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

I paper-traded a setup in Baidu.com, Inc. (ADR) (NASDAQ: BIDU) today, since I was out of daytrades.

I was watching the markets near 12:00 , when I saw that the QQQQ’s were smacking into $50 on low volume. I thought it would fail (and it later did). This gave me a short bias, and I noticed that BIDU was breaking below an inter-day pivot point on this 15′ chart:

I also noticed that my HMA/EMA crossover trend indicator was bearish. I would have gone short at the orange line, and the stop would have been at the red line at $213.04 (picked off of the 1′ chart swings). The initial target would have been the $210 level, all as I said on Wallstreak. In the end, with the partialing out, it would have been good for about 2.5R profit, though it was hairy in the first few minutes, moving to about -0.7R at one point!

More things to notice are pointed out in this 5′ chart:

The volume on the down moves was advancing, while the volume on the up moves was declining. This relationship between price direction and volume trend is a key to determining if an adverse move is simply a retrace or is actually a reversal. In general, retraces will come on declining, below average volume, and will be in the 38%-50% retracement range. Reversals happen when the character of the price/volume relationship changes–a volume spike that reflects capitulation buying / selling, a change to higher volume on adverse moves, etc. Note that if you covered the remainder of the position at the volume spike into the pivot point support at about $208, you would have covered right near the best price of the day, even if you waited until the close! Volume spikes like this are important points, where people who are forced to exit puke out their position at any cost. You want to be there to unwind your position through them, whether covering your short with their panic-sold shares, or offering your shares to a freshly-squeezed short seller. You’re actually doing them a service, since if your liquidity was not there, they would have to take a worse price to exit.

My strategy is to enter at inflection points, where a consolidation is broken and a new move gets underway. I want to exit profitably into strong price moves in my direction on high volume, when people who are trapped and wrong rush to the exits. This is how institutions operate, though not as nimbly as a small-time daytrader can; their accumulations and distributions can take weeks or months. I have to give a huge shout out to Jamie, as he has taught me so much about this trading style through his blog. The Tape Reading book I bought has also been immensely helpful, and I recommend it.

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