, aapl and rimm, dropped key support prices from last week. I caught the short in rimm but missed aapl as I was about to get up from the desk to grab my clubs.

I still think both probably break to the upside in the near future but I wasn’t deterred from a quick one point scalp short. Afterall, I am an intraday trader. Well, except for my wfmi long, which is gonna pay for this trip as long as it doesn’t break below 33.

SLB was a waste of time as neither the value buyers or the risk arb bunch could move it too much.

Good luck with your trading this week.

Yesterday our Best AM Idea was to short AMZN for a potential 4-6 point downside move. AMZN had failed to participate in the tech rally during the last week and seemed to be setting up for some serious downside. I got short at 117 and caught about 1.5 points of downside. The volume wasn’t great so I was somewhat suspicious of the down move.

Today as the market opened AMZN showed some weakness again so I got short. I really wanted to see the volume come in today to convince me that it would break the key 114 support area. Well, the volume did come in eventually after 10:00AM as AMZN ran up from 115 to 116.25. I covered my short above 115.50 and continued to watch AMZN trade. Based on what I was seeing on the tape I switched my bias to the long side.

I announced to the desk that I no longer believed AMZN was a good short. I bought it into the pullback to 115.50. I was prepared to hold at least until 117. If it continued to show strength in the afternoon I figured it could trade as high as 118.50. Once AMZN traded up to 116.60 I felt that the uptrend was firmly in place and I thought it would easily break through 117.

As usually is the case I had several meetings that I needed to attend during the midday so I set a stop order below 116.18 and left the trading desk. As you can see from the chart below I was stopped out at 11:30 when AMZN traded down to 116.06. When I returned to the desk AMZN was trading at 117.40 with its uptrend still firmly in place. So I bid for some stock and got long at 117.29. I was able to catch the up move to 118.

I was speaking with an experienced trader recently who told me that he believed that a huge problem among traders is that they are wedded to their trading biases. I was surprised by his comment. How could individuals whose livelihood was largely dependent on their ability to observe data in an objective fashion be overly stubborn? This made no sense to me. Perhaps experienced traders are so skilled in their risk management that they can continue to be on the wrong side for an extended period of time without ripping up large sums of money? I’m really not sure. But I do know that having the mental flexibility to change from long to short or short to long is a much more sane way to go.

I started trading AAPL around 10AM this morning. I noticed it held its small gap from the Open and that each time it was dropping below 202 it would quickly recover. I also noticed that each time it popped above 202.50 that it would fail to hold the bid and drop back down.

My thought process was that AAPL had been strong on Thursday and Friday and since it held the opening gap that it would probably trade higher. I figured that if I could establish an initial position around 202 I had at least two points of upside. At 10:15 AAPL dropped to 202 but was only there for a few seconds. Opportunity lost.

At 10:20 AAPL started to trade between 202.40 and 202.50s. I bid for some stock at 202.42 and got long. I like when stocks start consolidating in a tight range close to their intra-day high. Its usually a sign the stock will trade higher. I also noticed an accumulation program. Each time the bids would get hit around 202.40 AAPL would immediately begin to tick higher.

I made a rookie mistake a couple of times and bought extra shares in the 202.50s. I saw an increase in volume and concluded the buyers had lost their patience and were going to have to bid the stock higher. I was wrong. I dumped most of the extra shares I had bought around 202.48 because I did not want to be caught with a large position if the 202.40 dropped and it quickly traded down to 202.

About five minutes later there was a surge in volume and I caught a one point up move. But I had very little size. Once AAPL clearly started to hold above 202.60 I bid for some more shares but couldn’t get hit. As it moved higher I bid above 202.70 and couldn’t get hit. The buy program was being more aggressive and cutting anyone who was interested in picking up shares on the bid.

This blog is the type of post trade analysis I do every day. I think about each aspect of significant trade I made during the day. I review my rationale for being in the trade and each part of my execution. I ask myself question like “Was I buying at the most favorable prices?”, “Was I aggressive enough?”, “Was I properly controlling my risk?”, “Did I take enough money out of the move?” etc.

The idea is to fire up the synapses and make sure that when a similar trade presents itself in the future I will trade it more effectively. Make this type of post trade analysis part of your game.

And by the way, if you are continually bidding higher for a stock and you can’t get hit its probably going up!

For those of you who trade as part of a desk I’m sure you have heard expressions like this a thousand times:

“I can’t believe I missed that move in XYX. I was wating for that breakout for a week!”
“I got stopped out in ABC then it took off!”
“I missed getting hit on the bid by a penny then BS ran two points!”

I am used to hearing the above on a daily basis. Traders to their detriment spend a lot of time harping on the money that they “should” have made. The question is what were they doing to make sure that they didn’t miss the trade or if they got in and were stopped out did they have a plan to get back in.

During our traders’ initial training period I give a lecture on focus. I talk about what it means to be focused as a professional trader. Professional traders who are focused do not miss entries on stocks they have been following. They set an alert and when the alert is triggered they execute their trading strategy. They don’t come up with some excuse about how they were in another position at the time or they were eating their lunch or watching a video on you tube. They just execute.

Here are a few tips on how you can better execute on the opportunities presented each day:

1) Spend time each day visualizing how you traded a particular play. See yourself executing your trade as it occurred but also integrate into your visualization small adjustments you would make to improve your results. These adjustments should be based on observations you made at the time of the trade with respect to the price action of the stock. This exercise will give you more confidence the next time a similar set up occurs to pull the trigger and trade it with greater efficiency.

2) Spend time developing detailed trading plans for the stocks you intend to trade on a particular day. Then visualize executing the trades when the stock hits your price points. Visualize what the tape should look like in order to confirm your thesis. Also, visualize yourself hitting out of your position if it goes to a predetermined stop point or shows you something on the tape that warrants your exiting the position. See yourself taking profits and immediately determining where would be a good point to re-enter the position.

3) Get some rest. Without proper rest you will miss a huge percentage of your best setups.

4) Spend time each day reviewing charts of the top market stocks and top In Play stocks for the day. This will give you a sense of the most recent important support/resistance levels and will enhance your ability to execute when those stocks hit their important prices.

5) Be on the desk throughout the day. I am a firm believer in taking a break mid-day and re-energizing for the close. But you also need to be aware that the best moves of the day sometimes occur between 11-12 o’clock. Check out the charts in FCX and AAPL from today.

We all know there are literally hundreds of little things that need to be done to become a consistently profitable trader. Please include these on your list of daily activities.

In the coming days and weeks you will see us devoting quite a bit of time to the idea of “skill development” for traders. It is our contention that most trader training emphasizes knowledge over skill. Dr. Steenbarger recently touched upon this topic in his blog. The vast majority of under performance of traders is a direct result of the lack of time spent building trading skills.

I wasn’t feeling that great on the Open today. How you feel both physically and mentally can have a huge impact on your trading results. If you are tired you will process information less quickly and in today’s highly volatile market this will put you at a severe disadvantage. If you are feeling worn out from being tossed around in the market this may also impact your ability to effectively execute during the whippiness of the first 15 minutes.

Based on the fact that I was tired I cut my tier size in half and did not trade too aggressively when the market opened. Also, there were no phenomenal setups in either the market leaders or the fresh In Play stocks we were trading. Sure, there were opportunities but nothing that stood out to me. If for example there was a play similar to FCX from yesterday where I could risk 20-30 cents to capture three or four points I would have sucked it up and been more aggressive.

In the meantime I hung in there for the first couple of hours as the market reversed a couple of times. At 12:40pm I was short FAS as it appeared to be putting in a double top. I was rewarded with a ridiculous down move based on another chirp with respect to the bailout for Greece. That one trade made my entire day. I knew enough at that point to take what the choppy market had given me and called it a day.

Remember, every day doesn’t have to be a day where you “kill” the market. Sometimes it is good enough to hang in there and make a few bucks. Perhaps you will identify some interesting levels in the stocks you are watching that will lead to a bigger chop the next day.

We are in a downtrending market!  What?  We are in a downtrending market!! What? downtrend!!!!!! What does this mean for short term traders?

1. Short stocks if they pop to previous support levels
2. If the market trends up for two days then pray for a third day gap up so you can short the market!!
3. Trade with less size as downtrending markets tend to be more volatile
4. Be mentally prepared for the market to meltdown at any time.  See traderfeed.blogspot.com on an excellent post on what to look for. http://bit.ly/945ZkT
5. If the market gaps down and there is a feeble attempt at a bounce on the Open then put your short caps on.
6. Remember that stocks go down more quickly than they go up.  Take a deep breath when your shorts start working and give them some room to trade lower
7. If a stock makes a hard down move on volume wait for it to pop a little before initiating a short position
8. Don’t fade down moves. Fade up moves!!
9. Remember that in a weak market we don’t need to have a down day every single day.  If we have two hard down days in a row be careful with your shorts on the third day.  This isn’t September 2008.  The market isn’t gonna drop 20% in a week
10. It is OK to trade on the long side in a downtrending market.  We certainly trade on the short side when the market is trending up.  You just need to understand that the bigger chops are gonna be on the short side. i.e. AMZN 124.50 to 114, AAPL 202 to 190, GS 171 to 158.  These moves all happened intraday.  Correct.  They weren’t swing trades.  I guess you could call them intraday swing trades

Good luck with your trading tomorrow!

I received an email yesterday from a reader who asked if I could discuss why we choose to avoid certain stocks.  What I would first like to address is the idea of stock selection in general.  At SMB we have a very specific methodology to select the best stocks for intraday trading.  As most who have read our blog on a regular basis already know we focus on stocks with fresh news: “stocks in play”.

In general, if a stock has fresh news I will trade it.  Even a stock like CAT that normally trades erratically I will trade if it reports a remarkable earnings number.  My first choice if available will always be something with fresh news.  The increased order flow will overwhelm most of the silly HFT programs and create numerous low risk/high reward intraday trading setups.

As a rule these are some of the scenarios I tend to avoid:

1. Stocks gapping up more than 10 points.  On the Open there is too much price discovery occurring to risk the appropriate amount
2. Stocks where the CFO has resigned and there is a question as to the veracity of their numbers.  These situations are messy and it is difficult at times to define your risk
3. Stocks that require me to risk more than 50 cents.  I think it is extremely difficult to predict more than the next 2 to 3 points in a stock so I’m interested in risking less than 50 cents.
4. Stocks that trade under one million shares on average.  Not enough liquidity to get out at a very well defined price unless you have a very small position
5. Commodities and Energy stocks.  I will trade these if they are VERY In Play but normally they don’t trade in a rational fashion.  Some consider stocks like AMZN difficult.  For me a commodity stock has a lot of inputs determining the price.  It isn’t just about the buyesr and sellers but you also need to factor in the movement of the underlying commodity.  I believe this is the reason these stocks tend to trade less rationally intraday.

I will talk a bit more in a future post on what poor intraday stocks look like from a charting perspective.

Our “Best AM Idea” that we tweet each morning as part of our morning roundup blog is a trade idea that is based on all of the information we have prior to the market’s Open. Yesterday, I suggested that FCX be bought on a pull back to 71.50. FCX has traded down about 20% since reaching a 52 week high up around 90 on January 11th. The prior day, it bounced nicely in the afternoon and was gapping up in the morning. It was a perfect candidate to buy on a quick drop on the Open. I was willing to risk 15 cents to catch 2-3 points of upside.

But a funny thing happened on the Open yesterday. The market came off hard and dropped the 109.80 support prior to FCX trading down to 71.50. By the time FCX was heading towards our buy price of 71.50 the market had already attempted to rally above 109.80 and had failed. My mindset was that I should be focusing on my short setups rather than longs since our next support on the SPYs was 108.20. Nevertheless, I put on a small long trade on FCX when it traded down to 71.50. In fact, since the market was coming off so quickly I figured the 71.50 bid would get hit out so I bid 71.42 for some stock. My bid got hit and FCX actually traded up to the 71.60s. Unfortunately, it quickly went to the low and I got stopped out at 71.35.

After I got stopped out, that silly program that Bella so often talks about, “buy the new low”, caused FCX to spike back up to 71.87. I was not fooled. I began trading it on the short side. The “buy the new low” program was overwhelmed when it dropped the 71.35 level and it traded down to 70.87. When it quickly popped back up to the 71.30s, similarly to the move from 71.35 to 71.87, I shorted some more stock. I covered my position into the next down move to the 70.60s.

About an hour later FCX popped back up to 71.50. I failed to short it there as I was engrossed in my AAPL short that was tanking at the time. FCX trended down for the next two hours to 68. The 71.50 level that originally was intended as our “best am idea” on the long side became our best “lunchtime idea” on the short side. As a trader you must always be flexible and re-evaluate planned trades based on the data the market is presenting.

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