Making Trades Your Own (an Example in $SBUX)

Here’s an email exchange between a trader and me that demonstrates the importance of making trades your own.
—

I’m curious about what your thoughts are on this tweet (below). I thought you might appreciate it. I’m enjoying The Playbook, and I enjoyed reading One Good Trade several months ago as well. Thanks for all that you do.

Trend play setup in $SBUX. My job is to get long in this stock. Period. Stop is at $79. Buy dips. Buy breaks above. Manage position size.

@MikeBellafiore

Would prefer more specifics on how the pullback is defined. Would prefer more nuance on when this strategy will stop working: Like the naming of setup, like seeing the trade as a pattern, like not worrying about the result.

You’re on the right track here.

My thesis is that $SBUX is under accumulation right now. I would expect support plays to work intraday. I would look for buyers to be strong around $80.75, $80.25 and $79.15. I would expect bearish patterns (bear flags, etc.) to fail intraday and bullish patterns (bull flags, etc.) to hold intraday. I would expect SBUX to be strong relative to SPY. If SPY is up and SBUX is down, that would be a red flag. If SPY goes negative to positive and SBUX doesn’t, that would be a red flag. If SBUX breaks above $81.5 and can’t hold, that would be a red flag. I would expect to see volume divergences on falling prices and not so much with rising prices (high volume near the lows and lower volume near the highs).

If SBUX breaks above $81.5 I would expect volume to be relatively high. If SBUX opens above $81.46 I would expect it to hold a retest of that price. An open above and a close below would be a red flag. Constructive action would be consolidation above $81.5, consolidation above the 20MA and consolidation above the 8EMA. If I see that consolidation and it fails to hold, I would expect to see those breaks bought (volume surge) and price to quickly regain the level. On the daily bars I would expect volume to increase on down bars. Down days have been quickly reclaimed. If that changes, I would be less bullish. If QQQ holds above $83.28, that would be constructive. The market profile shows an LVN at $80.75. If it fails there I would expect it to be a spike down which would get quickly reclaimed.

Accumulation can go on for as long as it wants. A trend in motion tends to stay in motion. The trend right now is sideways. Once the sideways trend breaks, I would expect price to trend up or down. The longer the consolidation period, the longer the potential trend. $79 is the line in the sand according to price. If price breaks $79 then the whole setup is void. My thesis is wrong and/or my timing is wrong. I would manage risk through size. If it opens above $82 I would expect a gap and go. I would go in big with a stop below the opening print. If it opens between $81.50 and $82 I would be more inclined to expect a retest of $81.50 before seeing higher prices. I would go in with 1/4 size on the open and add 1/2 size on a break above the first 5 minute high. I would add 1/4 size on a retest of $81.50 with stop for everything at $81.40.

If price opens below $81.50 I would add on support with smaller size. I would treat the trade as more of a range play and trade it very differently. I could go into detail if you like. Lots of possibilities to consider. One thing I might look to do is add on relative strength in SBUX during weakness in the general market. I would have different expectations around timeframe as well.

Good luck out there tomorrow, Mr. Bellafiore.

@MikeBellafiore

Very good here. It’s not about getting any of this right above that is important, it’s about you going through the detail and thinking through this trade which will help you build skill.

I like your rehearsal here.

You can be better tomorrow than you are today!

Mike Bellafiore

One Good Trade
The PlayBook