Friday, July 06, 2007

Base & Break Trade - Baidu.com, Inc. (ADR) (Public, NASDAQ:BIDU)

After gapping up on the open, BIDU retraced about 25% of the move from the previous day low to the ORH. It found support on its rising 5 period ema but did not immediately show much promise as it traded on declining volume. As time went on and price and volume narrowed, it appeared that BIDU was setting up for a base and break. Shortly after 1:00 EST, I placed a buy stop order a few pennies above the high of the base. I started monitoring it closely on the lower timeframe for clues as to when it might break. At 1:30 volume almost dried up which is what I look for just prior to a flat base breakout ( the lull before the pop as Michelle B. is fond of saying).

From that point on, price and volume increased steadily as BIDU approached my buy stop order. After the break there was a short period of retest and then volume kicked in propelling price upwards.

As you can see from the chart above I placed my Fib. Ext, from the previous day low to the base as opposed to the ORH. I took a partial after price tested the 25% Fib, extension and started coming back in. I knew we were going to consolidate the momo move so I used the Fibonacci retracement tool to help me adjust my stop on the balance of my position. A normal retracement is 38%. Anything more than that can be a reversal especially if it is accompanied with higher volume. I placed my stop just below the 38% retracement of the last leg up and it held nicely as BIDU consolidated on lower volume well above the 38% level. And then, BIDU went for the pysch level $200 and I closed the balance of my position as it approached the 38% extension level.


CAL was pivot point B&B setup. I liked the convergence of the MAs as price approached the PP. Since the entry bar was WR, I used that as my stop. I partialed out at the round number level and closed the position shortly thereafter as volume levels did not inspire much in the way of further upside.

Flat Base - Key Points

The key take away for these flat B&B setups is to place your order a few pennies above the highest point of the base. It's best not to anticipate because these bases can last a long time and there's nothing more annoying than holding a position in the dead zone and not knowing if it will break. Price and volume contraction/expansion are the critical success factors in these patterns. If price does not expand sufficiently after the break, I usually start taking money off as price reaches a round number.

15 comments:

Alex said...

Jamie,
My biggest problem with these B&B's is that I enter the break and my breakout bar doesn't break out. It just leaves a candle with a long upper tail. With your Bidu trade (which was monster) today, why did you not enter on the 1:30 candle. That candle broke the base and had a high of 193.18 but closed back under the base with a long upper tail. However you did enter on the 1:45 bar which was actually the breakout bar. How can I improve my odds of catching the breakout bar and stop catching these false breakouts. Also, I see you used the 3min. chart to time it; specifically at which 3min. bar did you enter? Lastly, what is your rule of thumb for a minimum number of candles that constitute a base? Always gratefull for your help. Have a great weekend.

Jamie said...

Hey Alex,

I define the base line as the highest point in the base so I set my buy stop order above $193.25 (the high just before lunch). On a flat base breakout you want to cover the shadows of all the candles in the low volume, NR period. That will greatly improve your chances of avoiding a false break, however, the stop is usually wider. The alternative, is to split your order. Buy stop above the base and once you hear the beep alerting you that order has been filled, place a second order (limit) at a lower price. These patterns usually retest the base so you can lower your average price.

I don't have a rule of thumb on the number of candles that constitute a base. I did a similar trade last week with MRVL, which also had a long base. You can look at that chart to get a better feel for the base.

Okay, I looked at the 1 minute timeframe and I see that price dipped quite a bit after your order was filled. Price came back in about 25 cents after my BIDU order went through and that should be expected. I also traded AL with a but stop order and it was filled within minutes of the BIDU order. AL went straight up, but most dance around the breakout point for awhile before taking off. The base for the AL trade is from 10:15 to 1:30 - the order covers the highest high of the base which was 86.32 at 10:30. So a base can take several hours to form.

There's no magic formula and some failures will occur, the key is covering your shadows so as to avoid a false break and to monitor the volume patterns before and after the entry.

Good trading and enjoy the weekend!

Highchartpatterns said...

Very nicely done Jamie, bread and butter b and b. Worth mentioning to that the b and b almost perfectly coincided with a daily spot (all time-high) and that volume was excellent. B and B's with daily spots near by have much higher success.

Great trade on probably the best acting stock in the market (love FWLT too).

Jamie said...

Hey Guys,

Thanks, that's good to know re: the daily spots. I will keep that in mind when I'm scanning for my daily B&B charts.

Jamie said...

Alex,

Another good example of a B&B today is FWLT as mentioned by HCPG in the above comment. The base on that chart is 113.50 the 10:00 high and it didn't break until 2:15. All these examples will give you a good feel for defining the base.

Jerry said...

CAL was the first trade for me since I learned your method. I enter at 10:45 bar because it finished on orh. This was hard for me to focus as I was afraid of the price will drop back. So right after the WRB, I place a trailing stop (I should of use stop market instead) on top of the 61.8% ext(yesterday low to today orh). I was taking out exactly 61.8%.

However, price rally higher beyond the ext. Still, not a bad trade. Like Jamie mention, price and volume didn't increase all that much afterward. This volume and price is something I must learn to master.

Jamie, please do mention and teach more about price and volume so we can improve our entry and prevent from entering to early.

Also, you usually mention on other posts, low risk entry, does this low risk means the NB entry equal to ris of small amount for big return?

Say since you joined IB, did they ever give you any trouble in connection?

Jamie said...

Jerry,

The NRB serves two distinct purposes. Firstly, as you mention, it helps to find NRBs as trigger bars to reduce risk by placing the stop below the NRB. Secondly, NRB accompanied by much lower volume represent price and volume contraction ahead of price expansion. Generally speaking, the longer the basing period, the bigger the move once the breakout occurs, hence the BIDU base was a perfect setup for a very broad expansion. Stocks that gap up and base for an extended period of time in a very narrow range often provide good trading opportunities for this type of base and break setup. Also, you should have a watchlist of stocks trading near all time highs as potential breakout candidates.

I've recently noticed some occasional problems with IB. The problem usually occurs during peak trading hours near the end of the session. Basically, the bid and ask or one or the other don't keep pace with the actual ticker. When I reboot, it usually resolves the problem.

Alex said...

Jamie, thank you very much for your explanations. I am very grateful to you. It does clarify a lot for me. I am starting to realize that my mistakes are in incorrectly identifying the base. With FWLT, I figured the base was from 12:45 until 1:30. After your post, I started reconsidering that the base might actually be from 10:00-2:00. I received confirmation when you pointed out what the true FWLT base was. Well, back to the drawing board for me. Thanks a million (dollars I hope)!

Jerry said...

Noted!

From all your posts, I will now pratice more on buy few cents or more on top of trigger bar and stop loss few cents below. I believe this method is "save & safe" which creat minimum loss, but maximum return.

I will join IB later on because of the commission plan. Hope it won't give me much problems if I vacation trade in China. Then again, China internet connection to USA is another problem.

Thanks for your reply.

El Toro said...

Hey Jamie,

Nice work with BIDU! I missed that one but hit BOT off the 6th 15 min bar. It seems that you keep stocks on your watchlist for a few days or even weeks at a time. How do you determine when to take them off?

Thanks so much for your help!

Jamie said...

El Toro,

Excellent trade with BOT. That one got away from me so I didn't want to chase.

I keep stocks on the watch list for months as long as they keep performing. BIDU, for example has been on the watch list since it gapped up in April.

Anonymous said...

Jamie,
How do you determine when to place your Fib from previous day low to ORH vs from previous day low to base?

For BIDU, would you have considered entry on a break of 5th bar high (15min) as there was support from 5EMA and there is some room for expansion till the ORH? THanks

Pat

Jamie said...

Hi Pat,

If I have a lengthy base, and I plan to enter on the base break, I will extend from the base because the Fib. is a tool to help me manage my trade. The base does not always line up perfectly with the ORH, but this the exception as they are usually fairly close.

You could have entered from the break of the 5th bar high and I used to enter on these types of setups, but I've decided to wait for the B&B setup. I had a few scratches on these early entries and I've abandoned the strategy because it requires too much time and depending on market conditions, it could be a crap shoot. With B&B there's no waiting, the setup moves in your direction (or not) right away.

Josh said...

Hi Jamie

With a stop like BIDU what type of order did you use?

I have found that with market you get big slippage but get filled and with limit you don't get filled at all, even with a 5-10 cent limit.

Your guidance would be appreciated.

Jamie said...

Hi Josh,

With BIDU, I used a buy stop order two pennies above the base high. You have to expect some slippage with expensive stocks unless it's a stock like AAPL that trades 20 M shares per day. For AAPL I use buy stop limit orders as there is no reason to accept more than 2-3 slippage on such a liquid stock. BIDU is not as liquid so I have to live with the slippage if I use the buy stop order. If I wait for the pullback after the breakout then I can use a limit order and get a more exact price.

For stocks that trade less than 1 million shares per day, it is more difficult to get a good price on a base & break stop order so I like to watch the level II screen to get an idea on the spread and to see if the spread narrows as price approaches the break point and also to see if the bid thickens ie. to gauge the buy interest.

Are you using a direct access broker like IB? I use IB's Smart routing system.

If it's too easy to get into a trade (ie. no slippage), sometimes it's an indicator that there is no trade ie. a false breakout and that's why I like to use level II if I don't have too many setups breaking at the same time.