“Being a Chameleon” and “Anatomy of a Trade”
Posted by lasertrader on September 12, 2010
I don’t know why but I woke up exceptionally early this morning with a couple of things from this past trading week on my mind. As I drink my coffee, eat my oatmeal (which makes me think of another sector blog article I hope to get out tonight) and crunch on a couple of fresh out of the toaster Eggo waffles, I figured I would share these musings and also reinforce them in my own mind.
Being a Chameleon
I received an email from a friend of mine asking for my thoughts on an article he just read. It was located in the eSignal Trading Education section and is titled “What Style of Trader Am I?” . The article which can be read here is a good read that discuses the 4 main types of trading styles ( Scalping, Day Trading, Swing Trading and Position Trading).
The title is a question we should all ask ourselves and more importantly ask the others you are getting trade ideas from. As I mentioned in last week’s blog post, StockTwits is full of excellent traders pouring out great ideas 24/7 and also close to real time trades during the day. As I see these ideas flow by they seem good on the surface but without knowing what the poster’s Trading Style is you may be setting yourself up for a loss because you didn’t manage the trade properly. Take the time to define what your style is and make sure the folks you “follow” match your style of trading. The goal in this trading business should be to avoid information overload and focus on the information that provides value to you and helps you be more profitable. If you are a swing trader then why follow a bunch of scalpers. Watch the stream of people you follow and perhaps set up your own separate Twitter Lists of people who share the same trading style such as “Scalper List” and “Swing Trader List”.
A new trader should pick a style they feel comfortable with and focus on it until they become very proficient. As a trader who has been doing this for many years, I responded to my friends request for comments on the article this way:
“Thanks for this. Its a good article. My thoughts are that there is a time and place where each type of trader can make money. If you choose just one style you may have to wait for the appropriate market conditions to setup before you can take advantage of it. If you have the ability to do each of those styles you can trade every day. It really depends on your time frame and goals. If you want to generate daily income become a scalper and/or day trader. If you can exist in a longer time frame get larger gains by swings and positions.
I say “Be A Chameleon” and adapt to the current market conditions using the style that fits it, or wait for the proper conditions to suit your one style.”
Being proficient at one trading style can prove to be very profitable and we all should make sure we know what we do best and feel comfortable with. Just understand that if you chose a swing style there may be times where the market conditions don’t support big profits in that area and you need to be patient for the few times a year where the big money is made swing trading. As you become more experienced you may want to learn to trade other longer time frame or shorter time frame styles. That’s fine but always make sure you know what style of trade you are putting on so you can manage it properly.
So….. this leads me to a trade I did on Friday…….
Anatomy of a Trade
Each day I come into the day with a plan or road map of what I want to do given the market conditions as I see them. I found that if I don’t have a mental road map prepared then I am just chasing ideas all day. In most cases, chasing leads to poor execution. On Friday I came into the day knowing that I had several multiday swing trades that I put on earlier in the week and I felt the market is getting a bit overextended. The SPX has been playing out very nice technically. It approached the long descending trend line, paused forming a bullish flag then broke to the upside in a clean technical play. Although it looks good for more upside, my thoughts going into Friday was that the best we may do is the 200ma at 1115 and then we may have a rest or pullback due to the overbought nature that is starting to show. Here is a look at the chart:
With this in mind I came into the day with a plan of not adding any new long swings and perhaps taking a number of them off for a profit if they are near a resistance/target point. My plan was to be an opportunistic scalper/daytrader to make some change but not to hold any new trades over the weekend.
I did a nice trade in DO on Friday morning posting it in real time in TraderStewie’s chat room (The Art of Trading/TraderStewie Blog – links on the left of this blog) and after the trade I described exactly how I found it and traded it. For day trading/scalping I use a particular Chameleon style that I will share here in going through the DO trade execution.
On one of my screens I have a watch list of about 50 stocks (click the link for the current list). These stocks consist of good companies across several sectors and are also high beta trading stocks that can provide nice gains intraday. The trick is to set up the watch list so it is constantly being sorted by % gain. By doing this, you can instantly see the biggest percentage gainers at the top of the list and if in the top ten there are a couple of companies from the same sector you also know what sector is the strongest. As you get familiar with the list you will see intraday a stock start moving up quickly and that could also give you an opportunity. For this discussion I want to describe the DO trade because it was one of the cleanest trades you can find using this setup.
As I watched the market and my Twitter stream during the first 30 minutes is saw twitter all over RIG, everyone was mentioning it and trading it. I looked at my high beta trading list and RIG was in the top position. I quickly took a look at RIG and saw that it had already broken above Thursday’s high and was flying. I didn’t want to chase so I figured I would wait for a new intraday setup in RIG on my 5 minute chart. Then I looked down the list and saw DO in the number 2 position and OIH around number 6. It was clear money was flowing into the oil service sectors and RIG was not a unique play. So, since I decided to wait on RIG I took a look at the number 2 DO . Starting with the daily chart I saw that DO has yet to do what RIG had already done. I saw a very bullish either ascending triangle or channel breakout about to occur. Here is the chart (shows the pattern and the result):
Once I saw the setup forming on the daily I drilled down to a chart of my 5 minute trading time frame and saw a sweet setup as it had not yet broken Thursday’s high and if it did, it would most likely move nicely as RIG and the other OIH components were strong. Here is the chart (shows pattern setup and result)
It doesn’t get better than this. A setup that hasn’t yet triggered in a high beta name in the strongest sector of the day on my watch list. I entered the trade at 61.55 on the break of Thursday’s high. The way I like to trade is to immediately put a sell order in at what I feel would be a reasonable target for the trade. I can always move it down if the momentum wanes, but I find that my targets are usually good and the stock doesn’t often go much further. It seems that any time I think the stock is going to keep moving higher and move the sell order higher it hits my first target and quickly reverses so I honor my first target and take my profit. If it continues going then I may look for a re-entry but I have already booked a nice gain. Some people like to take half off letting the other half run and that’s a reasonable thing to do as well.
My first thought with DO was that the target could be the daily 200ma at about 62.30. I looked at the 60 minute chart and saw that if it could get through there it had a chance of running a bit more. Since the sector was strong and everything seems to overshoot normal TA targets these days I put the sell at 62.59. Again, I find that stocks moving on momentum will often get to a price of xx.60 then pullback to xx.40 before resuming their upward move. That’s why I chose 62.59. In the end it hit my target for a stress free gain of 1.04 points.
The intent of this “Anatomy of a Trade” recap was to explain one of my Chameleon methods in detail so you might be able to tweak your methodology to choose the best trades given the market conditions. Good trading!