Trading is about probabilites and not certainties: RIMM Short

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

I traded Research In Motion Limited (USA) (NASDAQ: RIMM) short today, based on what I thought was a compelling setup. All the elements were there, it just so happens that the nature of the market changed just after my entry, proving that even an ironclad setup can turn on a dime. You can’t predict what the crowd of traders will do, you can only put the odds in your favor. Today, I got nailed by the short odds on probability.

The Setup

I wanted to do a very short term trade, and I saw RIMM making this shallow retracement and flag setup on the 1-min:

A wide range move, and then a break of the support on high volume. A shallow retrace (less than 38%) on declining volume. Bearish setup! I decided to get in early (before a breakdown of the flag) to get a better fill, as the slippage can be nasty on RIMM. I took on the additional risk voluntarily.

The Trade

You can see how the trade turned out:

I entered early for the downside break, and put my stop above the 38% retracement (invalidating my setup if hit). Right after my entry, the market bias changed from bearish to bullish (at least, that’s my perception–maybe it never really was bearish??). Buyers came in, and I was stopped out quickly. Either way, whether my fault or theirs, I was wrongly positioned.

The Takeaway

In retrospect, I was shorting right into an uptrend on the higher timeframes (5 min, 15 min) even though my read of the 1 minute trend was correct. That would be the only mistake I see here, and I should revisit how I use multiple timeframes in my trading process. The 1 min setup was solid, but nothing is guaranteed. A setup can always go south, since there’s always a chance that market participants can choose to change their leanings.

There’s a nagging feeling that I just got suckered into shorting the bottom of the stock, though I’m mostly tending to think it was just a twist of fate rather than a big miss on my part. If I’m not seeing this clearly, I’d appreciate any feedback!

Trade Summary:

RIMM Short
Entry: $232.54, Stop: $233.20, Target: $231.00
Exit: $233.25, P/L: -1.06R

Trade Grade:

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This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com