On our desk newbies are taught to look for setups where they can risk one unit to make five. By constantly looking for these great risk/reward setups they can become consistently profitable. But there is something more important one needs to recognize in order to move to the “next level”. Traders must recognize that unlike people all trades are not created equal. Therefore, it is imperative that when a trade presents itself where the risk is one but the upside is ten, twenty or greater then you must get involved.
My favorite trainee, whom I like to call Rosie, announced that MS was approaching 25 yesterday. I was trading DRYS at the time but I punched up MS in my other Level II window. My thought process was that 25 was too important a level not to get involved in MS. I quickly noticed that it had made a powerful Opening Drive and had consolidated at 24.80. If it failed at 25 initially I would get short but cover when it pulled back to the 24.80 area. I expected MS eventually to trade through the 25 level because of the strength it displayed on the Open as well as the consolidation above its Opening Range.
MS initally failed above 25 so I went short. I covered in the 24.80s as my plan called for. The second time MS went above 25 I got long when it traded above the previous high of 25.06. I sold half of my position when it stalled out at 25.35. I placed a bid at 25.06 to buy back twice as many shares as I had just sold. My plan was to hit out the entire position below 24.95 or hold a core position of at least 1,000 shares until MS found major resistance. Worst case scenario I would break even because of the previous sale I had made when it stalled out at 25.35. My upside target was 26.14 and then 27.
MS is a stock that is followed by many market players. Its unusual strength was going to attract even more buying interest during the day. You can just hear the thoughts of the hedge fund guys trying to chase performance. “MS is finally showing some life. I really didn’t make enough in GS, JPM, and WFC. Now is my chance to catch a 20% move in MS.” My job as a trader is to intently watch my screen and look for signs of the big players gobbling this stock up.
At 11:12AM MS made another powerful move on heavy volume up to 25.80. It then proceeded to consolidate for another 90 minutes and would make its next big move at 1:00PM. Notice this move was around 60 cents similar in size to the previous large up move but took somewhat longer to develop. After failing to hold a bid at 26.40 it eventually traded down to its most recent breakout price of 25.80 which afforded another quick trade on the long side.
At no time did I risk more than ten cents from any of my entry points. MS offered me about 1.5 points of upside from my initial long entry. There were several well defined support/resistance levels along the way that made trading it even easier. I hope everyone is able to identify a trade with such an amazing risk/reward profile tomorrow. Especially Rosie and the other young traders on our desk.
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