Jarrett wrote:
“How do you know when a stock will go from momentum/ trending nicely, to consolidating. This always get me in trouble. I will trade a stock, like IBN, from short side 32 to 30, than it traded 30, so i got short, then it bounces to 30.20 i cover, back and forth, and it turns out the stock is in a range 30-30.50. I guess i should wait for a nice break below 30, but I fear that i will miss a good entry.”
I think this is a great question, and one that I think all developing traders have to think about. Looking at the chart of IBN from this morning, it traded down from 32 to 30 in the first few minutes of the day. I wasn’t watching it, so I’m not sure if there was a buyer that was refreshing at that level, or if there were plenty of bids at that level.
Regardless, the one cardinal rule you violated here: you got short before the level broke. I understand that you want to get great entry prices, but you have to wait for the level to drop!
In all reality, you’re not going to really know when a stock goes from being a momentum play to a range play, until it actually happens. The more times you see it, the longer you trade, the faster you’ll be able to spot when and how the stock changes. When you see the range develop, you should look to play it, from both ends. In your case, with a short bias, once you realize it’s in a range, you want to make sure you’re short the top of the range, covering most or all at the bottom of the range, and making sure to get back into the short side once it breaks out to the downside.
The only time I personally would begin to hit the stock before it broke 30, was if and when I saw a seller come in under 10 cents. When I see a buyer or seller so close to either end of the range, I expect that there could be a move out of the range, in which case we could get a momentum move. But unless I see that, I would be waiting for the level to drop, but most importantly, for the offer to hold below the level. Remember, the level dropping could just be the buyer shaking out the weak hands before taking the stock higher. To get aggressively short IBN, I would need to see someone selling the stock below $30.
And just one more thought with regards to entry, and we talk about this a lot in our video review sessions: just because you’re in from a higher price doesn’t necessarily make it a better short. In the case of IBN, the better short is when you spot a seller below 30. Maybe you don’t see anyone stick the offer until 29.93. In my opinion that’s a better short, with much less risk than getting short at 30 and maybe having the stock spike 15 cents against you in a squeeze.
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13 Comments on “Momentum Versus Range-bound Trading”
yes i saw this trade too. also got short at the whole number, as there was a lot of people hitting the bids. then suddenly it was at .05, then .08 and .09… I was fortunate to get out at .05, but then it traded up to .75 before becoming range bound again. but I know what you’re talking about, with the red scrolling on the t&s, it looked heavy and poised to break…
yes i saw this trade too. also got short at the whole number, as there was a lot of people hitting the bids. then suddenly it was at .05, then .08 and .09… I was fortunate to get out at .05, but then it traded up to .75 before becoming range bound again. but I know what you’re talking about, with the red scrolling on the t&s, it looked heavy and poised to break…
good post
good post
I wanted to say thank you for the comments, I really appreciate that. Do you have a list of cardinal day trading rules? I think that would really help me. I am not a newbie, but somewhat of a vet, but I have been in a funk since last year. I am trying to get back on track. Thanks Again, Jarrett
I wanted to say thank you for the comments, I really appreciate that. Do you have a list of cardinal day trading rules? I think that would really help me. I am not a newbie, but somewhat of a vet, but I have been in a funk since last year. I am trying to get back on track. Thanks Again, Jarrett
Great explanation! Can you elaborate on how you “see” buyers and sellers. I am assuming you are talking about Level II. Then, how do you account for potential manipulation of the bids offers in the pipeline?
Thanks!
Damien
Great explanation! Can you elaborate on how you “see” buyers and sellers. I am assuming you are talking about Level II. Then, how do you account for potential manipulation of the bids offers in the pipeline?
Thanks!
Damien
What advantage did you guys see in hitting the 30 before it dropped? A lot of extra risk is involved only to save a penny or three.
Some people (not me) would even let the 30 drop, then find a seller sticking the offer with volume and then get short. Others would even want to see the 30 get tested and fail then short.
This is one of the first plays I was taught at SMB and is still probably my favorite play because it is so simple. Try and focus on what possible scenarios can happen after 30 drops. There are not too many.
I shorted below 32 when that held, and the stock moved really fast. I covered in mid 30s, I guess I got a little anxious, which is one of my big flaws. Since it was moving fast, when I saw volume coming down at 30, I tried to jump it. Another play I did was RIMM at 74, prior R from last week pre opg. It acted nutty just before opg bounced to 74.50, no volume. I shorted in .90s, covered at 74, and did that 3 more times. Than if fell to below 72, and I missed everything because it was so fast. Any suggestions how to handle that, and hold that one.
I shorted below 32 when that held, and the stock moved really fast. I covered in mid 30s, I guess I got a little anxious, which is one of my big flaws. Since it was moving fast, when I saw volume coming down at 30, I tried to jump it. Another play I did was RIMM at 74, prior R from last week pre opg. It acted nutty just before opg bounced to 74.50, no volume. I shorted in .90s, covered at 74, and did that 3 more times. Than if fell to below 72, and I missed everything because it was so fast. Any suggestions how to handle that, and hold that one.
Nice explanation G!
Damien,
The way we spot buyers and sellers is through extensive training on correlating time & sales with the Level 2 and order books; not just looking at the Level 2. After training we go through a trader development period for several months where we identify different trading patterns that are variations of what we’ve learned through our training. Manipulation of bids and offers isn’t as much of a concern as long as you are focusing on the right things, such as the time & sales; however some manipulation can’t be avoided and that is why you need to be prepared for every scenario and as Mike says “never be surprised at a level.” As far as using the level 2, one thing I tell trader’s I mentor is you should always question the motives of large orders in the book. As Mr. Livermore figured out 100 years ago, you can learn a lot about a stock by the way large orders are filled in the market.
Nice explanation G!
Damien,
The way we spot buyers and sellers is through extensive training on correlating time & sales with the Level 2 and order books; not just looking at the Level 2. After training we go through a trader development period for several months where we identify different trading patterns that are variations of what we’ve learned through our training. Manipulation of bids and offers isn’t as much of a concern as long as you are focusing on the right things, such as the time & sales; however some manipulation can’t be avoided and that is why you need to be prepared for every scenario and as Mike says “never be surprised at a level.” As far as using the level 2, one thing I tell trader’s I mentor is you should always question the motives of large orders in the book. As Mr. Livermore figured out 100 years ago, you can learn a lot about a stock by the way large orders are filled in the market.