In this video, learn one Tape Reading exit strategy every trader must add to their trading. A new trader discusses with Mike how he exited a profitable Opening Drive trade. Mike suggests one essential exit strategy he did not consider and should have.
View Video Transcriptin this video learn one tape reading
exit strategy
every trader must add to their trading
hi i’m mike bellafiore co-founder of smb
capital and we’re a proprietary trading
firm located in midtown manhattan
and i’m also the author of the trading
classic one good trade
and the playbook in this video a new
trader discusses with me
how he exited a profitable opening drive
trade
i suggest one essential exit strategy
he did not consider and should have
let’s get to work on sharing these
important trading lessons so you
can grow your trading account
so i’m going to be going over an opening
drive short i was taking in nike last
week after they released earnings
i want to give some context to a bunch
of variables that align that got me
interested in taking this trade
so the day prior and after hours they
released earnings they were quite strong
so quarterly eps was 95 cents versus the
street estimate of 48 cents
and revenue of 10.6 billion versus a
9.15 billion
expectation so pretty pretty strong beat
there as well as digital sales up 82
which is to be expected given us being
in shutdown
as well as coming into the morning we
had a variety of big banks giving nike
price target upgrades so some some
strong variables aligning for it for the
bull thesis
but on the other hand i’m just thinking
we’re set to open up
almost 5 atr above yesterday’s close
which is
about 10 and we hit as high as plus 15
percent in the after hours yesterday
so just overall pretty extended and i’m
thinking we might need to see some
downside
and then when i’m thinking through these
opening drag trades i also like to think
about where the big players are
kind of positioned and so i recognize
that short float was under one percent
here
while institutional ownership is over 84
so on the open i’m not really expecting
to see a big short squeeze very often
because there just aren’t many shorts
that are going to be stuck overnight
there will be some but not many
whereas there’s going to be a lot of
institutional investors and big players
that position themselves along in nike
heading into earnings trying to get this
gap up that they just
got which is very significant and
they’re probably going to want to take
some profits
so i expect there to be a bigger supply
than demand on the open and nike here
and so coming into the open in
pre-market
me and all the guys in my training class
we were all kind of game planning this
together and figuring out
various ways we could approach this
based on how it reacts off the open
and most of us were pretty bullish and
thinking about how we could figure out
how to position ourselves for an
intraday swing and maybe get some more
continuation to the upside
but in the last couple hours of
pre-market we saw this fading action
we’ve been trading in a tight channel
between 131 and 133 for
quite a long time and graham if i can
just jump in here quickly
sure and you remarked about this in your
daily report card and i remarked back to
you which is
the work that you did in the pre-market
to game plan
and then to game plan with other traders
on your desk is terrific
and that is something i highly encourage
you to keep doing
particularly since it led to success
absolutely and i have to give a shout
out to tim
in the pre-market he noted that uh dks
and piton
to somewhat similar stocks that had
similarly very strong earnings and
gapped up very high
after hours and into the pre-market uh
but then just sold off aggressively on
the open and that was within
you know a very recent time period so
having that context and recognizing that
maybe this market environment is selling
off these large caps gave me a little
bit of extra conviction for the short
given the fact that we broke down from
this 131 to 133 channel
and volume is starting to dry up and it
was looking weaker and weaker
i was looking for the short just on
momentum again these are strong
changing fundamentals strong earnings
news but uh
we should see some relief on the open
was my thesis
and so coming into the or coming into
the open looking ready to take this
trade
i’m looking at this 128 to 126 as a
potential area of interest where we got
some consolidation before breaking out
higher
in the after hours so when i’m putting
on this opening drive my first profit
target area is going to be this 128 area
and then maybe see if i can take some
lower towards 127 or 126.
do you think when you’re looking at your
pre-market chart that the stock is
starting to roll over just a touch
absolutely yeah and so i’ll scooch
forward a little bit here
so like i said this 131 to 133 level was
really the the tight channel
and so in the last 30 minutes of
pre-market it kind of shows its hand
here
as it rolls down steeper than it has
before
tries to spike up on volume but
immediately fades that spike up
so once i see that i’m very interested
in the short
so once i see that i was hoping that we
would hold above 131 so that maybe we’d
see
a wall of bitters that i could hit into
on a decrement
but that’s not going to happen and so i
have to be flexible and figure out how i
can get myself into this trade
intelligently so that my risk reward
makes some sense and so
i’m thinking maybe this level of 130 a
round number that people are gonna have
their eyes on maybe i can trade it
against that
so we’re set to open soon if you want to
learn three
real world setups that our traders use
including the simple setup that we teach
all of our new traders and the setup
that turned one of our traders into a
seven
figure big money earner check out the
free webinar that we’re currently
running
just go ahead and click the link that
should be appearing right now at the top
right hand corner of your screen
that’s going to open up this free
registration page in the new window
so don’t worry you’re not going to lose
this video you’re going to learn more
in a couple of hours from this trading
workshop than from
years of online education and we do keep
breaking lower
coming into the open here i’m going to
test this 130 level
but yes to to re-solidify that like
seeing this last 20 minutes of
pre-market action makes me feel pretty
convicted that this is an opening drive
short
so now i’m just hoping we get some kind
of pop so there will be a little bit of
meat on the bone for me to take this
short but i am thinking
130 is probably the level i’m going to
be looking at
i’ll scoot forward just a little bit
more but you’re gonna see
my entries are going to be very quick
and i’ll run it back once or twice
but i’m just trying to find an area that
makes sense for me to play off of even
if it’s not the biggest technical level
from a daily perspective or on an hourly
chart i just want to have a way to
structure my risk intelligently
so i’m in very quickly we are open now
do a bit of selling
no real bids this is our biggest wall of
bitters since the open
we haven’t had anything and again i
think if this drops out it’s going to
drop out very quickly
especially given this last 20 minutes of
pre-market so i have to be able to be
reactionary and hit in quickly as well
so i hid in at 130 and the idea for this
is
if bids reclaim 130 i’m happy to take
this out as a loss
and if 130 didn’t hit out immediately
again i’m willing to pay the spread and
just take that loss
but i think if this drops out it could
drop out pretty far and graham are you
looking to see that the offers are 130
20 and identifying that as your
potential risk
yeah exactly so the spread isn’t
incredibly tight but it’s not it’s not
anything too crazy so
i’m recognizing i’m at least gonna have
to pay 20 cents of risk if i’m wrong
sure you’re looking at the offers and
you’re seeing where you can get out if
you’re wrong
and it looks like there’s some nice
offers there at 1 30
20 and that helps you to identify
potential risk
yeah and 20 cents is perfectly
reasonable in my opinion for this kind
of setup
if we’re in one of these stocks where it
opens up to a point point and a half on
the spread
it’s going to be a different story and
i’ll probably be hands off but i’m going
to pay 20 cents if i’m wrong so now i’m
just hoping to see this continue
and it pretty quickly begins working in
my favor yeah just
uh quickly i like the way you’re
thinking through that if that’s going to
work
when you hit that at 1 30 the way that
this trade will work for you over time
is if it starts to work for you right
away so what you need to see
are the bids dropping the bids dropping
the bids dropping very very quickly
and so if you hit that 130 and it you
didn’t just see it go down really
quickly
based on your thesis and what you’re
planning to do that really is a
get out as quick as you can if you can
get on the bid great if you have to pay
the offer
okay but the trade is the opening drive
play is
hit it and the damn bids ought to drop
and this thing ought to
go down really fast and that’s your
trade and if you’re not seeing that
then get out of it and you’ve set up a
pretty good trade here
and this does have a pretty good
likelihood that it can go down for you
pretty quickly
but you can’t hit it and if it doesn’t
go down right away kind of freeze
and start thinking and analyzing and
asking yourself questions as to well
maybe it’s
not ready to go down yet or you know
maybe it’s going to take a little bit
more time to develop it’s not a swing
trade
it’s a opening drive scalp and that
looks
a certain way that has certain
characteristics and that trade you hit
it and it goes down
immediately that’s the trade okay for
those of you looking for
a more academic explanation of what you
want to look for in a trade or for those
of you who want to make swing trades
not for you right here and that’s fine
okay
but the trade we’re describing is a very
effective
trade particularly the way that you’ve
looked at it
you can make really good money very
quickly
on this trade is a very legitimate
intraday strategy
and so good for you to measure whether
or not you can make it work for you
absolutely and i’ll even say i’m not a
good scalper but this is
one of the very few scalping momentum
trades that i think i do quite well in
have edge in
so we’ll let this continue
interested to see how quickly this can
really go
but again my my proper target really was
128
it’s a little less than an atr from the
open seeing if i can capture that
so while this is a bit uncomfortable i
put my first bids out and i believe this
is
at like 128.28
even if i’m wrong on this again i’m
going to be paying very little for this
loss so i want to give it time to work
starting to accelerate a little bit
now pretty quickly under 129 now
yeah and you’ll see the stock never
never really threatens to go back up
towards
where you entered never really threatens
to go up towards 130
never re-bids 130 never comes up even
anywhere near 1 30.
exactly and so what we see in this trade
for a lot of it is
especially here this 128.50 to 128 30ish
area
is giving it some issues um and i’m just
recognizing that this is just a momentum
trade
so if i see an area really stalling i’m
going to want to consider getting out
some of my shares and i actually do get
out
half of my position here given that
this is the first time we’ve seen
momentum really stall like this
and with these momentum traits there’s
at least a reasonable likelihood that we
could rubber bands and head back to
130 and actually put in a trend day
maybe i’m being a little bit of scared
money there
but i also just know that those shares
that i took off there
i had just about 25 cents lower so i
don’t know if it’s worth fighting for
those shares
uh for those 25 cents on those shares
yeah it’s not
on this type of trade it’s a different
trade maybe but not on this trade
agreed and so i’m still sitting on these
the second half of my position here and
i believe my price target was something
like 127.25
and that might just be a little bit too
ambitious
and this is this is a mistake i make
here in this trade
we get below 128 and i’m feeling good
about it but we really struggle to hold
below it and we do it one or two more
times before
before the trade is over and once i see
128 which i recognize is really the key
support level from the after hours yeah
and i think graham if i can jump in
when you watch tape enough and you watch
the way that got below 128 and you saw
how steep it was
you know when i when i’m watching that
tape with you right here
i’m getting a uneasy feeling in my
stomach
that there’s a trade decision here
because it’s just too steep
and now the risk is switching over that
you’re going to get back too much open
profit
but i think when you when you start to
watch tape over and over again
you’ll start to be able to take off
drops that are too steep
and recognize what that looks like and
just take it off
absolutely definitely a big area of
improvement for me and that’s really the
the main lesson i was taking away from
this trade
get below 128 again put in a spike low
and this is something that’s a pretty
big bullish indicator for me and a lot
of my trades
we spiked there below to 127.50 and
we’re pretty good
pretty quickly going to reclaim 128.
i just want to sort of bring up that
point which is there are reading the
tape principles where we wait for
something to re-bid and that gives us
the signal that we’re going to cover
that gives the signal that there’s some
strength in this area on the tape
we talk about that a lot you guys do a
really good job of covering that
but when something gets but there’s
another way to exit which is the point
i’m
making to you which is if something is
just too steep to the downside you’re
short it’s too steep to the downside
that also
that steepness that it’s just goes down
too fast too much too quickly
that also is going to become
when you’re reading the tape skills get
better
away to exit
and it takes a little bit of you’ll know
it when you see it
and there’s other things you can do like
look at atr’s
uh you can look at price and time
you can look at bollinger bands there
will be other ways for you to
build systematic ways to do that other
than just
catching it by your eye but what what
i’m encouraging you to do right here
great entry i love what you’re doing
here
but what i’m encouraging you to do right
here is to think about
another way to exit other than
you see it re-bid an area other than
you notice buying
you notice the momentum slowing in a
particular area those are legitimate
ways to exit
but another way to another legitimate
way to exit is too steep too quick
yeah i absolutely agree
fortunately i do hold on to it here and
now we start to see some strength in the
name
yeah and that’s the risk if you don’t
add that to your system you don’t add up
to your trading system the risk is
you’re going to get back open profit
exactly and going off of what you’re
saying about the steepness
we saw this steep drop off here and then
nike immediately rebid
like 70 cents in 15 seconds we haven’t
seen that and you’re not making a swing
trade
if this was a swing trade it would make
sense for you to look for the stock to
rebid maybe around 128
that would be a more legitimate way to
exit but you’re making momentum trade
and with the momentum trade you can’t
give up
60 70 percent of 60 70 cents of open
profit
on a two and a half dollar profit
and it’s just not the trade it’s the
momentum trade so
and so what we’ll see here is that nike
actually does kind of present an
opportunity for
another re-entry but i’m
not in a position where i feel like i
can re-add to my position
instead i’m stuck with these shares here
where i know that i’ve given back a lot
of open profit
yeah and i don’t like to re-add on that
that play at all and the reason i don’t
is because the earnings really good and
was gapping up
a very common thing that happens in
stocks like this particularly in a
strong market is that
on the open as you identify there’s some
profit taking
and the stock goes down a little bit and
it looks really weak right away in the
open
but then there are people that want to
continue buying this
and they step in at these lower prices
and start buying it up
and it’s a very common pattern can be
the thing goes down two and a half three
points right on the open
they buy it all the way back up to the
opening price
and then it as you said trends higher
for the rest of the day and so if you’re
shorting
a point and a half into a three-point
down move because you
think that it’s going to go right back
to where it it went to
in a stock that has strong earnings and
a stock that’s strong overall
and a strong market you got to be super
careful about
doing that just based on price if it
rolls over and it shows your weakness
into a retracement totally different
story but just shorting
on pops on on price with this setup
i’m i’m not doing very often i i guess i
should clarify i don’t like shorting
here either
i don’t think the risk war is nearly
good enough and i think the the good
old-fashioned dip and rip like you’re
talking about
happens to too often but we’ll see we’ll
see here that 130 rejects
um and we just spent some time stalling
here
um and i think it’s a it’s a lower eb
trade if you want to look at it that way
but it does perhaps offer an opportunity
i am interested to hear your thoughts on
it though
again we see this poll back here if you
see it and you see something
if you see the turn that’s the language
you use if you see the turn after a pop
i think that’s a different trade than
shorting the pop
in a a strong stock like nike i wouldn’t
want to short the pop in a strong stock
i would short the turn first scout
agreed
so we’ll see we’ve just been trading in
this little range here
showing some resistance around 129.50
and we try to take out 129
or 130.
try it can’t get above pull back
and once i see that steep of a rejection
if i can get 129.60
i think i would be happy with that
trading against 130
at least has an idea that was my thought
on that
but it was rather quick and we do end up
falling back here and i
switch my bit around here i don’t think
127s are really
on the table at least i don’t think the
win rate is going to be
large enough and i think i’m better off
suited trying to take my profits
down here and i believe i place a bid
out for 128.11.
so adjusting my stop because i know this
is an area of contention
and i know it’s an area where a bunch of
value buyers seem to be stepping up
yeah and i’ll just ask you to think
about whether or not you should be out
by now
whether or not whether or not you really
do need to sit through that up move
that retracement whether or not that’s
really good for this type of system and
i know you’re down to
you know maybe half of a tier maybe of a
quarter of a tier but do you need to be
sitting through this retracement
after you made a good trade agreed and i
was on audio chat and i was even talking
to the guys saying like
i do eventually get out of this trade
pretty soon here but i can’t help but
feel like i got
lucky on this second half of the
position yeah i think that’s a good
thought
i think that’s probably right
so get out right there at 128 11 and i’m
out of the trade
and i i already knew coming into the
open if something like this were to
happen
i’m really not interested in watching it
any further unless it reclaims 130 and
maybe gets it back above 133 because i
think this is just going to be very
choppy there’s a lot of eyes on it and
there’s a long way to go before we get
to the important inflection levels so i
look away fairly soon here
i can zoom forward a little bit
to end up moving around spiking below
127.50
again but again re-bidding and then
we’re right back into the zone
and we end up chopping around pretty
much for the rest of the day
they’re just taking out the weekend
longs there below 128.
agreed so that was the entirety of the
trade looking back at this trade
did a great job game planning you did a
great job
game planning with others you did a
terrific job
finding a price a level that you could
trade off of
that would be significant that gives you
the go signal
for your opening drive play you did a
really nice job thinking through the
potential trade
in terms of the thesis of profit taking
in this particular name you did a
really really nice job controlling your
risk overall for the trade hey we’re
going to hit some of these trades
at 1 30 and they’re not all going to
work out and all we’re really trying to
do is
as you said have ev on a particular
trade you know all
in this trade from 130 there’s
two and a half points of downside maybe
two points of downside
in in reality for 20 cents of
risk you don’t have to be right that
often
to make that trade work and in this case
it was a high probability trade the way
you thought through it
he did a nice job of taking partial
profits
and then leaving a little bit for
further decisions
and i thought you did a nice job
not making this into a mess
by shorting this thing at some bad
prices after it popped
um but i do think overall
a huge takeaway that you that you might
see from this is adding taking profits
on
steep declines and i do think
you should take away clarification of
when you’re going to short pops in
something like this
and when you’re going to insist on
shorting rollovers in something like
this
but you know overall
really solid hey go ahead and click our
subscribe button so you don’t miss
any of the videos they’re producing for
you and the trading community and please
take the time to add your feedback in
the comments section for what videos
you’d like for us to produce next
and what you found helpful from this
video from all of us at smb train
and trade well
* no relevant positions
