I received this review from a really solid young trader. There are two important trading lessons in his thoughts. Can you spot them?
Biggest regret today: not using the information I collected on ITMN as a short. I was watching above 17, I had a long bias, but I chose not to buy it because of what I saw. The way it traded around 17, that’s what a failed breakout/failure at resistance looks like. I was just so fixated on the long because I thought the risk-reward, based on the volume multiple and long-term trend reversal, was to the long side (especially after seeing MCP/YOKU lately), figured the short was a scalp for 40-50c at most. Trying to get long pre-market also
It’s like a fundamental error here, not being prepared for the gap fill play. That’s how I trade ideas at the open — stocks where I can have a psychological map for when it will squeeze and when it will collapse. So this was lapse in analysis. Some of my best trades on the open have come from looking at breakouts or momentum through the whole and sensing that something was a little off.
I hate it when I have small size at 16.25 for when it really goes and I’m getting bigger around 17 when it’s battling and then it fails… I got long 16.27 pre-market, sold 16.66. I wanted to buy a pullback into 16.60’s anyway and I’m spending my risk at 17…
Did you spot the two important trading lessons? If so well done. If not read further.
1) Biases are wonderful to develop before the open. But remember they are just biases. This is just your opinion about how a stock may trade. There are thousands of players in the market. It is impossible to understand what all players are thinking or why they have to buy and sell. Maybe a big HF needs to raise cash and they have chosen this moment in this stock? Maybe an institution sees a different longer term trade that disrupts your intraday trade?
Biases unconfirmed by the tape for the intraday trader breed irresponsible risk. Think of each trade as just an opportunity for the security to move away from prices you have identified as significant. And not necessarily a marriage between your bias and the next move in a stock.
2) Sometimes the buy at 17 is a better buy than the buy at 16.23. This is a hard concept to understand for the retail trader. How can it be better to buy a stock 77c higher? But for the intraday trader we must understand this trading principle.
The trade at 17 has a risk/reward.
The trade at 16.23 has a risk/reward.
It is entirely possible that the risk/reward is more opportunistic at 17. Let me offer an example.
CLF at 12PM (see the chart below) was a much better risk/reward trade at 69.50 than on the open around 69. More believed in the intraday long. 69.50 was not dropping the bid offering an excellent risk/reward entry. With a downside of 2c we had an upside to our target of 71.25, the next significant technical level. You will make a lot of money as a trader putting yourself in those risk/reward opportunities. And it all came a good 50c higher than our first entry opportunity.
Thanks for the analysis!
I agree and understand the better risk/reward at 69.5. So say you get in at that level, do you:
1) Ride the pull back keeping your original stop or do you get out? If out where would that be?
2) Wait for the break, go long above 69.5 once you see the level holds on the pull back after 12pm? It seems that stocks will most of the time do that: break a key level, pull back to that same level and then go without looking back.
Your thoughts are greatly appreciated!
Interesting post but I’m having hard time understanding when you state that the risk on the trade is only 2c. Although CLF is not one of those illiquid bouncy stocks it’s always possible that you can get ticks of at least 10c.
By no means giving a better answer than the SMB team, I think the 2c comes from the previous attempt to break that level, which now forms support. Wicks happen, but usually are minimized when stocks get attention, have news and fresh order flow. If you get stopped and the stock goes nothing prevents you from getting back in. At least once the stops get “consumed” they are somewhat less likely to happen, what do you think?
I completely disagree that can prevent $70 stock to tick down 10c and more(especially when a held bid is dropped) – unless $CLF is some kind of unique stock that never moves in more 2c increments.
Anyway, the risk/reward for the trade was still good in my opinion
Its Moshe here from Israel.
I love your blog. In hebrew we say “Gai kakhen afenyam”
Have a nice day
Looking back on missed trades on hindsight can be enlightening and teaches us how to be better at trading. When we have methods to take both long and short side, the bias actually became a hurdle when market does not move in the bias’ favor. The decision to take which side is discretionary.