Monday, October 13, 2008

Retracement Trades - Morgan Stanley (Public, NYSE:MS)

The markets gapped up and quickly started to fade. When this happens I look for stocks that retrace 38% from the previous day low to the ORH. 38% Fib. retracement is a normal retracement in the regular ebb and flow of a trending stock. MS was the big news story this morning so I quickly jumped in as depicted on the 5 min. time frame below.

There were numerous plays like this today. I also traded DRYS and POT.

The QQQQs retraced much less than 38% and volume was thin on the gap up so I didn't initiate any trade in the morning. In hindsight, the first three bars on the 15 min. time frame look like a bull flag.

In early afternoon the Qs retraced 38% from the morning swing low to the swing high and started to reverse. I jumped in long as price broke above the 25% level. As it broke the base from the swing high, it had the feel of a C&H setup so I drew in my Fib. ext. lines. It stalled for a long while at the 38% ext. but eventually completed a perfect measured move which really took flight in last 45 minutes of the session.

Sometimes I trade the E-mini futures and other times the NASDAQ ETF. Why? When I have too many trades in play, I don't want to risk trading the E-Minis because it requires a lot of attention. Mistakes in the Qs are less costly.

Check out Trader-X's NASDAQ futures trade. Two different ways to trade this one. From the visuals, it looks both of our trades probably generated the same type of extension.


Day Tradr said...


Excellent trades.

How do you determine target in retracement trade? I entered the MS trade at the same point as your's. My target was the recent swing high. I got all out by the time it reached the swing high. :(

Also, how do you use trailing stops? After the stock moves in your favor, when do you move your stops? I am having problems with this, missing very good moves many times.

TJ said...

Thanks Day Tradr,

I take a partial when price approached the ORH and wait to see how price reacts afterward. If it carves out a bearish candlestick pattern, I exit, but if it looks like it wants to consolidate and keep going, I try to stay in. I also look a potential resistance zones ahead of time. If there's strong resistance at or very near the ORH, I'll fold right away.

I use split stops as opposed to a full trailing stop. I leave the original stop (previous bar low, not entry bar low) on half, and trail a stop at each higher low for the balance. That means that if a stock breaks out and prints 3 green bars up and pauses to consolidate, I use the lowest of the consolidation bars as my stop after it prints a higher high and so on and so forth, until price approaches the preliminary target where I exit on market and cancel the prior stop. This is all done on the lower timeframe not the 15 min.

Day Tradr said...

Thanks Jamie. This is helpful.