Читать книгу The Art of Trend Trading - Parness Michael - Страница 6

The horse spirit guide is representative of speed, adapting to change, grace, and swiftness. There are tons of legends regarding the wisdom of horses, and in fact one of the fastest and newest types of therapy (for humans) is equine therapy. Don't laugh if you've never heard of it, or even if you have, I've done it many times. I found it quite illuminating at times, and what is useful to us as traders is that horses have a unique ability to read the emotions of those around them. They can sense when we are fearful, or nervous, or angry – or calm and at peace.

One of the easiest trends to play really embodies the animal spirit of the horse. It's so simple that anyone with any level of experience, or lack thereof, can take advantage of, have a huge edge and trade it effectively – and profitably!

In the simplest of terms, we call them breakouts and breakdowns. It's self-explanatory; we search for stocks that are making new highs or new lows. It really is that simple, except we break down these breakouts and breakdowns in several tradable manners.

The 10 a.m. Intraday Break

Oftentimes, the market changes its directional trend intraday. It'll start out one way and then take a turn and reverse. There's what I dub the “10 a.m. rule” that I've tracked for 15 years, and it's a high percentage winner, but – as I'll detail in this chapter, it's not ultimately the best breakout/breakdown trend we have. It is very easy to play and valuable for those of you who either do, or want to trade the market intraday. Basically, we are simply using the time frame of 9:30 and 10 a.m. EST to bracket the high and low during that time frame.

As you can see in Figure 3.1, FB Gaps up and then craps out, falling consistently for much of the rest of the day. You could have faded the gap, shorting FB at the open, or using our 10 a.m. rule, which I'll detail more upcoming, you can see a really nice entry near 10 a.m., which scored a nice profit to the short side!

Figure 3.1 Intraday Breakdown 9:30 a.m.

If we take the high and low from 9:30 to 10:00 a.m. EST, we then use that to guide us on which direction we play the break, or to stand aside because neither range is breached at any point.

Typically, this play is tradable until roughly 2 p.m. EST on any given day.

The Play

At 10 a.m. EST we now have the official bracket, so we take the high and the low of that half hour, and if the stock breaks below the lows of that time frame/bracket, we can short it. If, on the other hand, it breaks above the high of that time frame/bracket, it is a candidate to take long.

So, for example, if EBAY opens at 9:30 a.m. at $57.39 and between 9:30 and 10 a.m., it trades with a low price point of $56.92 and a high price point of $57.63, a break below $56.92 after 10 a.m., but before 2 p.m. EST would indicate a trigger to short EBAY. So, to be precise, if EBAY trades at $56.91, you'd be short the stock. If, on the other hand, it trades above $57.63, or at $57.64 or above after 10 a.m., but before 2 p.m. EST, then it triggers long. The cool thing about this play is that your stop loss is defined clearly. You can adjust it according to your risk tolerance and other factors you decide, but the simple stop on EBAY if you end up shorting it would be a break in the opposite direction above the 10 a.m. high! So, if you enter a short on EBAY at $56.91 and it ends up moving against you, your stop is at $57.64.

If you enter a long on EBAY on the long price trigger, your stop loss is the opposite; it's defined at $56.91. This is about as simple a trade as we can make intraday. It's a day trade only! This is not a trade we hold overnight, and in fact in the Power Trading chapter I'll discuss further how you can manage a trade such as this using time frames, but for now, let's keep it simple and say that you manage it using the parameters above, and let's throw in this factor:

Your range for EBAY based on the 10 a.m. rule is $56.92 and $57.63; that's a range of $0.71 between the high and low. That is what you use to trail your stops and that is what you use as your first target to take profits. You want your trades to be at least one-to-one risk/reward ratios. In many non–day trades we try to get two- or three-to-one risk/reward situations, but for intraday we want to try to look at one-to-one to start with. I mean, trying to get $5 out of EBAY intraday in 99.9 percent of all days, at least, is going to be impossible; it just doesn't trade with that kind of velocity. But, $0.71, yes, EBAY can trade out of a breakout pattern for $0.71.

The other factor is, as I stated, time. Typically, this trade is about a one- to two-hour trade, sometimes even less. It really depends on what time you enter. If you enter at 10:01 using a range break, which does happen more often than you'd guess, you will likely want to exit before noon, at least some of the position. And, once you take some of the position off, you'll want to reset your stop to trail by a tighter stop; let's say for this example maybe you move your stop loss to $0.50. It sounds arbitrary mainly because it is somewhat so. As you start to see what stocks trade in what ranges and at what velocity and volatility, you'll begin to get a feel for where your stops should be.

You can't possibly use a $0.50 stop on Google (GOOGL). I mean, you can, but it's likely you'll get stopped out the majority of the time. On a stock that is over $500 that trades in a big range (GOOGL often trades in a $5+ range) you'll need your stops to be at least $2 to $3 and maybe even $5 or $6.

You can see a fade in the opposite direction of the Facebook (FB) chart in Figure 3.2 using GOOGL as an example. The fade shown in Figure 3.2 works like a charm, but you'd want to set a realistic stop loss on it – as I stated, anywhere from $2 to $6 is fine by me.

Figure 3.2 Chart of Google (GOOGL)

Conversely, a stock like Bank of America (BAC), you'd be silly to use a $0.50 or $0.71 stop; the stock rarely trades with more than a $0.20 to $0.30 cent range, and often it's $0.10 to $0.15 or less! So, you're just wasting your time setting that stop on an intraday trade. On a swing trade lasting days, or weeks, or months, and so on that's a different story, but on a pure day trade, you need to know and learn how wide the typical ranges are for the stocks you are looking to trade.

The Technical Breakout

There are tons of ways to play breakouts via technical analysis. I'm going to just cover a few because I think going over 250 chart patterns with you is a different book. I'm not sure technical analysis, or TA, has many animal spirits, though I suppose it's like the horse in that it can provide stability and calm, because when a pattern sets up right and it's clear as day, it takes a lot of the thinking out of the equation.

Some of the simple patterns with which to trade breakouts and breakdowns off of are shown in Figure 3.3.

Figure 3.3 FB Blue Skies Breakout

Once the stock clears its all-time high at the time over $45 area it just za-zooms like it was shot out of a cannon. This is called a blue skies breakout, a stock that breaks its all-time high. It's an easy trade setup, and one that has worked extremely well over the years a countless number of times for us!

The 52-Week-High Breakout

One of the simplest and absolutely most-effective trades can be used as both a day trade and/or a swing trade. It's what I call a “thing of beauty” in terms of when it sets up and works because the moves can be so dramatic and so fast that you can make a huge score with very little downside risk if you use proper money management as discussed in Chapter 1.

One of the beautiful things about trading is oftentimes that simple is best…and this is mad simple!

We scan through market data you can easily get through a wide variety of places. Yahoo.com Finance is one, but you can Google “52-week highs” or “all-time stock highs” and get a whole bunch of free data for that day's trading, or recent trading.

Trading a stock based on a 52-week high or based on a 52-week low is as simple as that. We are seeking stocks that hit new 52-week lows or highs. If they break out above that 52-week high level, they are an automatic long. If they break down below that 52-week low, they are an automatic short.

This is a very high percentage play —very. I'd guesstimate it works more than 75 to 80 percent of the time, it's that accurate and it gives you potentially that two- or three-to-one risk/reward ratio because the moves can be so powerful, and your stop loss is well defined; you're just using a standard stop loss depending on what the stock's typical daily range is. If it drops below that level and you're long, then you're out. If it rallies above that level and you're short, then you're out.

When we go over options this is one trend you can usually use options (calls or puts) on and make yourself a really nice risk/reward while defining your maximum risk as the price of the option. But, I'll go over that in more detail later. For now, suffice to say trading 52-week high or low breakouts is a very sweet and usually rewarding trade.