Wednesday, February 19, 2014

KABOOM

I love it when a plan comes together.  Even more so when that plan involves making a little scratch.  Two (put) trades I want to highlight today, SPY and SLW.  I placed these trades near the close on Tuesday and I'll highlight why and where I think they might be going.  Below is a SPY a daily chart since the beginning of the year.  This is really was a no-brainer risk reward trade.  We have a ton of volume representing overhead resistance highlighted in red and decreasing daily volume on this move up.  In order to break that overhead resistance the market would have to either gap over and above the resistance zone or bust through on very high volume to absorb all that supply.   Instead the market moved higher today on lower volume only to fall apart for the rest of the day.  The next stop on the SPY is 180.69.

The SLW wasn't as obvious but still the risk reward again is very attractive since it was hovering around resistance after a large gap up on Monday.   Below is the daily candlestick chart with the $25.87 support and resistance area taken off a PnF chart.  You can see that the gap up candle rallied right into resistance closing well off the highs.  The next day another attempt to break resistance failed on lower volume.  Again the risk reward is apparent with a stop loss on a close above resistance.  Again today there was another attempt to rally above resistance (I was a bit nervous but patient) only to see it fail and follow the rest of the market down.  The next support is at 24.18 which would make this another great return on my put options.

That's it for today.  Lets see what the market has in store tomorrow.

Thanks for reading.

Saturday, February 15, 2014

The Follow Up

To follow up on Wednesday's post regarding SPY and LNKD we can see how price reacted around the support and resistance areas and the associated volume.  What is even more interesting is the crazy twists and turns to shake the weaker hands out.  Trading is definitely a game for the mentally strong (or just the mental).   Lets looks at what LNKD did the next day after are analysis.  It gapped downed at the open so the prudent move here would be to look for a test of broken support. Instead LNKD rallied right back into the trading range within the first 15 minutes of trading tell me this was a shake out.  The rest of the morning and early afternoon was spent trading within the trading range we defined the day before (195.09, 192.36) until 2pm when we saw another break of support on increased volume.   Again we waited for the test which came near the close of the day.  The test was very telling because you can see that we had very heavy volume but price remained in a tight price range unable to break what is now the resistance area of 192.36.   The next day LNKD dropped right from the open and continued its downward trajectory for the rest of the day.  The next stop is $183. 68 as we defined previously.  Another thing too note is the amount of volume that was transacted within the trading range we defined.  That tells us that any legitimate breakout will have some momentum behind it.   I'm not going to  say that it was easy to trade this in real time but having these predefined support and resistance areas along with volume analysis does certainly help you navigate through the twists and turns intraday.

 
The SPY chart below again shows the importance and action around these pre-defined support and resistance areas.  Like LNKD, SPY gapped lower (only 14 cents away from support) before moving higher.  However, as you can see SPY broke and tested all the overhead resistance areas before moving to the next level.  Again I cannot stress the importance of defining these support and resistance areas in advance. Using this in conjunction with volume analysis will result in consistent profits.   In my next post I will look to find another stock along with the SPY to analyze for the next trading day. If there is a stock you would like me to analyze just flip me a note I would be happy to post about it.

Thanks for reading.


Wednesday, February 12, 2014

Telling the Future

"I predict the stock market will move tomorrow."

Everyone is trying to predict what the market will do.  Well why not you do stand about a 50% of sounding like a market guru if you are right.  Well today's post I'm going to give you the current intraday trading range for the SPY and LNKD (I am looking to trade this one as well) and then the rules of when I would go long or short.  So the point is I'm not predicting the anything.  I'm simply setting up parameters and rules to go long or short should the criteria be met.

Lets start with the SPY.  We are in a trading range between 182.39 and 181.74.  I would wait for a breakout one way or the other confirmed by high volume to validate the breakout.  Typically, after the breakout you might see a test of the broken support or resistance before a continuation of the move in the direction of the breakout.  Where do you exit?  I would at 182.81 on a break of resistance as the next resistance area to access and 180.69 on a break of support.

Below is a chart of LNKD.  I like LNKD for intraday trading simply because it moves. After it broke support of $201.50 (which is tested and continued down) LNKD fell into a trading range between $195.09 and $192.36.  What is interesting to note is the amount of volume transacted at the lower end of the trading range today.  It looks to be accumulation but the prudent thing to do is wait and see and look for volume confirmation of any break out of the trend.   LNKD provides also a great risk/reward on any break intraday with next resistance at $201.5 and support at $183.68.

Lets see how my powers of prediction work out!  Thanks for reading.


192.36, 195.09, 201.5

Tuesday, February 11, 2014

Smart Trading and Dumb Trading

As promised today I will be presenting two real time trades I took.  One simply awesome.  The other simple stupid.  Both show why sticking to the rules is so important and how emotions can and will hurt your trading.  

First let me show you the prep for the trade and take you on a journey through my brilliant mind.  The SPY 60 min PnF mind clearly showed me on the close of February 10 the support and resistance area of 179.97-179.76.  That is step one.  Check.


The next chart is a 15min SPY candlestick chart the a Volume by Price (VP) overlay for the past two trading days.  You will notice that our support and resistance area has the most amount of volume activity.  This is where the accumulation or distribution is clearly happening.  However, we will not know which one until the range is broken.  We get the answer the next day with a breakout above the range on increased volume. This is where going long would make sense. You will also notice how the SPY would breakout of each smaller trading range on increased volume validating the move higher.   So yes that was a text book long trade and makes trading seem like a piece of cake.  

The next trade made very little sense.  It was more along the line of 'If I'm selling my long position I should or short'.  In hindsight I realized how idiotic of a trade this was.  There was nothing on the chart at that point indicating a move lower.  I was lucky enough to get out with a tiny loss after we broke higher once again.  The lesson was learned and cost me little.  I hope this example helps I will be adding more as the trades happen so stay tuned.   Thanks for reading.

Saturday, February 8, 2014

I have found the Holy Grail of Trading!

Now that I got your attention and probably lost any credibility I might have had with you I have not found the holy grail of trading.  The past month or so has been filled with several epiphanies and I think I found MY holy grail.  Which in short is just a trading system which I believe is complete enough to consistently make money using.  I will break down my trading system in steps and the tools I use to essentially document the trading system for myself and for all to see and criticize.  Below is the overview of the breakdown.

Wyckoff's Three Laws:  I've studied Richard Wyckoff's work and it is absolutely brilliant but the most important concepts that I believe every trader should have ingrained into their minds each and every time they analyze the markets are his three laws:
  • The Law of Supply and Demand 
  • The Law of Effort versus Result
  • The Law of Cause and Effect
This is the cornerstone of my trading and all the tools I use evolve around these three rules.  I ask myself these questions each time I analyze the markets.
  1. Are we trending or are we in a trading range?
  2. If we are trending then is the effort (volume) supporting the result (price move)?
  3. If we are in a trading range what are the upper and lower price boundaries?
  4. What was the amount of volume and time spent in the trading range and does it support a sustained price increase/decrease to make money from?
Support and Resistance:  This is probably the most important aspect to any trading system.  Being able to accurately define support and resistance areas alone could result in at least a 50% chance of being right on any trade.  More importantly, it is at these support and resistance areas that the battle of demand and supply is fought determining if there will be a continuation of the trend or a reversal.  I have not found any other tool better than Point and Figure chart to accurately determine support and resistance and hence it is my tool of choice and has been since the beginning.

Volume:  The second most important aspect to any trading system.  Does volume precedes price?  I think so and I think anyone that relies on price only will have a more difficult time making money consistently in the market then one who uses both price and volume.  I am of the mind that you want to follow the big money and not fade them to really catch those big trends.  How would you determine if the big money is buying or selling without analyzing volume?  Volume analyzes the effort of each price move.  I use two tools to look at volume and that is simple volume bars and volume by price both of which help me determine the volume support at specific price levels and strength/decline of any trend.

Price Bar Analysis:  Candlesticks vs bars? Another of the trading community's  great debates.  Honestly, they both are telling you the same thing however, candlesticks are more visual.  In the end though so long as you can determine the journey of price for that time period represented by the price bar and if it was bearish or bullish then feel free to pick your poison of candlesticks or bars. Just a note that I will follow up with in a separate post, up bars are not always bullish and down bars are not always bearish.

In the posts to follow this one I will provide examples of my recent trading highlighting all the points I've mentioned above into my analysis.  You will notice that I don't use any traditional technical indicators which signal when to buy or when to sell.  The reason is they do not fit into my understanding of how the markets work.  A MACD or Stochastic does not tell me anything about supply and demand.  Below are my steps to trading and the time frame makes no difference. The analysis is exactly the same.  Just don't expect a 50 cent trading range on a 5 min chart to lead to a $10 breakout move.

Entry Analysis:

1.  Define support and resistance areas using point and figure charts
2.  Determine if we are in a current trend or trading range in the timeframe being analyzed.
3.  Determine any price and volume congestion using volume by price.
4. If we are in a trading range determine the next possible price pause area above and below the trading range. This will determine you risk reward on any breakout.
5. Wait for the breakout of the trading range and ideally a test of the breakout range to enter your trade.
6. If we are trending again determine the next possible price pause to determine you risk reward should you enter the trade.

Exit Analysis:

1.  I usually place my stop loss just below the top of the trading range on an breakout higher.  I've found that if the price comes back into the trading range then it usually isn't a good sign.  The same goes for a breakout lower from the trading range I will place the stop slightly higher than the bottom of the range.  The loss is usually very small and I've found myself when trading lower time frames that i will get stopped out 2 or 3 times before the trend kicks in and my profits completely overshadow any small losses I've taken.

2. If the price has moved in favor of my position then having the predefined levels of support and resistance and volume congestion zones handy really help.  Usually when price hits a support or resistance level it will usually go into another temporary trading range (remember this is where the battle of demand and supply happens) so you can either exist your position at whatever profit you have at the time or wait to see how the trading range resolves.

Price can sometimes simply pullback or bounce higher when it hits support or resistance respectively without going into a trading range.  I've found that when that happens its just a temporary pause in the move and the trend will continue in the original direction.  The reason being is that the pullback serves as an opportunity for the big money to pick up some cheaper shares from weak hands and then continue to rally the market.

You will notice that this is all really prep work before you even begin the trading day.  The rest of trading day is really just waiting and watching to enter based on your price and volume analysis.

So there you have it my trading plan.  In the following days I'll be posting with examples of my recent trading to highlight both the success and mistakes I've made.

Thanks for reading.