Q&A

T writes -

I’ve been following your blog for quite some time and I must say it’s great … next to TraderX’s blog (which doesn’t run anymore unfortunately) it’s the best out there. Keep up the great work.

Q. Nevertheless, I have some questions that I wanted to ask you regarding your trading style. How do you judge what stocks you play during the day. Do you have a general watchlist of momentum stocks, do you screen for stocks every morning before the market opens (like TraderX with the gappers), what is it?

A. I prefer to trade NASDAQ stocks because computerized trading is more orderly and level II allows for greater visibility of market depth. I usually have a short focus list of stocks to watch from my own watch list and from HighChartPatterns newsletter of B&B setups. I screen for gappers every morning using several sources but primarily Trade-Ideas scanner, IB scans, and Briefing.com.

Q. What time frame do you mainly trade? What is your favorite setup? And how do you judge when to take your partial and when to get out with the rest? Last question ;-) … how do you judge where you put your stop loss and do you trail it?

A. I use four time frames daily, 15 min. 5 (3) and 1 min. - and hopefully everything gels. I prefer the 15 min. time frame which generally allows for more room to run. If I see a nice setup on the 15 min. I still want to make sure it fits with the higher and lower time frames. I manage the entry on the lowest time frame because that is the most critical part of the trade. My favorite setup is base & break which comes in many forms including a gapper momentum play that sets up with NRIB (NR7) or C&H or 3 PP B&B. For chart patterns I usually have a measured move target of 100%, but take a partial after 3 consecutive wide bars in my direction. Otherwise, I look for support/resistance levels to partial out. For gappers, I will exit in full the standard 38% Fib. extension (Trader-X style) if I get into a stock that has a wide spread or stalls midway to the initial target (AMED from Friday is a good example). If the gapper moves quickly out of the base with good volume and a tight bid and ask, I will partial out in the usual manner. Normally, I place my initial stop at previous bar high/low on 15 minute chart, but if price stalls on the BO and prints a reversal candle right out of the gate, I tighten the leash. See example of PG from Friday.

Thanks a lot for sharing your expertise!

Mailbag

Hi Jamie.

Say you are looking for a set-up and plan to enter on a break of the high of the entry candle and place your stop one cent below the low of the entry candle. As you flip through your watch list, you come across a great set-up that just formed and price action is currently on the next candle. What if price had broke the high of the entry candle before you noticed it and is now down below the entry point, but still above where your stop would have been?

Example.

High of entry candle: $20.35
Low of entry candle: $20.00

Next candle has gone up to $20.39 but is now at $20.25.

If you would have had your buy stop order @ $20.36 entered on time, you would already be in the trade. But considering you aren't, would you enter at $20.25 anyway and be happy that you are following your rules but are getting an even lower risk entry? Perhaps you would even buy more shares than planned with the lower risk? Or would you recommend placing a buy stop at $20.36 and wait for the price to climb back up to the intended entry point?

I often am busy looking at other charts and find myself in this situation when I load the chart with the good set-up. Half of me thinks I should wait until the price climbs back up, whereas the other half thinks I should get into the trade at a bargain price.

Thank-you for any advice.

-Nathan

Hi Nathan,

Here is an example of ADS (15 min.) which gapped up on Friday. After failing to take out the ORH, it retraced and made a move back up. At point A it started forming a solid base above the rising 5 period ema. At point B it attempted to BO but failed and pulled back.

If we drill down to the 5 min. time frame, I would not recommend buying in the area of point C at a better price. Once price pulls back, there's no guarantee that it will recover. The best place to enter is point D at the original buy stop price. In the ADS example we have a solid trigger bar at the original intended entry price. If this is not the case, for example, if the base is choppy, it might be better to wait until the high at point B is taken out.

If I miss an intended entry, I like to see how the next candle closes on the lower time frame. This usually gives me a good idea if the BO is a failure, or just a false start. If we look at my ESRX trade from Friday (5 min. chart below) and assume I missed my intended entry at the red arrow. We see that the next bar retraces above the PP (blue line). We also see that my stop is not taken out and that the next two candles print long bearish upper shadows. These two inside bars are weak so it is safe to enter on a break of the pink line, which is basically the intended entry point, or we can again wait until the green line segment is taken out. Either rule would get the job done. The bear flag above the pink line implies lower prices to come.


Hope this answers your question.

Acronyms and Abbreviations

In response to reader mail, here is a list of my blog's most commonly used acronyms and abbreviations:

NRB - Narrow Range Bar
WRB - Wide range Bar
ORH (L) - Opening Range High (Low)
NRIB - Narrow Range Inside Bar
ORBO - Opening Range Breakout
C&H - Cup and Handle
H&S - Head and Shoulders
BO - Breakout
BE - Break even
EOD - End of Day
B&B - Base and Break
PP - Pivot Point
R2 - Pivot point resistance level 2
S2 - Pivot point support level 2
NR7 - Narrowest price/volume bar in the last 7 bars. Price/volume contraction ahead of expansion.
4/15 - 4th bar on the 15 minute time frame.
SS - Short squeeze
SMA - Simple moving average
EMA - Exponential moving average
5 EMA - 5 period EMA
S/R - Support/Resistance
R:R - Risk: Reward Ratio. If the trade generates 3.0R, the return is three times the amount risked.
WL - Watch list
TI - Trade_Ideas Scanner
PDH(L) - Previous day high (low)
R-zone - Fibonacci retracement zone

If you need help understanding my underlying trading methodology, read the Intro to WSW Blog under Key Posts in the side panel. It's not complete by any means, but it's a good start.

Mail Bag

Trader Feedback

Hi Jamie,
Just to let you know how I've been doing. For the three month period
ending December 31, with 39 trades taken, my expectancy is 0.61, win
rate 44 percent, and a profit of 23.9R.
I continue to read your blog faithfully everyday which you post.
I have recently identified a weekly goal of attempting to achieve a 5R
profit. I plan on incorporating your pivot point method into my
trading plan.
Again, thank you for your help and the service you are providing with
your blog. Gary

Thanks for sharing Gary.  Your doing great which is an inspiration for
other traders and good for my ego as well!


 

Mailbag

A reader asks the best way to trade SSTR.

SSTR was a flat base breakout gapper on the daily chart. The first bar is bullish on very high volume. Price then consolidates the wide gap open. An early attempt to break the ORH fails and price eases back into the rising 5 period ema on declining volume. The fifth bar is a bullish green hammer reversal bar (NR7) in close proximity to 5 ema. This is the trigger bar for price expansion. There are several ways to enter: 1. break of hammer high; 2. Break of round $ number; or 3. Break of ORH. If you wait for the break of the ORH, you have to give price room to retest the base of the ORH.

A reader asks what went wrong with this JRJC trade using the 5 min. timeframe.

Click on the chart to read my notes. Here again I would emphasize the need to allow for a retest of the base set by the ORH immediately following the breakout.

A reader asks if ANW meets the criteria for a 38% retracement.

Due to lack of specifics, I'm assuming the reader wants to know if this qualifies after the first swing high. I normally use the 38% retracement after a stock has rallied out of a base. In this case ANW rallies off of the OR and swings back down. Volume is choppy, however after retracing 50%, it slowly moves above the 38% retracement level and carves out two NR7 bars which could be used as a low risk entry point.

He also mentions JSDA. All I can say about JDSA is that it gapped after two previous MOMO days, and the third day usually loses momentum, so I don't recommend trading a stock that gaps after such big gains. I know that the Chinese plays are defying gravity at the moment but trading rules are not based on exceptions, they are based on everyday trading reality. So in this case, I would pass as per my trading rules.

How do I develop my watch list?

I did a post on that which you can find in the Intro to WSW Blog. I've also recently started scanning for inside bars on declining volume on the daily charts. I'm looking for inside bars on an established trend which implies a pause before the next leg or wave.

Reader participation - Check the comments section of the Focus and Watch List posts as many readers contribute some awesome setups.

If you are a new trader and you need a watch list, you can use the Focus Lists on this blog. However, I don't update every night due to blogging time constraints. A fresh nightly watch list is available at highchartpatterns.com. I've used the service and highly recommend it for B&B.