A Trade A Day

I’m playing it safe the next few days. I guess day trading isn’t generally considered safe, but I commit less capital to day trades. I’ve gotten to the point in my day trading where I only take a few setups that are high percentage.

I have a couple of examples to show you:

SYMC had a nice setup on the 5 and 15 minute chart. I don’t know how to describe this pattern. Basically, the stock opens and heads lower, reverses, and if the moving averages are supporting the price, I’ll take the trade over the high of the first bar. I’m sure someone has coined a term for it, but I couldn’t tell you. It doesn’t always work, but I have had some success with the pattern. Here’s another example:

AMZN also gave me a good setup. One more example:

Another good setup in QQQQ. Repetitive for sure, but that’s what successful trading is all about.

I don’t anticipate having any swings for a few days because I need to see more consolidation after Tuesday’s big drop. Tomorrow I’ll see about putting together some examples of losers. I find I always learn more from those.

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Do your homework. Whether you call it research or post trade analysis, you need to sit down and methodically analyze your winners and losers. Ask yourself why you selected the trade, what rules did you use to enter and exit the trade. Generate a list of reasons why you won or lost. Then track this every day to see what common reasons your winners and losers share. It is a tedious, time consuming process, but nothing aside from my risk management plan has caused me to have more success.

I have several market scanners that automate my research. I subscribe to IBD, but it can be as easy as using Yahoo’s market scanner. I find a lot of trades just by looking through the NASDAQ 100. The point is that you need to do your homework everyday.

I spend 90% of my day doing research and analyzing trades. Very little is spent actually trading. Looking over thousands of charts and doing my post trade analysis has caused me to grow more as a trader than any book or system.

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Well, today I think we got a slight clue as to where the market might be headed. All kidding aside, I wasn’t surprised that the market headed downward, but the magnitude of the move was very surprising. In case you’re wondering, my longs were stopped, and I’m in cash.

The market in its extreme move has given us a unique opportunity. As a technical discretionary trader, I identify market patterns because to me they are a manifestation of all the supply, demand, hopes, and fears of all market participants. Now that the market is running scared, it’s time to take advantage.

Yesterday, I talked about bear traps. A potential trade I featured was AHM. AHM was running scared. For the past three sessions AHM was headed lower. Each session, was a bigger loss than the one previous. Today, I didn’t get the gap up I wanted, but AHM did give a nice setup and run.

Extremes in the market give you opportunity. I don’t know if tomorrow we’ll see more selling or a bounce. If we see a bounce, I’ll be looking for stocks that got caught in today’s sell off and are gapping, trapping the bears. If the market retraces gradually, I’ll be on the sidelines, looking for short setups for next week. If the market keeps dropping, I’ll be looking for shorts in the AM, but more than likely I’ll be on the sidelines.

The point is that now there is opportunity. I hope your methodology has you positioned to take advantage of this down move. If you’re out licking you wounds, don’t let it get to you. There will be more trades.

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New traders should not use margin. It is a great tool, but it compounds your mistakes. In the beginning if you can agree that your focus should be to learn. Anyone should have enough capital without having to go on margin.

When I first started day trading, I found a firm that gave me 10X my capital on day trading and 4X for overnight with no cost of carry. It was such a great deal. But I was learning, and I was I wasn’t making good trades. I wanted to make money so bad. I wanted to just trade and I thought the leverage would get me there fast. My results were erratic and eventually I took enough losses that I had to close my account.

A consistent, tested risk management plan with a solid methodology is what all new traders should focus on. Advanced traders who have developed consistency can use margin to accelerate their progress and grow their bankroll exponentially, but new traders need to acquire a consistent methodology first.

Want to know where you can get a consistent methodology? I’ll be posting what has worked for me in future posts. Until then keep researching and if you are going to trade, trade small.

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First an update on my trades. I’m staying with EBAY, CTSH, and AER. Despite the weakness in the market, I think these trades all still look good, but the market’s trend is going to determine whether they end up profitable.

Speaking of profitable, I took partials on TIVO couple of days ago. My stops are at breakeven currently. If TIVO can consolidate and move over its 200 day SMA, I’ll move my stops up.

ROST has dropped too far and no longer has a valid formation.

Now let’s look at one of my favorite strategies, the bear trap. Simply defined, a bear trap occurs when a stock is in a downward trend, and the next day the stock gaps open above the high of the previous day. There are a couple of traits that I have found, that make bear traps work really well.

1. The stock should have closed lower for each of the past three sessions.
2. The stock’s decline should look like it’s accelerating.

Now looking at AHM, I think this is a good bear trap candidate.

Firstly, the stock has finished lower the past three sessions, and the decline looks to have accelerated. If you look at the stock on a weekly chart, it also is sitting on its 200 day SMA.

What needs to happen now is a gap up tomorrow. Obviously I can’t tell if this is going to happen. But if you want to see what the action might look like. Check XMSR on , the day I was stopped out.

Now, the ideal situation is to have a gap and then some consolidation like the XMSR example. The bear trap is one of my favorite setups and when I can catch them, they are consistent winners for me.

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