Knowing when a stock should move can be more important than picking its direction

BellaMike Bellafiore's (Bella's) Blogs2 Comments

Most traders make a whole lot about picking the direction of a stock.  A very important skill talked little about is knowing when a stock should move.  After you see something of the Tape you know the stock is now likely to move.  We saw that a few times in PCX.  Sometimes this skill is more important than actually picking the direction of a stock.

26.50 was the level we were watching from past trading in PCX.  Above this level and we wanted to buy some PCX.  So most traders obsess about whether PCX will trade above or below 26.50 today right?  But does that matter as much as you think?  Trading is about controlling your risk/reward.  If we can find spots where the stock should move off of, then determining the direction of the stock is less important.  Now we will have spots where if we are right our upside is outstanding and if we are wrong our downside is controlled and minimal.  This is the essence of trading.

Today we had two instances in PCX.  PCX got above 26.50 and then impressively took out a decent size offer at 26.52.  Right after clearing this offer PCX did not go down.  Above the 26.50 level, strength on the tape, now not trading below 26.50 and ready to move was important trading knowledge.  PCX traded to its highest intraday price right after the above.

PCX then pulled back to 26.55.  It was still early where volatile moves occur.  26.55 was buying more than at any other time.  We were above our important 26.50 level.  We weren’t sure whether PCX would hold and then make a new high.  But we knew that this was an important moment.  If PCX was going to work today on the Open it would probably work right now with 55c never dropping.  This is important trading knowledge.

Think about it.  If we wanted to get big then this was our moment.  Our downside was 1-6c depending on your stop.   And our upside was a morning of new highs.  This was a position of strength because we found the moment, the catalyst, that PCX ought to move off of.

So for your trading give this some thought.  What are the catalysts, the moments, that you spot to control your risk/reward?

Mike Bellafiore

Author, One Good Trade

2 Comments on “Knowing when a stock should move can be more important than picking its direction”

  1. i would take this one step further. picking the direction of a stock before you see it trade there is meaningless. we hold an am meeting every day where i outline important prices and possible trading patterns. even if a stock trades verbatim as how i describe it in the meeting very few will make money. trading is a skill based job. ideas are just ideas. they aren’t successful execution of strategies.

    get to work. and silly anonymous cowards who like to post on other’s blogs. seriously? don’t u have something better to do with your time?

  2. Good post!
    My answer to your question: When a level is hit very hard and holds. This can either be on a breakout or on a pullback. I don’t care about the direction, I just have a small and controlled risk. I always said that in trading you don’t make money by guessing the trend of a move (up or down), but by combining 3 factors: timing, size and risk.

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