Tuesday, May 12, 2009

A temper tantrum

To begin, I must express my outrage... the one minute chart lies!
It only took me a few minutes to find an example 'cause it happens all the time.
Here is the one minute, two hour, chart of today's FAS Price action:

Click for larger image, browser back.

Notice the points identified by the letters A thru E...

A marks the point where Price is highest
A is followed by a higher (than the previous) low, so we can expect a higher high to follow
B indicates a lower high

Therefore we should expect that the rally has ended and a downturn has begun (sell short here)

C This lower low and high confirm the downturn is intact

Now, here is where it gets sticky...

D This is a higher high than the previous
E This higher low confirms the beginning of an uptrend

But does it? No! From there, Price takes a nosedive. (Grrrr)
At point D my short trade stops out at a loss.
Then the stock merrily performs as I expect it to (without me).

Plan B and Oops!
Here is a 60 minute, 4 week, chart of the same ETF:

Click for larger image, browser back.

A Higher high followed by a higher low (add to a long position at the breakout)
B Higher high followed by a lower low (stop out at a loss)

OK, with a lower low, the uptrend is over

C High of the day (Grrr! times 60)

This stuff is tricky!

Don't be afraid to stop out at a small loss... it happens
Ya can't perfectly pick tops and bottoms
If you want to ensure a small profit, update your stop after every candle, or set a tight trailing stop
Ride out the ups and downs when you know a stock is moving your way on a higher time-frame


1 comment:

  1. mike,
    I respect your work tremendously. Because of the nature of 3X, we must be prepared to be more aggressive on the matter of stop loss.
    Meaning: because of their rapid movement, one should allow the trade to really bend about which requires a greater breadth in the range of the stop.
    Easier said than done, I know, especially in the d/t arena. Particularly difficult is the sideways A- D range although the D area did not break or touch the upper BB.
    The D dark cloud and E bearish engulfing confirms your thought process.
    Difficult trading here.