Yesterday I wrote a blog post stressing the importance of making the real trades intraday.  One of our very experienced traders sent me this question:

i traded JWN today… why did you want to buy above 32 when it had just closed the gap and showed no signs of holding support?  to me, that’s a trade that flies in the face of fundamentally good technical trading.  maybe we’re seeing something differently but i dont see how that can be a model trade… it was actually a good short as it lost momentum after closing the gap and dropped support, right?

there was also a textbook pullback to vwap at 2:00 in that stock that i walked the new guys sitting around me through.  that is a good and easy trade.

i know different opinions make markets but i just thought the pay above a whole number wasn’t the trade to hold out as THE trade in jwn today.

Bella Responds

Great question by a serious market thinker. And thanks for making my Saturday AM a little more interesting as I consider this trade again.

First, I am not crazy about this trade because it steps outside of the stocks I have been most successful with this trading month. I will try and write more about these stocks tomorrow. In short, I have been trading the stocks with fresh news that were either really good or really bad. And JWN did not fit into that box.

32 was a longer term technical level that we identified in our AM meeting. Above this level was another check in our favor. We spotted a bullish flag intraday before this level. And then a very impressive move above both on the chart and the tape. The impressive move on the tape above 32 sparked my trading intuition that JWN might make a move to at least above 32.50. I formulated a trading plan to buy into the pullback below the whole.

Now one huge advantage of being an intraday trader is that we can use our trading skills to improve our price and thus our win rate per trade. My plan was to buy a pullback below 32 using my tape reading skills to start my position. JWN made a sharp and quick drop below 32, slowed every so slightly to my microscalping eye at 83c, where I placed a bid and got hit. I know some others on our desk got stopped out below 85c. But again I was buying the pullback below the whole and got the low print into the downmove. Hey it helps to have trading skills.

I did not love the downmove below the whole. I was not a fan of the upmove after the downmove. I took off most of my position into the next upmove to 13c and held the rest (I got stopped out of 1/3 at 31.79).

My playbook is more nuanced than most new traders. Most developing traders will just buy the pullback and hope for the best. I have many more if/then statements. So since I was not a fan of the downmove nor the upmove I took off most of my risk. Essentially I aborted a one lot pullback trade into a scalp fade trade leaving a 1/3 Trade2Hold position.

Now admittedly this can get very complicated. And there might never be a way for me to teach the trade that I made. Or readjust midtrade the trade I made. That takes trading intuition built through 12 years of screen time. But the underlining point to my previous blog is still important. I was making one pullback trade. I was not going to pay above 32 for a momentum trade, fade the move to 32.33, bid 32.11 after a sharp return to the whole and kick it out at 32.17, bid 32.01 and sell 32.11. We may have done this in some stocks in 08. And these were all trades that would have worked.

We make trading decisions based upon three factors: intraday fundamentals, reading the tape, and technicals. The weakness with my JWN trade for me, even though I turned into a profitable one because of my trading skills, was that the news was not bad enough or good enough for JWN to trend cleanly in one direction yesterday. This lowered the win rate for my JWN pullback trade such that it may not have been a trade that was best for me in this market environment.

In this market there are only real trades to be made, at excellent prices, waiting for real moves. We must focus on the real trades.

Finally I love you finding a VWAP trade that made sense to you with this same trade. If the SMB Training Blog is getting readers to think about these set ups and find such trades that make the most sense to them, then we are really making a significant contribution to the trading community. And that puts a huge smile on my face.

Mike Bellafiore
Author, One Good Trade (Wiley)

A few years ago two of our best traders knocked on my office to chat. They had an idea. They were interested in trading a swing account with the firm. I suggested that they come up with a list of patterns they wanted to trade and come find me. They never reapproached me with specific enough set ups and worse yet I never followed up. Both of these traders were well ahead of the intraday trading curve. Going forward all of our best traders will trade multiple accounts including a swing account.

One of the greatest day traders on the Street made most of his money in 09 in his Swing Account and not his day trading account. GMan on Friday crushed the market in his swing account and not necessarily his day trading account. On Thursday he was having the best day of his month in his swing account and not his day trading account before the GS news.

I am not suggesting that day traders become swing traders. I am just sharing that there is a trend in intraday trading to allow your best traders to trade multiple accounts, one of them being a swing account. HFTs have forced all of us to remake ourselves as intraday traders. The day trading account gives the trader a feel for excellent swing trades. These swing account trades are options trades or longer term stock trades. The day trading account is needed to find these plays to exploit. Finding these great risk/reward opportunities exist because of the work done day trading.

……Then there will be trading the foreign markets. We are in the first inning of electronic trading. The one day trading account, trading US equities exclusively, may not be the model for the future of intraday trading.

On my latest StockTwits TV show, SMB University, I was asked about trading right on the Open.  Often new traders struggle with this time period for two reasons:

a) they miscalculate their downside risk before entering the trade

b) they do not have a playbook with trades that work for the open.

Well let’s try and correct some of (b) with this blog.  I will introduce an Opening Range Play.  Perhaps you can make this trading pattern your own.

On Thursday there was this from the financial paper of record, the Wall Street Journal:

Monsanto Co. cut its earnings forecast Thursday for the second time in seven weeks, as it slashed prices of its Roundup herbicide, largely putting to pasture the onetime cash cow that funded the company’s push into crop biotechnology in the 1990s.

MON gapped down Thursday AM about four points from 52.50ish to 48.50ish.  MON ended the session near 50.   A quick peak at the intraday chart on this Thursday shows MON in a nice uptrend.

On Friday MON opened above 50, first moved higher to 50.70ish and then started a nice range between 50.20 and 50.35.   During our Tradecast after the Close today one of our traders mentioned, “There was a huge seller at 50.35.”  MON broke above this range.  As intraday traders we get long.  We are long above the opening range.

If you missed this move, there was more opportunity.  MON traded in another range between 50.40 and 50.60.  50.40 held the bid cleanly.  There was never any 39c, 38c, 37c, 33c, nonsense shakeout.  There was 50.40 on the bid, holding, and not dropping.  Beautiful.  We have MON above the opening range and an impressive held bid at 40c, so buy more.

For those who struggle in the first 15 minutes of trading this is one play to consider.  Perhaps you can make this trading pattern your own.  If you have any questions please do not hesitate to contact me at mbellafiore@smbcap.com, or post a comment on this blog.

Reader Alex asked:

My name is Alex and I’ve been swing trading for two years.  I’ve been reading SMB’s blog for a while, and really enjoy the posts on trader development.  I have recently journaled a question that emerged during two of my recent short trades.  I believe that this question relates to intra-day trading as well.

Depending on conditions and the setup I am trading, I like to take profits on 1/2 of my position when my first profit target is hit, move my initial stop loss to break-even, and hold the remaining 1/2 for a second profit target.  The issue I ran into with two of my recent swing trades was that my break-even price (entry price) was not in a ‘technically correct’ area (i.e. was not above a recent resistance/value area, it was actually just inside of it).  In these situations, should a stop loss be moved to my entry price (although a higher probability exists that it will be breached if that resistance level is tested) or should I risk taking a loss and move my stop above the resistance area?  Any thoughts would be much appreciated.

Bella Responds:

Alex great job of recognizing a potential flaw with your exit.  Awesome job of developing a system to trade your set ups.

I love this idea of moving your exit prices to above the resistance level on shorts.  This makes more sense.  Why cover if the stock is still below resistance?

Also would it be best for you to add more if/then statements to your exit?  Some examples:

a) Cover if the stock breaks its intraday downtrend.

b) Cover if the corresponding futures spike.

c) Cover if the clear seller causing the stock to trade in a downtrend disappears.

d) Cover if the stock is just not as weak as you expected.

The more if/then statements and conditions you develop for your intraday trades the more consistent your results.  You do not want to miss the big move but trading is generally more complicated then I am short and if it works great and if it doesn’t I lose.  Intraday swing traders must learn to trade the subsets of your set ups.  And that takes more nuance to your exits.

You are on a terrific path.  Very well done working on improving your results.  This is the most important aspect of your trading, including your results.  Thank you for your terrific question and contribution to our community.

Watch Mike Bellafiore in this short video discuss SMB’s Trade of the Week.  SMB’s new video series for StockTwits TV first released exclusively on the iPad, details trading patterns that are consistently used on SMB’s trading desk.  Mike Bellafiore, partner at SMB Capital and author of One Good Trade: Inside the Highly Competitive World of Proprietary Trading (Wiley), discusses a Resistance Trade in Visa in this video.

We hope you enjoy!

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Also, check out SMB on youtube for more SMB Trades of the Week!

Today I maximized my weaknesses.  I found the set up that is a trading weakness for my system, traded it with size, and now sit with a P&L that represents the worst of my trading.  In one sense this is quite impressive.  I did not just underperform this open.  I did as poorly as I possible could.

Fresh news hit that BP is close to sealing their oil leak and it gapped up on the open.  A bullish flag pattern was forming at 45.  Before the open I thought:

a) If it trades cleanly and strongly then I will get aggressive.

b) If it shows me it will tick at every price I will move on or trade with very small size.

What pattern did I get?  Pattern B.  How did I trade it?  Aggressively of course.  I journaled, “BP is a piece of shit, dog shit, nonsensical, reversing, touch every price, garbage, idiotic trading stock.  TRADE STOCKS THAT ARE CLEAN YOU JACKASS!”

I prefer stocks that are trending, In Play, and showing me weakness on the tape.  Stocks that reverse and touch every price breed a day of frustration and losses.  Stocks like BP today.

I should have started a position in BP at 44.80 and just held it for an intraday, all day trend play, or moved on.  Instead I loaded up on the break above 45.25 only to watch this move fail.  I did it again only to watch the next pass fail.  I did it again, same result.  I did it again, watched BP trade higher to 44.57.  Victory?  No I got stopped out below 44.15.  Awesome!

MON was the type of stock I should have traded.  Weak.  Trending.  Not lifting 49.  Dropping out.  Losing in this stock would have been acceptable.  Losing in BP was the worst of my trading.  It was me maximizing my weaknesses.

I have traded my own money for the past twelve years.  And there was the Asian Financial Crisis, the Bursting of the Internet Bubble, 2002, Hybrid, Penny Spreads, the near recent collapse of our financial markets, and now the era of big government irresponsible spending causing havoc on the world’s currencies.  I know most enter trading because they seek riches.  Almost all will never make it for this very reason.

The trading community is reading all the wrong books.  How many traders have read The Talent Code, Enhancing Trader Performance, Drive, Talent is Overrated, Malcolm Gladwell, The Black Swan, Learned Optimism, Ayn Rand? Money, money, money is too often a trader’s goal.  How foolish.  How limiting.

Yesterday a new trader saw I had had a very profitable day.  He asked,”How was your day?”

I sighed and said, “Ahhh.”

The new trader responded, “Seems like that was one of your better days.”

I returned, “Why do you say that?”

“Because you made a lot of money.  How did you do it?”

I retorted, “I am just trying to get better.”  I had to go an journal some more and consider whether it really was a good day for me.

You see a good day for me is one where I get better.  Did I learn something about myself and the market?  My journey everyday is to learn, to improve, to do more of what I do best.  I am trying to master this craft called trading.  I understand that I will never get there.  And I accept this.  But I will keep reaching for that elusive goal of mastery.

Why do you trade?  If it is not to master your trading, you will never reach your potential.  And you will have a very unhealthy, short lived, unsatisfying trading career.

Your life is what you do and not how much you make.  I am just trying to get better.

As we continue to gravitate towards more Trades2Hold, longer holding time periods for intraday trades, we found another excellent set up today in LXK.  This is a simple trade and a pattern you might spot a few times a week.  We will discuss the entry and the exit.  (let me state at the outset that for some reason I can’t type up the correct symbol of this stock.  All day I kept calling it by the wrong symbol and typing up the wrong symbol.  Weird.)

LXK announced positive earnings and gapped up.  It was at a 52 week high which is bullish technically for a stock.  29.80 was intraday resistance and Lexmark cleared this level.  We headed for 30 long and holding.  But then 30 presented the selling of a brick wall.  Hmmm.

30 lifted ever so slightly as SPY popped.  There was little interest to aggressively buy LXK above 30.  And an ARCA seller kept coming back to 30 with more inventory to unload.  Interesting.

The market continued to pop and LXK would not trade above 30.  30.05 was a price it would not trade above as most of the order flow was matched at 30.  With the market ripping and LXK at a 52 week high, why the heck wasn’t this stock finding higher altitude?

This presented a relative strength play.  LXK was much weaker than the market.  Also during earnings the pattern has been to sell the gaps.  Was this stock ready to reverse?

When the 30 dropped the bid LXK dropped out to 75c.

ALJ exclaimed, “What the hell?”

This was a very quick drop.  To me this signaled a failure from 30 and a Trade2Hold candidate as LXK retraced back towards 30.  I started a small position at 29,85c as the offer held slightly.  LXK found a way to touch 30 where I added some size.  I could not get the two lots that I wanted.  My 97c and 99c offers were not executed.  When a 94c buyer dropped I smacked the bids for another lot.

80c held the bid so I covered one lot there a hundred shares at a time as it kept holding and holding.  I held one lot.  After the significant volume at 30 this was a Trade2Hold for me.  I was going to give LXK a chance, even if I couldn’t type the dopey stock up on my Level II.

With a Trade2Hold we develop reasons to cover.  One reason to cover is if a stock breaks the intraday downtrend.  After LXK traded all the way down to near 29 I had lightened up a little.  I still was holding 3/4 of  one lot.

My 5 minute charts indicated above 40c was a break of the downtrend.  I set a stop for 1/2 of my position there.  65c was an important level on the way down so I set another stop to get flat.

Steve mentioned after we reviewed this trade that 20c was an area of consolidation to take some stock off the table.  You could decide to agree with him and exit some there.  My sense was that LXK had some more to fall so I held.

The market rallied into the close and I was stopped out at 41c and 66c.  Oh well.  The market has been weak of late so this gave me more pause to cover at 20c.

Above is my example of a Trade2Hold and my execution to exit.  You could have traded this with more size and covered in a way that makes sense to you.

In my review I should have added one more lot at 30.  I could have covered a little more into the steeper downmove close to 29.  

We received this tweet question today.

SkyTrader @smbcapital you guys trading $LXK at the close? crazy hold on the offer @ $30 (NYSE). wondering how you would play it tomorrow. thanks.

Tomorrow I will use this 30 as a significant level.

Best of luck with your trading!

DE was a strong stock this AM.  I blog this point besides DE being at its 52 week high.  And save that DE was up over 2 1/2 points.   There was a telling movement on the open from 51.50 to 51 which foreshadowed a new intraday high to visit.  Let’s discuss.

SPY 111.50 is an important intraday level.  We failed miserably there this open at around 111.42.  The downmove was ugly to 110.60.  During this downmove in the market I watched the bids get hit in DE.  I suspected that DE would find lower ground since the market became so weak as SPY tanked.  But there was significant buying on the bid at 51.45, when 51.50 was DE’s high.  And then 40c bought before FINALLY dropping.  And then 35c repeated this buy pattern.  And then 30c.  And then 25c.   Then 20c, and 15c, and the whole.

Yes DE traded lower but it showed noteworthy relative strength into the SPY dip.  So when SPY stabilized I started a longer term intraday position in DE near 51.  Fast forward and DE found 52.25.  Some on our desk got shaken out into this downmove.   Maybe one day these traders will become as good as me (just kidding).

I use this technique, calculating the strength of the stock by watching the bid buying into a downmove, to determine which stocks to enter longer term intraday postions.  DE Buy 51 was an excellent intraday trading opportunity.

Best of luck with your trading! Don’t forget to follow us on Twiiter!

Good traders pick their spots.  Some opportunities allow us to be more aggressive than others.  When we spot one of these opportunities we pounce, like a baseball player who takes a healthy cut a 3 and 1 fastball.  If we fail to pounce then in our journals we must detail this opportunity so the next time we do. 

During our SMB AM Meetingwe identified 109.80 and 108.80 as important levels in SPY.  Knowing these levels provided us an edge intraday today.  The market stopped trading lower on the Open right at the 108.80 level.  Was Mother Market listening to our AM Meeting?  And then later stocks had trouble trading higher until we clearly held above SPY 109.80.  In reviewing my work there was an opportunity today where I could have been most aggressive.  Let’s discuss.

Bear with me as I set the stage.  SPY found support at 108.80.  Then SPY popped to 109.10ish.  The pullback is the tell.  Would SPY pullback to 108.80 or would it show more strength into the pullback?  It showed more strength.

SPY found support at 108.90, a higher low (more strength), then spiked to 109.20.  So the pullback was shallower than I expected and the spike was more explosive than anticipated.  Now we had a market that was starting an uptrend.  And SPY’s next level was not until 109.80 so we had a lot of room to run.  When SPY held this 190.20 this was our opportunity to be most aggressive as intraday traders.

The strongest stock I was watching intraday at SPY 109.20 was CAT.  So I bought some more.  I should have bought even more than I did.  The market showed us her cards.  I had a safe level to add size in CAT at 56.30 (out below 19c).  This was my time to be most aggressive.

The market has room to run until resistance at 109.80.  CAT was above a level at 55 and acting well intraday.  A safe level to enter was offered in CAT.  Add this all up and this was my opportunity to be most aggressive today.

When can you be most aggressive with your trading?

Best of luck with your trading!