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

I traded Apple Inc. (NASDAQ: AAPL) today from a 1 minute chart. I saw the setup on that timeframe, so I stuck to it, even though other timeframes called to me with their siren song.

The Setup

I was looking for setups as I talked about yesterday: A big move up, a shallow retrace, and a base breakout. I stalked a few names that failed, including NOV and QCOM. I watched the strength in AAPL, after a mention by johnson from Wallstreak. Because of my oath to only focus on my one setup, I didn’t want to jump in and chase the stock.

However, a bit later on, I was watching AAPL’s 1 minute chart, and saw this setup:

This is similar to my chosen setup, in that it is a base breakout, just at the high of the day rather than after a retrace. I consider this to be riskier than a base after a retrace, because you will often get to retest the day’s high, while in this setup there is no guarantee that price will continue to move up. The setup was compelling, though, so I took the trade, ignoring my advice to myself from yesterday.

The Trigger

I went long as price made a new high on the upper channel on my chart, filled at $125.70, with a stop at $125 even. The stop probably should have been tighter, but I wanted to give it more room to work out–a byproduct of my restricted daytrades. The target was the previous all time high of $127.61 as seen on the daily:

Since I was trading off of the 1 minute chart, I didn’t really expect this target to be hit, but that’s where I would take profits if I wasn’t stopped out.

Trade Management

I managed the trade as shown on this 1 minute chart:

You can see all of the places that I raised my stop. I described them in (almost) real time on Wallstreak. I trailed the stop up as new swing lows were formed on lower volume, and then price moved up on higher volume. Then price stalled out, and the volume trend reversed–low volume on the advances. Here is where a little man in a red suit appeared on my shoulder and said “Prospectus! (if that is your real name) switch to the 5-minute chart! The base is holding well on that timeframe!” Ignoring the temptation, I kept to my 1 minute chart and the stops based on that price / volume action, and ended up getting stopped out for a 0.79R profit.

Takeaway

This brings up an important lesson: Had I listened to the Beelzebub of Trading, I could have held on with my stop at breakeven and exited near the close around $127.20 for 2.1R. Equally as likely, price could have retraced to my entry point and I would have exited with nothing. Further, if the Father of Trading Lies was able to convince me to switch timeframes once, what’s to stop me from switching again? “Hey, there’s good support on the 15 minute timeframe, but you’d have to drop your stop a bit wider than you thought. But it’ll probably bounce from there!” And from there, if price kept retreating, he’d say “Hey, hold it overnight! It’s gotta come back! Look at the daily chart!”

No. Based on my information and the timeframe for making my entry decision, my best action was to get stopped out as I did. You can’t base the wisdom of a decision on the eventual outcome. You have to base it on the best probability for the desired outcome, taking the information known at the time into account.

Your trading timeframe is a paradigm–a way you look at reality. Reality is bid, ask and volume. That’s it. Everything else is some kind of derivative of those tangibles. A 1 minute chart tells a different story than a 15 mintue chart, a daily chart, or a weekly chart. If you change your paradigm mid-trade, you are fooling yourself and probability (there’s that word again) will come to bite you someday. I would have gotten away with it today if I had switched–but what about when I take a 4R loss, or worse, by switching around, and price keeps going against me? If you don’t have timeframe rules for your trading, you should. They may not be the same as mine, but they should be designed to keep you honest and keep your Trading Devil at bay.

Plan your trade, and trade your plan!

Trade Summary:

AAPL Long
Entry: $125.70, Stop: $125.00, Target: $127.61
Exit: $126.25, P/L: 0.79R

Trade Grade:

Stocks Mentioned In This Article
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AAPL	| |

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

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

I was really impressed by the Marubozu candle on the daily chart for Google Inc. (NASDAQ: GOOG) on 6/5/07. So much so that I entered at the close for a swing trade:

It went nowhere the next day, and I tightened my stop as it put in a swing low on a volume uptick. This morning, it took off in the middle of the bloodbath, and I had my sights set on $550. GOOG stalled at $525, and I should have exited as I had to be away from the computer for several hours. Instead I left my stop intact and came back to find myself stopped out for about -0.6R (I tightened my stop, remember?)

I should have at least put the stop to breakeven before I left, and that’s my first mistake. Second, I was not sure about my target before I entered–that’s a recurring theme in a lot of my trades. I often have a “target” I pick, but many times it’s just a level on the chart that gives me a “good” risk:reward level. This target usually doesn’t sync with my stop choice, or else it would get hit more often. My trades hardly ever hit their targets, while my losses often hit -1R, which kills my expectancy.

This made me realize (not for the first time) that my trades are mixing up timeframes. Maybe my target can eventually be hit, but not in combination with the stop I select. Usually my trades go my way (within the confines of the stop I choose), but that stop is not wide enough to allow the trade to hit my target, and eventually I get stopped out at breakeven or a loss. This results in an artificially high reward:risk analysis of the trade. I hope this makes sense!

What I really realized is that I need to have an idea of what kind of move I am trying to capture before I frame the trade. My usual way is to try to find a good low-risk trade entry, and then I pick a target that seems sensible that will give me a favorable R:R. That’s all wrong for me! I need to have a defined plan for the type of move I am trying to capture, based on the timeframe I have chosen, and then look for a low risk entry into that move. It’s completely backwards to the way I have been trading, but I think it’s the right way to go about it. I’ll write up a few setup plans that are geared this way before I enter my next trade, and see how it works.

Any comments are welcomed!

Stocks Mentioned In This Article
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GOOG	| |

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