I received this question on a previous post that we should discuss from Damien Hoffman of Wall Street Cheat Sheet.  Let’s tackle this question.

Damien Hoffman Says:
June 29th, 2009 at 10:43 pm

1) How do you deal with a gap against an overnight position which breaks your stop?

2) Do you favor 52-week and all-time high stocks? I have been becoming more and more of a fan since they tend to breakout with lots of momentum and mitigate risk (i.e., I end up in a winning position very quickly when a buy/sell stop limit is triggered at a critical level).

Bella responds:

Damien,

1) We are hoping to hear some good news from you this weekend.

2) Great interview with Barry Ritholtz.  Can you be more correct and still so humble than Mr. Ritholtz?  I especially enjoyed this comment from Mr. Ritholtz, “But, one of the things I’ve loved about Wall Street is people are incredibly generous with their time and expertise…..There is this a mentoring relationship you can develop with people — and they’re top notch.”  We should all seek mentoring relationships with those who can teach us to become better at whatever it is we do.

3) If you do not mind, I am going to skip to question 2.  I get this one a lot from new traders.  And I suspect this is a question that many new, developing and experienced traders may have.   For me a level is most meaningful based upon how much volume is done at a particular level.  I am looking for levels where there has been an epic battle.  When I spot one of these battles we expect a substantial move away from these levels.

And at SMB this is our expertise. We find levels by watching the tape and the order flow intraday. We can see where the buyers and sellers are fighting.  Often this is not apparent on our charts. These levels that we determine by watching a stock trade, based upon the order flow, are our truest levels.

So if a stock reaches a 52 week high yet there was no battle at this level, then for us this is not a significant trading opportunity.  But if a stock is making just a new intraday high after an epic battle then this is a significant battle for us.

Hope that helps. Don’t forget to follow us on Twitter!