The market gap up huge on the good news about the buyout for Greece. Then it sold off in the first hour. My friend suggested to long TZA at 33.60. The daily high for TZA is 34.44 something half hour later. This trade is too short and requiring excellent exit strategy. So I did not take it.
The market consolidate at the noon and down a little bit, then go up from 2:30pm. I should look at the 5 minute chart around 2pm when I saw the stochastic was at the bottom and started to crossover. That was a good good long entry. The index squeeze to the end of the close which makes the close really nice. I was thinking to long June 133 call for $2.32. At the close, the call is worth 2.72. It seems whenever I hesistate to enter a position, the decision is good. Whenever I rush to enter a position, the outcome is just opposite to what I wish. Gosh, too bad.
I have made some paper money from my paper trading account. Enter PPO put when PPO retrace back to 20SMA for a short position. Made some profit on it. Enter 100 UNG put at 0.41 when UNG touched 11.91 ( I was thinking it is forming a head shoulder formation, as 11.91 is the previous high for the right shoulder). Closed the 100 put for 0.46. Good gain for a day trade.
For the real money trade, I entered the long position for NUAN at 21.95. I hope I will have some gain tomorrow. Good luck.
Tuesday, May 31, 2011
Friday, May 27, 2011
Dairy Week 1 Day 2
Today I closed my long position on LULU after the downgrade yesterday. LULU did not have bounce at the open and heading to 88 directly. I notice the stock down from 90.4 to 88.6 in one minute. That is a really disaster. Sold 100 LULU at 90.06 at stop, which I am able to quickly set the stop. I sold the other 150 LULU at 88.91 at the market order, my bottomline was totally destroyed at that moment. Dramatic drop for the LULU trade without setting proper stop. My biggest loss ever since the trading. My trading account is down 15 percent from the beginning of the year in just two days from Wednesday to this Friday.
I will stop real trading for a while and only do the paper trading. I need to think about all the mistakes I have made and learn from each bloody lesson.
I will stop real trading for a while and only do the paper trading. I need to think about all the mistakes I have made and learn from each bloody lesson.
Thursday, May 26, 2011
Dairy Week 1 Day 1
I want to write my trading activity everyday on this blog from today to record what I vision, what I perform, what I learn through a day by day base. It will be extremely useful when I come back later to recall what I have done.
Today is a miserable trading day for me after the dramatically down day for AKAM. I lost $1000 dollars in one day after I bought the stocks yesterday. This is a disaster to my trading account.
1. Bought 150 LULU at $97.55 yesterday. Today morning some stupid company downgraded LULU which draw the price down 6 percent at close today. I was initially set a stop at 96.20 yesterday. But when I see LULU only has price $95 in the pre-market, I cancelled my stop order, thinking it is not worth to cut my loss right away. But things just keep against me. It went up to 96.40 in the first 10 minutes, which can be my escape point, then LULU freely falled down to 91.04 in a day, closed at 91.75. I did not even think about set a new stop order. I even average down another 100 shares at 92.06, wishing I can minimize some loss. Recall that, one day Traderstewie bought BRKS and it got downgraded, Traderstewie sell BRKS right at the open. I should do this also for LULU. Lesson to learn: Whenever a stock got downgrade, sell it as soon as possible. Now I am just hoping tomorrow I can come back some loss. Sell it at 5 minute bounce and move on.
2. Sold 400 share KKD yesterday aftermarket at 7.84. I set a stop order at 7.99. My stop order was triggered 6 minutes after the market open today. Luckily that I set a stop order to cut my loss. KKD is up 11 percent today. What a monster! This kind of failed trade is the same as the old one for GLNG. Yesterday I think KKD would follow through to go down today, but it is acting very strong. I am not regret for this trade, as I feel KKD was more likely go down based on yesterday chart. I am good to set a stop order for it to cut loss if the direction is against me. But for LULU, with the gap down, my stop order does not work.
I will keep posting everyday about my trading activities here. Hope this diary will help me become strong. I need to stop trading for a while. I have to and need to.
Today is a miserable trading day for me after the dramatically down day for AKAM. I lost $1000 dollars in one day after I bought the stocks yesterday. This is a disaster to my trading account.
1. Bought 150 LULU at $97.55 yesterday. Today morning some stupid company downgraded LULU which draw the price down 6 percent at close today. I was initially set a stop at 96.20 yesterday. But when I see LULU only has price $95 in the pre-market, I cancelled my stop order, thinking it is not worth to cut my loss right away. But things just keep against me. It went up to 96.40 in the first 10 minutes, which can be my escape point, then LULU freely falled down to 91.04 in a day, closed at 91.75. I did not even think about set a new stop order. I even average down another 100 shares at 92.06, wishing I can minimize some loss. Recall that, one day Traderstewie bought BRKS and it got downgraded, Traderstewie sell BRKS right at the open. I should do this also for LULU. Lesson to learn: Whenever a stock got downgrade, sell it as soon as possible. Now I am just hoping tomorrow I can come back some loss. Sell it at 5 minute bounce and move on.
2. Sold 400 share KKD yesterday aftermarket at 7.84. I set a stop order at 7.99. My stop order was triggered 6 minutes after the market open today. Luckily that I set a stop order to cut my loss. KKD is up 11 percent today. What a monster! This kind of failed trade is the same as the old one for GLNG. Yesterday I think KKD would follow through to go down today, but it is acting very strong. I am not regret for this trade, as I feel KKD was more likely go down based on yesterday chart. I am good to set a stop order for it to cut loss if the direction is against me. But for LULU, with the gap down, my stop order does not work.
I will keep posting everyday about my trading activities here. Hope this diary will help me become strong. I need to stop trading for a while. I have to and need to.
Wednesday, May 18, 2011
Thoughts on Position Sizing from chartswingtrader
http://www.chartswingtrader.com/2008/08/some-thoughts-on-position-sizing.html
Gio over at Hawaii Trader and IBankCoin asked me for some thoughts on position sizing from a swing trader's perspective. I never really put my strategy into words for this aspect of trading, and to be honest, I think a lot of times it is more of a "feel" thing for me, but then I thought more about it and realized it would probably be a good idea to do so. Here are some of the thoughts I came up with:
The potential loss I face when I start a position is probably the biggest factor for me in how big of a position to take. I chiefly use moving averages and support/resistance levels as my stop loss levels - not just flat percentage stop losses. If I get into a stock that has a clear stop loss level very close by(therefore making the potential percentage loss small), then I may take a larger position because my overall dollar loss will still not be that big (because the percentage loss is so small). However, if say I missed a breakout and was farther away from a logical stop loss level, I would not want to take as big of a position because now my potential percentage loss is bigger, and if I took a bigger position, I would be facing a bigger potential dollar loss as well. I like to cut my losses very quickly, probably quicker than most, so this may not work for everyone.
The overall market should play a big role in how big of a position you take as well. In a clear uptrend or downtrend, it is safer to take big positions in my opinion. In a choppy, whipsaw environment (like we have had recently) taking larger positions is a good recipe for disaster. Obviously, you need to have a system to determine what type of market you are trading in - there are various techniques for this. I use technical analysis of the indices for this and also a set of Telechart scans that I keep track of each day and use as an indicator of the market trend and to also show possible turning points in the market. For instance, right now my momentum indicator is at its highest numbers ever (or at least since I've been tracking it) and when this gets to extremes on the plus side, it usually signals a market that has run too far too fast and needs to cool down. Therefore, right now, based on that, I would not be taking large long positions right now because I feel it would be too risky.
Recent trading success also is a big factor in position sizing in my opinion. If you find yourself on a losing streak, or just kind of grinding your way sideways, that probably is a signal that the market is not setting up well for your particular trading style, and in that case, you should definitely reduce your position size. I know I have personally seen that this past month. Stocks that I thought looked like very good setups have not acted anything like I expected, and that action told me it is not a good time to make big bets. Things are too hard to do that right now. On the other hand, if you begin to put a string of very successful trades together, and setups that you see act well and do what you expect them to do, then perhaps start to take bigger positions. A lot of this is just psychology too - if you get some bad trades strung together, your instinct is to try and get the gains you lost back quickly. This is counterproductive however - unless you are trading a totally new strategy and not following your normal rules that you've had success with, most likely the losses that occurred were a result of difficult market conditions. And when you try to get those gains back quickly, all you are doing is forcing yourself to make more trades in a poor environment, which is certainly not a recipe for success. If you condition yourself to trade less and in smaller positions when you are having less success, you will do a better job of preserving capital during difficult times and slowly allow yourself to regain confidence without blowing out your account.
I would also add that fundamentals usually play a role for me in how big of a position to take. If I am looking at a nice chart of an IBD-quality stock, with great growth and sales growth, then I would be willing to take a larger position. The fundamentals doesn't guarantee the trade will work, but it gives it a better chance of working, as earnings acceleration are the biggest factor in stock price appreciation. On the other hand, if I am looking at a biotech that has negative EPS, I won't take a big chance in a stock like that. There are just too many question marks to take a large position. The chart setup is always the number one factor for me in trade selection, but fundamentals are important in my opinion as well.
Finally, I think it is important to remember to build positions slowly as a swing trader. Ideally, I rarely will take a full position in a stock during my first trade. Instead, I will start a position(usually around 50-75%) and automatically look for a point where I will want to add to it. If it doesn't follow-through and hit the add point, then no big deal - I get out of a small position with a small loss. But if it does move higher, I am forcing myself to add to a winning position, which is always a good thing. It makes the positions that are working automatically bigger while keeping losing positions small.
Hope this helps and is informative. Good luck next week.
Update: I realized I wanted to add a little about the amount of my account I dedicate to a particular stock.
Based on William O'Neil's recommendations in his wonderful books, I don't really believe in diversifying. I really try to be focused in my positions, rarely having more than five or so positions total. So I am willing to put up between 25-33% of my account into one stock. I usually start my positions around 15-20% of my account each. That may seem like a lot, but that is also why I cut my losses so quickly. I can concentrate my positions without too much harm to my account (usually) because I try to keep all losses around 3% or less. That equals out to about 0.5% of my account per loss, but I try to keep it lower than that actually. Most traders I read about usually use the 1% of account value as how much they risk on a trade. I prefer to risk or lose less than that. If trades don't work right away, I don't see any reason to hold onto a stock. Get rid of it and move onto a better one. You can always get back into a stock if you need to. I would rather be safe than sorry. And if I follow my buy and sell rules (getting rid of ones that don't work right away, adding to ones that do) it usually allows me to get bigger positions in stocks that are working well while not holding onto positions that stink.
As I gain more and more experience as a trader, perhaps my strategies will change, but for now, I feel this is the best way for me to trade, and it goes along with the general CANSLIM philosophy that I try to follow in my swing trading. This method isn't perfect - no method is in trading - but it works for me and for my personality and temperment.
Gio over at Hawaii Trader and IBankCoin asked me for some thoughts on position sizing from a swing trader's perspective. I never really put my strategy into words for this aspect of trading, and to be honest, I think a lot of times it is more of a "feel" thing for me, but then I thought more about it and realized it would probably be a good idea to do so. Here are some of the thoughts I came up with:
The potential loss I face when I start a position is probably the biggest factor for me in how big of a position to take. I chiefly use moving averages and support/resistance levels as my stop loss levels - not just flat percentage stop losses. If I get into a stock that has a clear stop loss level very close by(therefore making the potential percentage loss small), then I may take a larger position because my overall dollar loss will still not be that big (because the percentage loss is so small). However, if say I missed a breakout and was farther away from a logical stop loss level, I would not want to take as big of a position because now my potential percentage loss is bigger, and if I took a bigger position, I would be facing a bigger potential dollar loss as well. I like to cut my losses very quickly, probably quicker than most, so this may not work for everyone.
The overall market should play a big role in how big of a position you take as well. In a clear uptrend or downtrend, it is safer to take big positions in my opinion. In a choppy, whipsaw environment (like we have had recently) taking larger positions is a good recipe for disaster. Obviously, you need to have a system to determine what type of market you are trading in - there are various techniques for this. I use technical analysis of the indices for this and also a set of Telechart scans that I keep track of each day and use as an indicator of the market trend and to also show possible turning points in the market. For instance, right now my momentum indicator is at its highest numbers ever (or at least since I've been tracking it) and when this gets to extremes on the plus side, it usually signals a market that has run too far too fast and needs to cool down. Therefore, right now, based on that, I would not be taking large long positions right now because I feel it would be too risky.
Recent trading success also is a big factor in position sizing in my opinion. If you find yourself on a losing streak, or just kind of grinding your way sideways, that probably is a signal that the market is not setting up well for your particular trading style, and in that case, you should definitely reduce your position size. I know I have personally seen that this past month. Stocks that I thought looked like very good setups have not acted anything like I expected, and that action told me it is not a good time to make big bets. Things are too hard to do that right now. On the other hand, if you begin to put a string of very successful trades together, and setups that you see act well and do what you expect them to do, then perhaps start to take bigger positions. A lot of this is just psychology too - if you get some bad trades strung together, your instinct is to try and get the gains you lost back quickly. This is counterproductive however - unless you are trading a totally new strategy and not following your normal rules that you've had success with, most likely the losses that occurred were a result of difficult market conditions. And when you try to get those gains back quickly, all you are doing is forcing yourself to make more trades in a poor environment, which is certainly not a recipe for success. If you condition yourself to trade less and in smaller positions when you are having less success, you will do a better job of preserving capital during difficult times and slowly allow yourself to regain confidence without blowing out your account.
I would also add that fundamentals usually play a role for me in how big of a position to take. If I am looking at a nice chart of an IBD-quality stock, with great growth and sales growth, then I would be willing to take a larger position. The fundamentals doesn't guarantee the trade will work, but it gives it a better chance of working, as earnings acceleration are the biggest factor in stock price appreciation. On the other hand, if I am looking at a biotech that has negative EPS, I won't take a big chance in a stock like that. There are just too many question marks to take a large position. The chart setup is always the number one factor for me in trade selection, but fundamentals are important in my opinion as well.
Finally, I think it is important to remember to build positions slowly as a swing trader. Ideally, I rarely will take a full position in a stock during my first trade. Instead, I will start a position(usually around 50-75%) and automatically look for a point where I will want to add to it. If it doesn't follow-through and hit the add point, then no big deal - I get out of a small position with a small loss. But if it does move higher, I am forcing myself to add to a winning position, which is always a good thing. It makes the positions that are working automatically bigger while keeping losing positions small.
Hope this helps and is informative. Good luck next week.
Update: I realized I wanted to add a little about the amount of my account I dedicate to a particular stock.
Based on William O'Neil's recommendations in his wonderful books, I don't really believe in diversifying. I really try to be focused in my positions, rarely having more than five or so positions total. So I am willing to put up between 25-33% of my account into one stock. I usually start my positions around 15-20% of my account each. That may seem like a lot, but that is also why I cut my losses so quickly. I can concentrate my positions without too much harm to my account (usually) because I try to keep all losses around 3% or less. That equals out to about 0.5% of my account per loss, but I try to keep it lower than that actually. Most traders I read about usually use the 1% of account value as how much they risk on a trade. I prefer to risk or lose less than that. If trades don't work right away, I don't see any reason to hold onto a stock. Get rid of it and move onto a better one. You can always get back into a stock if you need to. I would rather be safe than sorry. And if I follow my buy and sell rules (getting rid of ones that don't work right away, adding to ones that do) it usually allows me to get bigger positions in stocks that are working well while not holding onto positions that stink.
As I gain more and more experience as a trader, perhaps my strategies will change, but for now, I feel this is the best way for me to trade, and it goes along with the general CANSLIM philosophy that I try to follow in my swing trading. This method isn't perfect - no method is in trading - but it works for me and for my personality and temperment.
Knife catching
http://highchartpatterns.blogspot.com/2011/05/when-knife-catching-is-not-knife.html
Tuesday, May 10, 2011
When knife catching is not knife catching
We’ve tweaked this strategy as the years have passed and here is quick outline of the main points of sector support buying:
1. For the most part we prefer to get involved with ETFs over stocks, or at least put the size on the ETFs and smaller size for the stocks. This type of trade boils down to confidence, and for us it’s much easier being confident in an ETF than a stock.
2. This one is very important — it can’t just be one stock hitting support, it has to be the whole sector. The more stocks hit support at the same time, the closer you are to a bounce.
3. Best time to add is the day after a trend-day down. The sweet spot for buying support is in the morning sell-off after a trend-day down. That’s when the best bounces come. However sometimes market ends at the lows (this is what happened to miners on Thursday) and then gaps up on Friday. This is the reason we partial in on different days, because it’s very difficult to time the exact bottom.
4. Best support buys are when it’s not on fundamental news. For example we wouldn’t buy support on cloud stocks after bad earnings. Period. We stayed away from buying the dip after Japan nuclear crisis because we couldn’t “game” the situation (too bad, bounced great). But buying “margin pukes” is probably the BEST time to buy support as there is no change in the fundamental scenario.
5. You don’t anticipate this type of trade, patience is key. You have to wait until there’s blood and then partial in — and never all in on one day. It’s all about buying power and allocation — you have to give yourself concrete levels for adding. As long as the rubber band stretches past support, you can add. Once you’re in overshoot territory your adds will lower your cost basis and eventually your target will be your first entry at initial support. The first target of overshoot is always the first support. For example let’s say you want to get into an ETF called OO. The sector is deeply oversold and many stocks in the sector are hitting support at the same time, similar to what happened here. You start your first partial at 50 which is long term support, and add near the close at 48. You’re now in overshoot territory. Next day it opens at 46, and you add more. Sector starts bouncing. Since you’re in overshoot the primary exit for first partial now is the support that you first started buying, 50, but your cost average is now 48. However, it can also happen in which we are not “feeling” it and do not wait until target and take the profit earlier. Either way, once you get the bounce, your stop automatically becomes the low, no matter what.
6. The exit plan if things go badly: if the stocks start basing over the next few days, then you need to start lightening up and taking losses as any basing diminishes the rubber band snap back effect. As said, once the bounce comes that low becomes the stop. If the bounce is not enough for you to get out of your positions profitably and you go back to the lows then you will have to take the loss, which can be quite significant. We hate to jinx ourselves but, to date, after 14 yrs of trading, this has never occurred in which we bail on the entire position without a bounce for significant losses. There is always a bounce in ETFs. However, what can occur (and has happened to us in which we have scratched the trade or gotten out with some damage) is that you get out on the initial bounce but with losses when sector bounces weakly and you feel like it’s your best chance to exit before your position goes back through the lows.
7. One last thing: for 90% of our trading we will not go into a trade unless we feel that our risk reward is around 3:1. This means if we risk 1 point we expect to make 3 points. This is very common for traders and is a very sound strategy. This means that even if you’re wrong 50% of the time, you still are profitable due to the 3:1 ratio. However, for this particular strategy this is not the case. Sometimes our profits are less than how much our unrealized losses were but we still consider it a good trade. For example, let’s say we start buying on support and add on overshoot. At the lows we are down 40K unrealized. Sector bounces and we get our first target and start partialling out, bounce stalls and we exit everything for 20K profit. Now most traders will tell you this is not good trading as you were down/risked 2x more than your profits. However, it’s the way it is in the strategy and we haven’t been able to change it — what makes us override this red flag is the extreme consistency of wins the strategy yields. The only time we can endorse a strategy in which the risk is more than the reward (for example 2x) is when the strategy has an incredible win rate. Again, this could be a turn off for many of you, and that’s understandable. This strategy is definitely not for everyone.
8. There are three places where traders often make errors:
a) Getting in too early. They put on a small position early and then see it become quite red and start adding. Don’t even start that original position until there’s blood in the street. Disasters start slowly and this is a prime example of it. They use up all their buying power and cannot lower their cost average. When the bounce occurs it’s not strong enough for them to go green and they exit with losses. This is THE most common error a support trader can make.
A 2% pullback on a strong momentum stock could be a nice entry, but only if you get in on reversal with stop under — we would never use the described strategy for stocks near their highs. It has to be a fast (the faster the better) deep pull-back, often when stocks are hitting the 200SMA or at least 100SMA. Even the 50SMA often is not enough for us to enter this strategy (but yes on individual support buys which are very different than what we’re describing here — for those we wait for reversal, buy, and put stop on that low. We never add and we always have a defined stop).
Additional naunce: we don’t wait always wait for the ETF to hit major support (even though it has to be very close) but the leading stocks in the sector.
b) Buying a broken stock instead of buying oversold into support on longer-term bull trend. We would never get into a broken stock just because it’s “cheap”. In our business nothing gets cheaper faster than an already cheap stock. When we say we’re buying on “support”, it automatically means that the long-term bull trend is intact. If it’s a broken chart, by definition, there is no support.
c) Not waiting for whole sector to hit support. Probably the main reason we’ve had such consistent success with this strategy is that we simply wait for whole sector to hit support simultaneously. If you want a recent example look at the charts from last week’s post here.
The ETFs that we use most frequently for this strategy are OIH XLE KOL JJC XME GDX GDXJ SIL SMH QQQQ, and when it’s with the Ags then POT CF MOS AGU as basket.
We’re primarily break-out traders but there is no strategy that has rewarded us more consistently over the years than buying baskets of deeply oversold ETFs hitting simultaneous support while in longer term bull trends . We hope these detailed notes explain how what some perceive to be “knife catching” is not knife catching at all, but just a good trading opportunity.
Tuesday, May 10, 2011
When knife catching is not knife catching
We’ve tweaked this strategy as the years have passed and here is quick outline of the main points of sector support buying:
1. For the most part we prefer to get involved with ETFs over stocks, or at least put the size on the ETFs and smaller size for the stocks. This type of trade boils down to confidence, and for us it’s much easier being confident in an ETF than a stock.
2. This one is very important — it can’t just be one stock hitting support, it has to be the whole sector. The more stocks hit support at the same time, the closer you are to a bounce.
3. Best time to add is the day after a trend-day down. The sweet spot for buying support is in the morning sell-off after a trend-day down. That’s when the best bounces come. However sometimes market ends at the lows (this is what happened to miners on Thursday) and then gaps up on Friday. This is the reason we partial in on different days, because it’s very difficult to time the exact bottom.
4. Best support buys are when it’s not on fundamental news. For example we wouldn’t buy support on cloud stocks after bad earnings. Period. We stayed away from buying the dip after Japan nuclear crisis because we couldn’t “game” the situation (too bad, bounced great). But buying “margin pukes” is probably the BEST time to buy support as there is no change in the fundamental scenario.
5. You don’t anticipate this type of trade, patience is key. You have to wait until there’s blood and then partial in — and never all in on one day. It’s all about buying power and allocation — you have to give yourself concrete levels for adding. As long as the rubber band stretches past support, you can add. Once you’re in overshoot territory your adds will lower your cost basis and eventually your target will be your first entry at initial support. The first target of overshoot is always the first support. For example let’s say you want to get into an ETF called OO. The sector is deeply oversold and many stocks in the sector are hitting support at the same time, similar to what happened here. You start your first partial at 50 which is long term support, and add near the close at 48. You’re now in overshoot territory. Next day it opens at 46, and you add more. Sector starts bouncing. Since you’re in overshoot the primary exit for first partial now is the support that you first started buying, 50, but your cost average is now 48. However, it can also happen in which we are not “feeling” it and do not wait until target and take the profit earlier. Either way, once you get the bounce, your stop automatically becomes the low, no matter what.
6. The exit plan if things go badly: if the stocks start basing over the next few days, then you need to start lightening up and taking losses as any basing diminishes the rubber band snap back effect. As said, once the bounce comes that low becomes the stop. If the bounce is not enough for you to get out of your positions profitably and you go back to the lows then you will have to take the loss, which can be quite significant. We hate to jinx ourselves but, to date, after 14 yrs of trading, this has never occurred in which we bail on the entire position without a bounce for significant losses. There is always a bounce in ETFs. However, what can occur (and has happened to us in which we have scratched the trade or gotten out with some damage) is that you get out on the initial bounce but with losses when sector bounces weakly and you feel like it’s your best chance to exit before your position goes back through the lows.
7. One last thing: for 90% of our trading we will not go into a trade unless we feel that our risk reward is around 3:1. This means if we risk 1 point we expect to make 3 points. This is very common for traders and is a very sound strategy. This means that even if you’re wrong 50% of the time, you still are profitable due to the 3:1 ratio. However, for this particular strategy this is not the case. Sometimes our profits are less than how much our unrealized losses were but we still consider it a good trade. For example, let’s say we start buying on support and add on overshoot. At the lows we are down 40K unrealized. Sector bounces and we get our first target and start partialling out, bounce stalls and we exit everything for 20K profit. Now most traders will tell you this is not good trading as you were down/risked 2x more than your profits. However, it’s the way it is in the strategy and we haven’t been able to change it — what makes us override this red flag is the extreme consistency of wins the strategy yields. The only time we can endorse a strategy in which the risk is more than the reward (for example 2x) is when the strategy has an incredible win rate. Again, this could be a turn off for many of you, and that’s understandable. This strategy is definitely not for everyone.
8. There are three places where traders often make errors:
a) Getting in too early. They put on a small position early and then see it become quite red and start adding. Don’t even start that original position until there’s blood in the street. Disasters start slowly and this is a prime example of it. They use up all their buying power and cannot lower their cost average. When the bounce occurs it’s not strong enough for them to go green and they exit with losses. This is THE most common error a support trader can make.
A 2% pullback on a strong momentum stock could be a nice entry, but only if you get in on reversal with stop under — we would never use the described strategy for stocks near their highs. It has to be a fast (the faster the better) deep pull-back, often when stocks are hitting the 200SMA or at least 100SMA. Even the 50SMA often is not enough for us to enter this strategy (but yes on individual support buys which are very different than what we’re describing here — for those we wait for reversal, buy, and put stop on that low. We never add and we always have a defined stop).
Additional naunce: we don’t wait always wait for the ETF to hit major support (even though it has to be very close) but the leading stocks in the sector.
b) Buying a broken stock instead of buying oversold into support on longer-term bull trend. We would never get into a broken stock just because it’s “cheap”. In our business nothing gets cheaper faster than an already cheap stock. When we say we’re buying on “support”, it automatically means that the long-term bull trend is intact. If it’s a broken chart, by definition, there is no support.
c) Not waiting for whole sector to hit support. Probably the main reason we’ve had such consistent success with this strategy is that we simply wait for whole sector to hit support simultaneously. If you want a recent example look at the charts from last week’s post here.
The ETFs that we use most frequently for this strategy are OIH XLE KOL JJC XME GDX GDXJ SIL SMH QQQQ, and when it’s with the Ags then POT CF MOS AGU as basket.
We’re primarily break-out traders but there is no strategy that has rewarded us more consistently over the years than buying baskets of deeply oversold ETFs hitting simultaneous support while in longer term bull trends . We hope these detailed notes explain how what some perceive to be “knife catching” is not knife catching at all, but just a good trading opportunity.
Subscribe to:
Posts (Atom)