12/3/13 OMED gap up to momentum long. Not the cleanest move but many potential points. First step is to recognize this as a long momentum trade rather than a fade (although the fade worked in the afternoon). Psychologically the easy trade is to short because stock is up over 100%. I like how the 5 min chart holds the 6 EMA on the way up. Also, worth noting the first obvious short entry is blown out to the upside.
12/3/13 LDOS cuts guidance. Gap down to momentum short. Love the small consistent 1 minute candles and the brief flags. Also, paid to be late in this trade. Once it picks a direction after the first 30 minutes of volatility and chop, consistency sets in.
I really like how a long entry is clearly defined on the 1 min with volume confirmation.
Looking at the daily, potential for points is there.
Excerpts from “The Tao of Pooh” by Benjamin Hoff
- The basic Taosism that we are concerned with here is simply a particular way of appreciating, learning from, and working with whatever happens in everyday life. From the Taoist point of view, the natural result of this harmonious way of living is happiness. p5
- The essence of the principle of the Uncarved Block (P’u) is that things in their original simplicity contain their own natural power, power that is easily spoiled and lost when that simplicity is changed. p10
- Those who know what’s wrong with them and take care of themselves accordingly will tend to live a lot longer than those who consider themselves perfectly healthy and neglet their weaknesses. So, in that sense at least, a Weakness of some sort can do you a big favor, if you acknowledge that it’s there…Once you face and understand your limitations, you can worth with them, instead of having them work against you and get in your way, which is what they do when you ignore them, whether you realize it or not. p48-49
- What we need to do is recognize Inner Nature and work with Things As They Are. When we don’t, we get into trouble. p50
- The Way of Self-Reliance starts with recognizing who we are, what we’ve got to work with, and what works best for us. p57
- Wu Wei means “without doing, causing, or making”…the efficiency of Wu Wei is like that of water flowing over and around rocks in its path - not the mechanical, straight-line approach that usually ends up short-circuiting natural laws, but one that evolves from an inner sensitivity to the natural rhythm of things. p68
- When we learn to work with our own Inner Nature, and with the natural laws operating around us, we reach the level of Wu Wei. Then we work with the natural order of things and operate on the principle of minimal effort. Since the natural world follows that principle, it does not make mistakes. Mistakes are made - or imagined - by man, the creature with the overloaded Brain who separates himself from the supporting network of natural laws by interfering and trying too hard. p69
- When you work with Wu Wei, you put the round peg in the round hole and the square peg in the square hole. No stress, no struggle. Egotistical Desire tries to force the round peg into the square hole and the square peg into the round hole. Cleverness tries to devise craftier ways to making pegs fit where they don’t belong. Knowledge tries to figure out why round pegs fit round holes, but not square holes. Wu Wei doesn’t try. It doesn’t think about it. It just does it. And when it does, it doesn’t appear to do much of anything. But Things Get Done. p75
- And when you try to hard, it doesn’t work. p76
- You dont have to try very hard to make them work out; you just let them. p78
- Things happen in the right way, at the right time. At least they do when you let them, when you work with curcumstances instead of saying, “This isn’t supposed to be happening this way,” and trying hard to make it happen some other way. If you’re in tune with The Way Things Work, then they work the way they need to, no matter what you may think about it at the time. Later on, you can look back and say, “Oh now I understand. That had to happen so that those could happen, and those had to happen in order for this to happen…” Then you realize that even if you’d tried to make it all turn out perfectly, you couldn’t hae done better, and if you’d really tried, you would have made a mess of the whole thing. p80
- Using Wu Wei, you go by cicrumstances and listen to your own intuition. “This isn’t the best time to do this. I’d better go that way.” Like that. When you do that sort of thing, people may say you have a Sixth Sense or something. All it really is, though, is being Sensitive to Circumstances. That’s just natural. It’s only strange when you don’t listen. One of the most convenient things about this Sensitivity to Circumstances is that you don’t have to make so many difficult decisions. Instead, you can let them make themselves. p85-86
On Friday CERN stood out as one of the best momentum trades I’ve seen in a while. I was lucky enough to enter below 50 but unfortunately took profits too early for a 2 pt gain.
I like the trade for a few reasons:
- the potential for a breakout on the daily is there, 50 being the key level of resistance
- a relatively high short interest (13 days to cover) perpetuates the momentum
- the candle consistency is great. Very steady with similar 5 min bars
- consistently holds the 6 EMA
- bull flag at 51 and two cup and handles
Although I made a couple points in this trade, my exit was terrible. I didn’t let the trade fully play out; a good exit would have been on capitulation (extension and volume indication) or a break of EMAs. One thing to keep in mind is how great momentum trades tend to dwarf previous candles. CERN at 52 had already moved 3 pts and looked relatively extended, but the move from 52 to 55 made the first leg of the momentum look tame.
For reference, this is what the chart looked like when I entered the trade. Entering on momentum requires a little bit of imagination ie saying to yourself, “given these candles, the daily chart, and the short interest, this move could really accelerate.” This mentality is key because these prices look great only when you go back and look at the chart fully played out.
The lesson here is recognizing an A+ trade when you’re in one. All the early characteristics of this move pointed to a great momentum trade, so my ideal exit is on the “right” side of the trade, even if it means giving up some profit.
Momentum has been dead recently - I attribute it to the light trading volume and directionless market recently, which is often the case during the doldrums of August.
One pattern I’ve noticed, and to be honest have been losing money on, are bearish flags at the lows of short setups. When momentum is working well, these setups are great short entries. Recently, however, they have been breaking to the upside and turn into great long entries. The mean reversion types have been destroying me on these trades.
Today I noticed CONN was continuing lower for a second day (yesterday it released earnings and after a big gap down, closed near the lows). It crossed down and found support at 57 down 5%. I really liked the solid 5 min candles on the cross down, so I entered short in the flag at 57.
This flag broke to the upside (surprise surprise) and I found myself down a point in the trade. It found resistance at the 15 EMA on the 5 min, and then reversed lower, so I added to the position.
Once it broke the low, the solid red candles returned and it continued down 13% on the day, staying below the 6 EMA consistenly.
I scaled out of the position on sweeps down. 400 @ 55.35, 200 @ 54.68, 200 @ 53.44, and 400 @ 52.50. Average cover 1200 @ 53.97. In retrospect, I should have kept the full position on until it broke the EMAs, but I am content to book a profit of 3.20 on the trade.
5 min intraday:
Second day continuation:
Thoughts on mean reversion
When it comes to trading style, I am more of a momentum guy than mean reversion. I think mean reversion can be really tricky - although very profitbale if done correctly. The reason why I avoid trading mean reversion set ups is because my momentum mindset has conditioned me to always expect the unexpected. Usually the best momentum trades defy the imagination and go a lot farther than people expect, all the while blowing out those who try to mean revert the trade. The more “insane” a move gets, the more mean reverters are drawn to the trade, and if the trend continues, this only perpetuates the momentum as mean reverters cover at a loss.
Mean reversion can get very dangerous because you are essentially calling a top or bottom to a move. This act has a psychological impact on the trader, as if any price more extreme than that spot is “irrational.” So if the trend continues and the trader is facing a loss, the tendency is to average into the position to get a better price - because, after all, the trend cannot possibly contiue much longer, right?
I’m a firm believer that we as humans have a tendency towards mean reversion trades, that it’s in our nature. It’s psychologically comforable to buy something that has gone down and sell something that has gone up. Buy low, sell high, right? This thesis is confirmed by the fact that new traders primarily stick to mean reversion trades.
In my experience, the best trades go against human nature and are psychologically the most difficult positions to put on. Why would you possibly think of buying a stock that is up 200% on the day? The ONLY trade that makes sense is to go short, because stocks are not meant to move that much intraday, right?
The fact is, if your timeframe is intraday, percentages should have no bearing on your decision to buy or sell a stock. When stocks put on “insane” moves intraday, the percentage alone tends to create a bias in our mind, and this leads us to think mean reversion and only mean reversion. The reality is, the only thing that matters is price action and volume ie technicals. Nothing else.
A good fade will exhibit both short term price extension and volume capitulation. Also, the right side of a good fade, the side where you will be making money short the stock, will continue uncontested. This results in a wick at the highs and steady red candles. A decent fade that comes to mind is CGNX:
Price extension is exhibited by the divergence of the 6 and 15 EMA. Volume capitulation occurs at the highs, resulting in a wick to indicate a possible reversal, then solid red candles on the right side which indicate that those are the best prices to sell in that moment. I also like the flag at the 15 min which is broken to the downside. The important take away is once the wick is in, the short side is never tested.
Now take a look at the following chart and see if it fits the textbook fade set up:
For the time being, ignore the y-axis price scale. There is very little short term price extension, but possible volume capitulation around 12:30. Price holds the 6 EMA until 12:50 with consistent solid green candles. Unlike in CGNX, the flag above the 15 EMA breaks to the upside, and shorts now have to contend with new highs.
This move today attracted short sellers because the stock was up 100%, 200%, 300%, and then 400%. The shorts were so tied up with the percentage gain, they lost sight of the consistency in the price action, which indicated the trend would only continue, however irrational it may have been. Although buying a stock that is up 100% or 200% may be hard to do psychologically, it is the only right trade in this situation.
Here is the 1 min chart for the first half of the day:
Notice the consistency in the price action and volume, as well as the multiple 1 min flags that break to the upside. There is absolutely no reason to short a trending stock like this.
The daily chart puts the move into perspective, and the absurdity of it is why it attracted so many shorts.
But I always remind myself that the best trades are often the most absurd.