Day Trading & ScalpingEquitiesTechnical Analysis

Anatomy of a Trade

Today is Monday December 27th and the US is open. Many would say, "oh, what’s the point, the action will be thin and the pickings, if any, hard." Well, in my experience, that approach is mistaken. 36 minutes before the market even opened today, I read this story:

"Amazon.com, Inc. (AMZN) said Monday the 2004 Holiday season was its "best ever", with the online retailer setting a record of more than 2.8 million units ordered in a single-day, or 32 items per second worldwide. The Seattle-based company said consumer electronics sales was its largest sales category."

Again many would say, "oh, the news will be in the price so it’s pointless" This is also just plain wrong a lot of the time.

I have traded AMZN three times today, all profitably. On the second trade I did a screen shot of the entry and the exit.

Chart

As you can see, price had formed a tight consolidation – the bulls and the bears were apparently equal. Actually, they weren’t – the bulls were about to take over.

How did I know that was a very high probability?- because I know from experience that this particular breakout pattern, with a minimal pullback from highs, works most of the time provided that the bearish pressure was disappearing and bullish pressure mounting.

My exact entries and exits are strongly influenced by my reading of the "tape" – this is an integrated method of chart patterns, level 2, time and sales and the way I specifically interpret the evidence these reveal of trader sentiment at the time. Tape reading is a huge subject and beyond the purposes of this article. If there is interest I will try to return to the subject in a future piece but for present purposes suffice to say it essentially involves seeing the buy and sell pressures waxing and waning, the trades actually being printed, the behaviour of major market participants such as leading market makers and ECNs and how all these come together at different price levels.

I use many patterns, all are tried and tested and have been back tested and forward walked live – only then am I confident enough to trade them for real. If the set up pattern is present I will only take the trade if it is confirmed by my tape reading. For example, with breakouts this approach actually keeps me out of several trades which then fail.

In the case of the AMZN trade, after identifying the pattern and reviewing the tape I entered at 40.93 before the break out above the high of 43.00. What was the risk? Negligible. Had the tape suddenly and immediately turned against me, which from experience of this type of trading is possible but very unlikely, I would have been out for, at very worst, a tiny loss of three to five cents. If it had broken out to a new high and quickly failed I would have been out before it had fallen back to the entry at 40.93 for a tiny profit.

This approach means that on the rare occasions the break out fails, and tape reading hasn?t kept me out of the trade, then it?s unusual for me to make a loss. So knowing what the worst case scenario was I felt very comfortable and quietly confident, but if proved wrong by the market, ready to simply exit the trade immediately and without hesitation.

What was the risk/reward? Three to five cents risk against a completely unknown reward. How could I possibly know where this was going? It would have just been a guess – useless.

What would the percetage probability of failure against success have been? That’s different – I know from experience this pattern works most of the time when confirmed by tape reading. I don’t actually have to guess where it’s going or how far – I’m on board for profit with absolutely minimum risk – and that’s good enough for me – and a lot better than any classical technical analysis derived target.

Chart

This is the point of exit seven minutes later at 41.36 for a 43c profit. On 1000 shares that is $430; 2000 shares $860; 3000 shares $1290 and so on. With a stock like AMZN there is no problem taking a few thousand shares when you want.

As you can see by comparing the two charts once I entered the trade it did not move against me at all. Why exit where I did? The price had run up quite sharply in those few minutes and it was time for a pause or sudden retracement – that put me on alert – that is, it set up a potential exit IF my tape reading confirmed a potential fall. Buying pressure decreased and selling pressure increased, so I exited and banked the profits.

Does it matter whether the stock then headed north again? No, because I had taken my profits and could always re-enter if another high probability trade set up. I’m then ready to look for another opportunity in this stock or another, maybe using another pattern, maybe the same one.

Richard Joyson (Mr. Charts) made the much dreamed of transition from day job to intra day trader of US shares when he gave up his full time profession nearly 10 years ago.  He  combines trading with personal coaching and mentoring, aiming to pass on to his students the same methods, techniques and patterns he uses in his own trading.He posts about his techniques regularly on T2W and has lectured on training CDs and seminars at the Millennium Centre and the Bloomberg Centre in the City of London. He is also owner of nasdaq-nyse-trading-school where he provides educational articles, answers questions and provides live educational trading alerts to members

Richard Joyson (Mr. Charts) made the much dreamed of transition from day job to intra day trader of US shares when he gave up his full time profession...

bracke

Experienced member
1,286 12
Richard

A couple of questions if I may.

1 Does this pattern ( minimal pullback from high price followed by price rise) work with most shares?

2 If you do not have level 2 is it possible to use volume information to determine selling/buying pressure?

Regards

bracke
 

Mr. Charts

Legendary member
7,364 1,181
bracke,
1. Too sweeping a generalisation, I'm afraid. If the stock is moving readably, (by that I mean cleanly without long wicks on the candles and cleanly trending) then the answer is yes, provided the market/sector is not going in the opposite direction.
2. In a slightly broader time frame, yes. Although it can be done without level 2, the use of the latter combined with time and sales and reading bid/sell pressure is a much more accurate, useful and informative tool so the success rate is higher.
HTH
Richard
 

Salty Gibbon

Experienced member
1,535 6
Hi Richard

As always an excellent and very interesting article.

I would like to make some comments if I may and please shoot me down if I say anything dumb or I am completely wrong in my observations.

I have read your posts etc for a long time now and you keep returning to the same theme of reading the tape before deciding whether to enter a trade. Obviously your reading of the tape is critical as to whether you enter a trade or just pass on it.

I have attempted this kind of pre-trade analysis and these are my observations :-

1. I have my price and volume charts, Level II, T&S and trade screen all up at the same time as usual.

2. I see my chart pattern and I identify a potential long trade. From the pattern I instantly work out my entry point and stop level.

3. I glance at Level II and see small spread, the bid is well stacked ( few or no gaps and my stop level is viable ) and a preponderance of orders coming in on the bid side with only a few coming in on the ask side.

4. T&S is mostly green.

5. Excellent. Limit order entered, entry price achieved and order filled.

6. Immediately on entry everything goes in the opposite direction.

7. What I saw on the Level II screen moments before has been reversed and T&S has gone red.

8. Price drops 7 cents ( say ) and I cut losses before my stop is hit because trade is going the wrong way. By the way my stop is at 15 cents.

9. I am out of the trade and lo and behold everything now reverses back again, the price turns around from its small dip and motors off north and I miss out on a double-dollar run.

10. B******ks I say. How dumb can I get.

11. If I had allowed my stop to be the exit point on the downside instead of being clever and getting out early I would have cleaned up.

What to do ?

Okay, I have decided that :-

(a) The tape is very fickle and can change instantly in many directions over a very short space of time. Bit like a woman really.

(b) In order to trade like Mr Charts you need to be pinpoint accurate on your entry level and in fact the entry price is the most critical part of the trade.

(c) If my skill level is not yet at the point where I can be pinpoint accurate with my entries then I should allow my stop to take me out rather than my often questionable judgement.

Phew !!

Any comments ??
 
Last edited:

Trader333

Moderator
8,502 881
In my view it is your reading of the Level II screen that maybe flawed. There are ways of knowing the likely level that price will go to (against your position) before then moving back in the direction of your intended trade. There are also ways of knowing (when the price moves against you), if it is likely to continue doing so. These are dynamic decisions and by that I mean that once you are filled then the immediate action on the Level II screen becomes quite important. The way that I read this is not used by the majority of people I know who use Level II but it has proven to reduce my risk at market entry on a consistent basis for a long time.


Paul
 
Last edited:

Salty Gibbon

Experienced member
1,535 6
Do you mean that if I suddenly see significant size on Level II from a major player below my stop level, then I should get the hell out ?

Or if that size is a few cents above my stop level, I should let the price come down to that level and hope to see it reverse ? If it continued on down after that then I could let the stop handle it or maybe save a few cents and manually extricate myself ?
 

Mayfly

Established member
514 28
Nice One

Nice one, Richard – it seems to me that you squeezed the trigger at just the right moment as the chart of last month’s - 10th Dec thru 7th January - price action shows. :cool:

Cheers

Mayfly
 

Attachments

Mr. Charts

Legendary member
7,364 1,181
Salty,
A really excellent post !
Very often a breakout will come back on the following one minute candle as unwise pros fade the breakout, before it shoots off in the direction of the break out - the ability to see that happening and recognise the micro pullback for what it is WILL come to YOU with practice and experience. You can, of course wait for the micro pullback then take the trade afterwards - this is often 20-60 seconds later - but the train may leave once only.
There is NOT a set of hard and fast rules which can be scientifically or analytically applied though seeing how axes and ecns behave is helpful. This is the boundary between science and art and experience.

Mayfly,
Some readers may not fly with your noughts and crosses, so here is another rather interesting image -

islands in the sun,
and events to come.
perhaps some people's eyes
will see a sun arise........ ;-))

Richard
 

Attachments

Mayfly

Established member
514 28
Stormy Weather

Richard,

I agree that it’s absolutely essential that you find yourself on the leeside of the island when the weather changes, particularly at times of cyclonic extremes. :)

I reckon the charts below should be easy on the eye than my earlier effort!

Regards

Mayfly
 

Attachments

nagula

Newbie
6 0
Nice read Mr. Charts, do you use limit orders or just pull the trigger when the time comes?

Also, in the sentence
"In the case of the AMZN trade, after identifying the pattern and reviewing the tape I entered at 40.93 before the break out above the high of 43.00."
did you mean "above the high of 41.00." ?
 

Mr. Charts

Legendary member
7,364 1,181
Yes, sorry, typo.
I usually enter longs on a market order, but sometimes on a stop, sometimes on a limit depending on the circumstances. The decision rests on the type of pattern and my tape reading.
Shorts are always entered on limit orders.
 

Similar threads