I have spent some time the past two days talking to one of our better young traders about an issue with which he has struggled.  Dove Bar, as I like to call him, is trying to figure out the best way to trade after the Open.  Usually he crushes the market in the first 15-30 minutes.  The majority of the time he is up 1-2K by 10:00AM.  After that time his P&L tends to be on a bit of a roller coaster ride.  And based on how exasperated he has been during our conversations I would surmise that he is not a big fan of the SMB amusement park.

I believe that one of the main reasons D Bar does so well when the market opens is that he has spent a lot of time mentally preparing for a multitude of possible trading scenarios.  He is extremely aggressive when he sees one of these scenarios unfold.  He also is very quick to get out if the trade doesn’t work right away.  Generally, aggressive traders who are quick to acknowledge that they are wrong do very well trading right when the market opens.  There is a lot of volatility in the first 15 minutes of the trading day and if you understand the setups that work best you can make money very quickly with little risk.

After the initial thrusts take place on the Open it becomes more confusing for many.  I will use today as an example.  D Bar was trading FAS on the Open and caught a VERY powerful down move to 71.  D Bar surmised because this down move was so powerful that the direction of the stock had been established for the day.  Therefore, when FAS popped up to 71.75 from 70.50 he got short.  FAS quickly traded down to 71.10 but he held the position because he felt it would go through the low.  When FAS started to trade higher he covered for a small loss.  This was a good trade.  It was an advanced trade which involved fading the short term momentum but was in the direction of the larger trend of the day.  This is certainly not a trade that we would allow someone on the desk with less than one year of experience to execute but was something that definitely should be a part of D Bar’s playbook.

FAS then had another up leg to 72.80.  D Bar tried to fade this move as well.  He still had the mentality that the hard down move to 70.50 trumped the fact that the stock was making a second up leg.  He lost.  Not such a good trade.  FAS then made a third up leg which he shorted again.  He frustratingly lost money on this trade as well.  This was also not a good trade.  The stock was clearly in an uptrend at this point and the only fade trade that made sense was buying into a pullback.

Then D Lee who is a little bit more experienced than D Bar and probably overall a better FAS trader established a short around 73.25.  He decided that this was a Trade To Hold.  His reasoning was that since the most powerful down move of the day began around this level that it was a spot where FAS could reverse and go to the low.  There is no doubt that this was a possibility but it was not likely.  FAS dropped on the Open from this level very hard and within five minutes had hit its intraday low.  It was in a strong down trend at the time after failing at 74.75.  The next time it was at the 73.25 level it was in a strong uptrend of 40 minutes making higher highs and higher lows.  D Lee had a great entry point but the stock was still in an uptrend and only offered a scalp on the short side.

A trader with D Lee’s skill level definitely can make this trade but needs to recognize that it’s a scalp play and only would become a Trade To Hold if it broke the uptrend and then made a lower high.  At one point D Lee was 50 cents in the money on this trade but he did not book profits because he wrongly concluded that it was a Trade To Hold.  Part of me is proud of this fact in that D Lee has worked very hard on holding his winners longer.  But the experienced trader in me knows that he should have covered half of the position into the down move because FAS had still not broken its intraday uptrend.

After speaking with D Bar about his various trades in FAS I think he agreed that his first fade made sense but the subsequent trades should be eliminated from his playbook.  D Lee’s fade at a critical inflection point definitely can stay in the play book but it is a scalp trade and should be treated as such.

Something that D Bar and D Lee have in common is that they are very focused on watching every tick in the stock that they are trading.  They are excellent tape readers.  But occasionally a trader’s tape reading skills can be to their detriment if not used in conjunction with the bigger picture in a stock.  If a stock is in an uptrend and you are able to identify a seller on the tape then this is a good time to sell part of your position but it is not a spot where you should get short.  If a stock is in a downtrend and a buyer emerges at a particular level then it is a good spot to cover some shares but not a spot where you should get long.  Maintaining this type of awareness improves your results in the long run because you are making trades in the direction of the trend.

The best day traders all have excellent tape reading skills.  Eventually they develop bigger picture technical analysis skills as well.  I can see by watching and listening to the two Ds that they are well on there way to developing bigger picture tech analysis skills to complement their advanced tape reading skills.  When these two things are combined your upside is basically unlimited.  I’m looking forward to seeing the day both of these kids are in that category.

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