My one trade today was in Rackable Systems, Inc. (Nasdaq: RACK), for 0.72 R. I thought the setup was fantastic. I was watching for a break of 28.40, and the stock set up with a narrow-range candle just under 28.35. Great! It had been hovering in that area for 45 minutes. Even better!
But, as soon as I made this trade, I didn’t like it. Several red flags immediately went up:
- My market order took several seconds to start filling. Not that unusual on a break of resistance, but not what I like to see.
- My order filled in a trickle of 100 share increments, for an average basis of 28.46. An average basis a full 11 cents above my desired entry. The 100 share increments warn me that I might be in a crowd of tiny speculators, and no big money is participating.
- Because my basis was higher than I anticipated, in order to hold to my desired risk amount, my stop would have to be higher than I wanted. You can see on the chart, my stop is not quite below the previous candle. Had the stock not shot straight up, I would have eaten the commission and sold off enough shares to put my stop back where I wanted it.
- The stock shot up nearly 2% in a couple minutes. Too much, too fast, for my tastes.
So, when I hit 28.71, which was my 1 R profit point, in less than 2 minutes, I thought that was enough of a gift. I decided to get out. As I feared, my market order again executed in 100 share increments, across a nine cent range! My average exit price was 28.64, leaving me with less than 1 R profit. The chart (click to enlarge):
I was also a little concerned about what I hope were bad tick data, but which I’ve seen from multiple chart sources now. On my entry candle, you can see that shares traded around 28.06. If I had a stop in the market, that might have taken me out. A few bars later you can see the print up in the 29.90’s. After Ugly’s misfortune with crazy price action, I am a little nervous about these anomalies! Probably too nervous, but still, I am noticing them a lot more now.
More and more after this summer’s trading, I believe there’s a lot of merit in taking your money out of harm’s way as quickly as possible. In some respects, that’s what daytrading is all about, after all! Had I been a hold-til-the close guy on this one, for instance, I would have been stopped out for either a loss or break-even. At best, I would have made the same profit I did in two minutes, only it would have taken two hours. If the fills weren’t so sloppy, I would have had closer to 1.5 R on the trade, which is more than good enough to make a living, with my win rate.
I am a little disappointed with myself, though, for not shorting the stock during the market downturn in the afternoon. There was a decent setup for that under the 2:00 candle. It would have been another quick profit that I would have bailed on at 1 to 1.5 R. Most stocks I was watching discarded all their gains for the day in the early afternoon. If I had had the guts to short just about anything, I would have made a lot more money today.
| Stocks Mentioned In This Article | |
|---|---|
| Stock | Links |
| RACK |  |  |  |
September 18th, 2006 at 2:04 pm
Wow, look at that death candle! I got caught at the bottom of one of those today and they can just destroy an otherwise good day. I’m glad you and others share these things so that newbies like me can catch a glimpse into the minds of better traders. Gives me hope for the future! :)
September 18th, 2006 at 2:10 pm
@Tyro: yeah, luckily, this one telegraphed itself quite well with the two preceding candles. I’m still kicking myself for not shorting into it.
September 18th, 2006 at 3:12 pm
[...] I have been thinking about my rules. Rules are important to follow, but if trading were just rules anyone (or any computer) could do it. Similarly, rules are important in chess, but if you only follow rules you will not be any good (unless you can compute 200 million positions per second). Intuition is our edge. The way we can feel the market is what really makes us good at trading. Basically, this inuition is just the human brain’s amazing pattern recognition capabilities. You can’t ignore your trading intuition - you will only give away your advantage. The computers can’t feel the market like we can - yet. A rule I have is to let my winners run. It’s usually a good rule. But today it wouldn’t have worked with the trades I made. At around 1pm today I closed out everything for a profit because I didn’t like the way things felt. It worked. Richard also made a similar profitable trade based on his intuition. But this doesn’t mean that rules are unimportant. They are very, very important in trading. After thinking about this a lot lately, I believe that rules (at least for me) are especially important when dealing with risk management. I don’t ever want to break a rule that has to do with risk management (e.g. pulling a stop, overtrading…). I need these rules as a safety net and I won’t even let my intuition interfere. Other rules (e.g. letting your winners run) may not be as important if your inuition is telling you something different. What I’m trying to say is that you need rules but you can’t always let them get in the way of your intuition. You need rules to keep the emotional part of your brain from taking control. Trading with inuition is okay as long as you are not trading with emotion. Also worth noting today is the large chunk of QQQQ that passed by at 2:30: Another thing I’d like to mention is that when I post about my frustration or feelings about trading (e.g the AMR incident), I am only posting about my frustration or feelings with trading, and not with life in general. When I say (half-sarcastically) that God is against me, I only mean to say that he has the other side of my trade, and not that he has given me a bad lot in life. I am well aware of the extreme luck I have been given in my life - I am a card-carrying member of the lucky sperm club. I try to think that the troubles I have are due to my own mistakes, while the good things come from luck. [...]
September 18th, 2006 at 4:33 pm
Hi Richard, may I ask why you are using market orders to enter and exit. Also are you trading thousands of shares?
Thanks!!
September 18th, 2006 at 4:42 pm
Hey Glenn, I normally use market orders to play breakouts because I expect a big move, with everyone piling on at the same time. So, this puts me ahead of the limit orders, and I know there is a good chance I can make a profit even off a bid fill. Like today, for instance.
When I play a slower setup, like a normal dummy-style narrow bar, I tend to favor a limit order to protect myself.
Yeah, in the $30 price range I am usually trading thousands of shares.