A scalp like this is one of my “pay the bills” plays… little, reliable plays that I can usually find if I’m willing to look hard enough. As I get toward the end of the month, if I’m feeling the pressure to pay some bills, I get motivated to wake up on time and find these suckers. A few months back when I had a 100% win rate for 40 days or so, I was basically doing nothing but this move.
Leading Up to the Trade
If you’ve been following my Twitter feed, you know that I have been having internet connectivity issues today. I had access, but there was lots of lag which left quotetracker mostly useless. One possibliity I pointed out via twitter, was MEMC Electronic Materials Inc (NYSE: WFR) for a break of 54.50. I mentioned that I generally do not trust this shape (which you’ll see on the chart below).
I’ve seen this pattern reverse quite a bit when volume isn’t high. If a low-volume stock hasn’t broken its OR yet, chances are it’s not going to. Well, leading to the break, volume on WFR wasn’t especially high, and also I knew from reading Trader Mike’s watchlist post that the beige book would be released soon. So, I had little confidence that the move would follow through. However, there’s still a high-probability trade to make!
Why It Works
Here’s why it works: Check out the chart. When the pattern on the chart is so clear, and it’s a round number that corresponds to the opening range high, you know that a lot of other small traders have spotted this chart. And, that means that big money and the specialist will be more than happy to trap those traders by letting the level break, and then fishing for their stops. This is why I think that the cleanest-looking setups are actually more likely to fail than ugly ones. Without really high volume, little traders are bound to get hurt.
Given that logic, you might think it’s best to short these breaks. That’s one option, but I don’t trade against the trend, so I won’t do that. You never know… maybe volume will pour in that will keep the move going. So instead, I just scalp my way in and out before the move can fail. I usually target 10 cents, and if it blows past 10 cents I wait for buying to dry up. Why 10? It just seems like, no matter how cheap or expensive the stock, a level break will pop about 10 cents. At that point, it seems like buyers and sellers pause to consider whether they will keep going. Just my observation.
The Chart
Here’s the chart… my trade is in that first tiny wick that peeked above the upper blue line to 54.60.
I’ve drawn in the ascending triangle shape I spotted. Since the touches of the upper line are so infrequent before the end, it kinda also forms a rough cup-and handle type shape as well. The top of the triangle is the OR high, and it’s at round number 54.50. Both very good signs for a pop through the number. I bought in at 54.50, and got out for an average price of 54.59. Since I’m scalping, I plan to get out immediately if the pop doesn’t happen.
The stock moved exactly as I thought. Look at the surge of volume suckered into this move. As I write this, the stock has fallen all the way back to 54.23. Ouch! Poor bullish chartists. It will probably recover, but I don’t know if it will run again. And, since I’ve banked my profits, I don’t really care. :-)
For R reporting, I don’t want to report 9R (given that I planned to risk 1 cent), so for these scalps I just compare the money I made to my ‘typical’ risk amount, and report that. In this case, I made 0.5R in just a couple seconds. Not as impressive as ugly’s ATS yesterday, but at my R size, it doesn’t take many R’s per month for me to live well.
(although you can never have too many!)
| Stocks Mentioned In This Article | |
|---|---|
| Stock | Links |
| WFR |  |  |  |
March 7th, 2007 at 1:31 pm
Richard
Do you enter a stop buy order at 54.50 or a market order, how do you get the exact price you want? Thanks for the heads up, and the info….
March 7th, 2007 at 1:42 pm
nice job! quit bragging about how big it is (R’s that is), or the trading goddess may start stalking u :-)
March 7th, 2007 at 1:45 pm
@bill: that’s an art, really, and takes practice. What I do depends on the situation, and I usually figure it out by watching the T&S. Maybe one day I’ll do a really long post on this.
These ascending triangles get up to the number, and fall away, and re-approach, and fall away. They fall because the ask gets large at the number, and the buyers run out of steam. But, when the break happens, the ask size goes away, and you can just feel that the smart money has opened up that bull trap. When I see the ticks speed up, and see mostly up-ticks, with some larger (1000+ shares) sizes going by, AND the bid becomes larger than the ask, I issue a market order while there’s still a few shares left on the ask at the price I want. I usually get at least partially filled at my number, or close to it.
Of course, sometimes it runs too fast, and I have to just let the trade go. Or, sometimes it runs as I enter my order, and I get a bad fill. If the stock is thin, I reduce my size, and sometimes go as far as using a limit order to make sure I don’t get filled too far away from the current price. But, I mainly do that for short plays. On the long side I want the fastest fill possible on these breaks, and that means a market order.
March 7th, 2007 at 2:07 pm
thank you Richard, your answer is just what I expected: something I am going to have to read several times and digest. If this thing was easy then….. Sometimes I have tried to scalp 10 cents and been frustrated and ended up in a bad trade. Sometimes it works, recently I tried buy stop orders, but that did not seem to work out either. Again, thanks for sharing, someday I will return the favor, but for now Im still way too green….
March 7th, 2007 at 2:18 pm
If you are trying to avoid slippage, than a buy stop is probably not the way to go. On the other hand, if you want in a trade, and don’t want to have to watch it like a hawk, then a buy stop is fine. Just not for a scalp in my opinion. At least, the way I do it, you don’t want in just because a round lot has traded at your number. I need to see a much more specific pattern of ticks go by.
March 7th, 2007 at 3:15 pm
oh… I got it! thanks, I love when the light goes on…. Thanks
March 8th, 2007 at 2:46 am
John,
Do not worry. I stop stalking people when they don’t stalk back. ;)
And as far as how big it is… you always told me it was the motion of the ocean that mattered, not the size of the ship! Have I been mislead all these many months???
March 8th, 2007 at 2:55 am
you’ve got to consider that a dinghy has got to work a lot harder than a yacht to cause the same amount of ‘ocean motion’
March 8th, 2007 at 5:18 am
richard and tg: lol
March 8th, 2007 at 5:33 am
richard: u better have a big “yacht” if u are in this ocean…beware — slumpbuster/camel toe
http://files.myopera.com/Mathilda/albums/46883/Disturbingly%20Huge%20Camel%20Toe.jpg
March 8th, 2007 at 9:13 pm
What is a dinghy?
March 8th, 2007 at 9:43 pm
a very small boat. sometimes it’s even inflatable. big boats have dinghies on them, often, for making excursions away from the main boat.
March 10th, 2007 at 12:45 am
ummmmm…..
Richard?
I was just joking around.
However, it is good to know that you are aware that dinghies are inflatable…
;)
March 10th, 2007 at 1:21 am
I usually take questions at face value. If you needed to know the answer, I wouldn’t want to leave you wanting.
March 10th, 2007 at 2:27 am
I would think, hanging around my dear friend John, that you would be used to a little “ribbing”.
Now…. should I take your sentence “I wouldn’t want to leave you wanting” at face value?
If so, I am indeed left wanting…
;)
March 12th, 2007 at 12:58 pm
[...] and sales, and trying to spot the last possible moment to enter the trade at a decent price (as I discussed here). Since I never (well, almost never) front-run breakouts, it might have been impossible to catch [...]
March 14th, 2007 at 11:01 am
[...] hard to convince you that bad triangles look good, when you are itching to trade. Be careful! The trade I took on WFR not long ago is an example of where I went ahead and played a malformed trangle. If I had been [...]