Article 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:
", 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.
As you can see, price had formed a tight consolidation – the bulls and the bears were apparently equal. Actually...

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Experienced member

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?



Mr. Charts

Legendary member
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.

Salty Gibbon

Experienced member
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 ??
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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.

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Salty Gibbon

Experienced member
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 ?


Established member
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:




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Mr. Charts

Legendary member
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.

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........ ;-))



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Established member
Stormy Weather


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!




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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
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.
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