Breakout Trading using Time and Sales

[amit1986]

Amit, you mentioned you can spot weak breakouts and avoid market maker traps. can you explain a little bit about this, thanks for your posts.

Hi aberden,

Sometimes, not always, when you watch level 2 / time & sales prior to a breakout, you see weak bid/ask pressure. Market makers know there are lot of traders who are watching the stock and are looking to go short/long on the breakout. Thus, those who cannot read the order flow and judge the strength of a breakout will often get trapped by the market maker who will simply pop the stock a few cents below/above the low/high and then drive the price back up/down, forcing those who entered the breakout to close their position (essentially handing their money to the market maker).

I was watching the order flow on LMT and the breakout was too weak for me to justify taking a short. Soon after the breakout, the stock had reversed approximately 50% of its intraday fall. That is what I refer to as the power of accurately reading level 2.

 

[amit1986]

A few trades so far:

DEPO: +6 cents per share
DEPO: -8 cents per share
GT: +7.5 cents per share
MMI: +21 cents per share

The MMI trade was a beauty. I actually wanted to enter it earlier but there was U.S. economic news coming out around 10am EST and by the time I had entered, it had already collapsed significantly. Nonetheless, I was able to get a modest gain out of it. It then collapsed even more, but the ATR was too high so I decided to pass up the trade. There will always be more opportunities.

 

[amit1986]

I was watching OCLR after it plunged down today about 8.5%. It pushed down below the critical $15 level, which was also support on the daily chart. I was looking for a reversal and was about to take it when the spread opened up to almost 10 cents. Momentum was very good on level 2, but the spread put me off and I decided to stay away from it. It's now at 15.10/15.11!

Sticking to the rules can be quite frustrating sometimes, but in the long run, it helps maintain consistent profitability.

 

[amit1986]

Watching QGEN as it is approaching a very important area of resistance...take a look at the daily chart. Nice trending stock.

 

[amit1986]

QGEN: +4 cents per share

This was a reversal trade. Slow moving stock - very boring trade. I actually didn`t get a very good short fill on it, but really wanted to get out as it is mid-day and markets are quite choppy right now.

I will post a chart of this trade a little later.

 

[amit1986]

I must add that I usually don`t trade around this time of the day. But if a high probability setup occurs and momentum is there on level 2, then there is no point in letting money just sit there on the table

 

[bm200906]

Amit,
I'm interested in one of your earlier comments about ATR - what's the highest ATR you're normally comfortable trading? (....I know it also depends on lot size)

- I'm sometimes lulled into trading a high ATR stock because it generally means a quicker result, but if it reverses you can get burnt big time (.....it's much more difficult to limit your losses to an acceptable level if the stock reverses very quickly)

Thanks,

 

[amit1986]

bm,

what's the highest ATR you're normally comfortable trading? (....I know it also depends on lot size)

Here's my criteria:

1-minute chart: maximum ATR of 0.08
3-minute chart: maximum ATR of 0.14
5-minute chart: if both the 1-minute and the 3-minute chart ATR conditions are met (as above), then I will trade the 5-minute chart.

Also, it doesn't depend on lot size for me. If I feel I have to adjust the lot size, then clearly I cannot read the order flow accurately. In that case, I don't feel like I've got any sort of edge and it feels like gambling. Thus, I let it go and move on. I trade a fixed position size on all trades.

 

[amit1986]

Got plenty to keep an eye on today:

ACAS, ARG, CMCSA, DELL, DENN, DF, DG, DLTR, FDO, FRED, LOGM, MDRX, OMX, PLAB, ROVI, SINA, VCLK, CENX.

Some of the higher price stocks like SINA, ROVI and DLTR, I likely won't be trading, but will still have them on the watch list incase they setup, are readable on level 2 and have reasonable ATRs (as outlined in my previous post).

 

[amit1986]

+7 cents per share on DELL

Didn't enjoy that trade - glad it's over.

 

[amit1986]

Took DELL breakout again and it didn't work out.

DELL: -3 cents per share.

 

[amit1986]

Another small scalp on DELL for +2 cents per share. Really difficult to read DELL.

It's probably best to trade DELL purely from a chart perspective and avoid level 2.

 

[amit1986]

I'm surprised as to how difficult it is today, especially since the overall markets are trending.

 

[amit1986]

Took two more trades:

DELL: -9 cents per share
ADSK: +13 cents per share

Deleted DELL from my watchlist - it really is a waste of time to trade it.

 

[amit1986]

Cleared up my watchlist a little bit and now I have: DENN, ACAS, OMX, ADSK, DLTR, ERTS, FDO, LIFE, and GD.

 

[amit1986]

+6 cents per share LIFE reversal.

Added BEAV to my watchlist.

 

[amit1986]

Clearly got out of LIFE too early . Should have just used the opposite end of the previous candle trailing stop rule.

 

[amit1986]

+34 cents per share BEAV reversal trade. Finally a nice move!

 

[amit1986]

Yesterday, I mentioned QGEN and took a reversal trade on it. Here is the daily chart:



It's obvious that the $20 decade number has provided an important area of resistance in the past. But yesterday, it actually pushed through that area. In the kind of bull market we have these days, there are certainly lots of traders looking to go long on nice charts. Yesterday, QGEN had effectively broken out of narrow range to which it had been confined over the past several weeks.

Thus, there were likely lots of buyers who were looking to go long on the break. Market makers also know this and can see the buying pressure. These market makers will likely let the price shoot through resistance, trap all the buyers, and then force the price down. Through this process, all the people who bought on the break will now be covering and selling either for a small profit or a loss.

I knew this and decided to take a reversal trade if momentum presented itself. The gain was small but the concept is a high probability one which can be applied to fast moving stocks as well.



Short Entry: 19.97
Exit: 19.93
Profit: +4 cents per share
Comissions: 1 cent per share
Net Profit: +3 cents per share

 

[amit1986]

Another reversal trade today: BEAV.

It shot below the whole number on high volume. Similar story to the previous post. Whole numbers act as magnates towards stocks. If there is good momentum, then they provide excellent opportunities for reversal trades and scalp breakouts. It does require some experience in reading level 2 though.



Long entry: 35.96
Exit: 36.30
Profit: +34 cents per share
Commission: 1 cent per share
Net Profit: +33 cents per share