Anatomy of a Day Trade: Entrances and Exits
Updated
O FGS! Dammit! They gapped it up overnight, what should I do?!?
Well what gap is this? Three weeks ago we had Initiation Gap: These often do not fill, don't short them! It's suicide, lol!
This has hallmarks of an Exhaustion Gap; it will fill intra-day or within a few sessions at most... a great short opportunity!
See my related post on gaps FYI.
But, when should you enter?! If you foolishly short it at the open be prepared to wait for hours and watch your position dwindle... ow!!
Should you buy calls at the open?! Maybe it will run higher?! Of course it CAN, but it can also run lower and gapfill quickly, within minutes.
A long position taken first thing is high risk... as are early shorts! So, when can you enter a position with reasonable expectation of profit?!
In fact, ANY position taken in the first 20 minutes of the trading day is very high risk, I do not like to open new positions right away!
So, you Watch and Wait! Looking for opportunity... in the first hour price ran higher and calls had been profitable, but we didn't take a position with no signal, we like good Risk/Reward positions with clear signals, not gambling on the opening price. After what seems like an eternity, price begins to consolidate and gives us several warning signals, first a pinbar appears, with a needle doji and tall wick followed by a red candle, a bearish signal; two spinning tops follow, but price clings to the opening price support line tenaciously as the bulls struggle to push higher... finally the price breaks below the support from the opening gap. This was the price support that market enjoyed from the open, as buy order imbalance filled, RSI weakens and money flow decreases until... price breaks under the opening price, signaling downtrend moving towards the gap. Notice how RSI moves from overbought, signaling weakness?
This is a short entry high R/R position. You can buy daily puts here with confidence they will increase in value rapidly and immediately.
You do not want to get stuck holding these dreadful instruments more than half an hour, you can see the value drain out as expiration nears!
Well we see the gap filled, not completely to yesterday's closing price, but it sold down to former resistance at the high prices from last session.
This often is all you get on a fill, it won't always close precisely! Sometimes price will dip below the gap and go negative for a few minutes. When the gap fills, you close position, we can't afford to gamble on whether it's gonna get lower or not...
Suddenly an impulsive bright green candle appears! Gosh I hope you sold those puts!
Notice how RSI has moved nearly to oversold? It's gonna bounce!!
NOW is the time we make the best money. This was the candle we saw on 7 October, pullback ran to 13 October; another one appeared on Fed day at 2PM, pullback was just minutes then it bulled up and up... these are the money makers! Learn to recognize this chart pattern and you WILL make money on option trades.
You can take a moderate sized position here, I like to trade lots of ten, when I see this candle I'm gonna start with 20-40 calls depending on cost, and add more as price moves in favor. I do not like to add when price moves away! USUALLY Dollar-Cost Averaging in options just leads to magnified losses!! The more you take the greater the loss you might experience, remember when you enter an option trade you assume the total risk for premium paid, a sudden price change can wipe out your position before you can even set up the closing trade. So risk what you are willing to lose, and no more.
After the first impulsive move, a retracement nearly always pulls price back to ~2/3 of the impulse height. Here you draw the fib extension to get your target price projection; Fib Extension tool has three buttons, first at bottom of green candle, second at top, and third at bottom of the retracement. Chart your fibo and target the 1.618 extension, this is where your calls will take you! They might take you farther, but that involves more hand-wringing, nail-biting and screen cursing while you wait and watch the time value run down! Do not hold these any longer than necessary!
So there were TWO good R/R day trades in Friday's session on 11/5. A short, and the subsequent long. You could have taken other positions, but R/R would be poor, most 'trades' without signals are just gambling. Be a trader not a gambler! Most of the time you want to stay OUT of the market!
Look, today's trades involved about two half-hours out of a 6.5 hour session! The rest was just noise and risk.
Notably, in 'Power Hour' at EOD, there was not enough bullish energy to lift price back to HOTD... this is Bearish, in a long bull run Fridays typically close at HOTD and short-covering rallies into close are typical, we didn't get that today and daily calls ran down to expiration worthlessly. You might consider taking a longer-term short in weekly or monthly contracts, to catch a move MOnday if the price weakness persists and a gap down follows the exhaustion gap up... if you dare.
Remember Buffet's rules of trading: 1) Never Lose Money. 2) Never break Rule 1.
Hopefully this post will be of some value of increasing clarity in trading. When you're in the market watching the numbers flicker it is so easy to get lost and miss the forest for the trees... Get ready for some amazing trades as this parabola rolls over and the cascade ensues... always exciting!!
Well what gap is this? Three weeks ago we had Initiation Gap: These often do not fill, don't short them! It's suicide, lol!
This has hallmarks of an Exhaustion Gap; it will fill intra-day or within a few sessions at most... a great short opportunity!
See my related post on gaps FYI.
But, when should you enter?! If you foolishly short it at the open be prepared to wait for hours and watch your position dwindle... ow!!
Should you buy calls at the open?! Maybe it will run higher?! Of course it CAN, but it can also run lower and gapfill quickly, within minutes.
A long position taken first thing is high risk... as are early shorts! So, when can you enter a position with reasonable expectation of profit?!
In fact, ANY position taken in the first 20 minutes of the trading day is very high risk, I do not like to open new positions right away!
So, you Watch and Wait! Looking for opportunity... in the first hour price ran higher and calls had been profitable, but we didn't take a position with no signal, we like good Risk/Reward positions with clear signals, not gambling on the opening price. After what seems like an eternity, price begins to consolidate and gives us several warning signals, first a pinbar appears, with a needle doji and tall wick followed by a red candle, a bearish signal; two spinning tops follow, but price clings to the opening price support line tenaciously as the bulls struggle to push higher... finally the price breaks below the support from the opening gap. This was the price support that market enjoyed from the open, as buy order imbalance filled, RSI weakens and money flow decreases until... price breaks under the opening price, signaling downtrend moving towards the gap. Notice how RSI moves from overbought, signaling weakness?
This is a short entry high R/R position. You can buy daily puts here with confidence they will increase in value rapidly and immediately.
You do not want to get stuck holding these dreadful instruments more than half an hour, you can see the value drain out as expiration nears!
Well we see the gap filled, not completely to yesterday's closing price, but it sold down to former resistance at the high prices from last session.
This often is all you get on a fill, it won't always close precisely! Sometimes price will dip below the gap and go negative for a few minutes. When the gap fills, you close position, we can't afford to gamble on whether it's gonna get lower or not...
Suddenly an impulsive bright green candle appears! Gosh I hope you sold those puts!
Notice how RSI has moved nearly to oversold? It's gonna bounce!!
NOW is the time we make the best money. This was the candle we saw on 7 October, pullback ran to 13 October; another one appeared on Fed day at 2PM, pullback was just minutes then it bulled up and up... these are the money makers! Learn to recognize this chart pattern and you WILL make money on option trades.
You can take a moderate sized position here, I like to trade lots of ten, when I see this candle I'm gonna start with 20-40 calls depending on cost, and add more as price moves in favor. I do not like to add when price moves away! USUALLY Dollar-Cost Averaging in options just leads to magnified losses!! The more you take the greater the loss you might experience, remember when you enter an option trade you assume the total risk for premium paid, a sudden price change can wipe out your position before you can even set up the closing trade. So risk what you are willing to lose, and no more.
After the first impulsive move, a retracement nearly always pulls price back to ~2/3 of the impulse height. Here you draw the fib extension to get your target price projection; Fib Extension tool has three buttons, first at bottom of green candle, second at top, and third at bottom of the retracement. Chart your fibo and target the 1.618 extension, this is where your calls will take you! They might take you farther, but that involves more hand-wringing, nail-biting and screen cursing while you wait and watch the time value run down! Do not hold these any longer than necessary!
So there were TWO good R/R day trades in Friday's session on 11/5. A short, and the subsequent long. You could have taken other positions, but R/R would be poor, most 'trades' without signals are just gambling. Be a trader not a gambler! Most of the time you want to stay OUT of the market!
Look, today's trades involved about two half-hours out of a 6.5 hour session! The rest was just noise and risk.
Notably, in 'Power Hour' at EOD, there was not enough bullish energy to lift price back to HOTD... this is Bearish, in a long bull run Fridays typically close at HOTD and short-covering rallies into close are typical, we didn't get that today and daily calls ran down to expiration worthlessly. You might consider taking a longer-term short in weekly or monthly contracts, to catch a move MOnday if the price weakness persists and a gap down follows the exhaustion gap up... if you dare.
Remember Buffet's rules of trading: 1) Never Lose Money. 2) Never break Rule 1.
Hopefully this post will be of some value of increasing clarity in trading. When you're in the market watching the numbers flicker it is so easy to get lost and miss the forest for the trees... Get ready for some amazing trades as this parabola rolls over and the cascade ensues... always exciting!!
Note
Follow-up; similar patterns emerged MOnday 11/08, but the gap up was small and the subsequent selldown more limited, a bounce occurred again EOD, once more to ~.50 Fibo retracement, you can see the charts begins to assume a bearish tone, stepwise small declines with weak retracements. This pattern can persist for days before a selloff really begins, it is a period of Complacency among participants. Watch the closing prices during these periods for clues of trend change!Note
How do we deal with adverse price moves in overnight trade? Suppose you had bought puts on Monday night and wake up Tues to see NQ futurz +50?! Dang nab it!! Fooled me again! What should you do?!Well, first off, if you gonna hold putskis ON, u really need to write bear spreads. Buy a weekly, sell the near-expiration dailies, get a credit for those. I don't sell any less than .50c. Useless to sell a .15c or .25c contract and wake up to find it turned into a $1.50! Write the spreads at least $5 apart in strikes, i.e., buy a 400 monthly put, sell the daily or weekly 395 below.
Having done this, when faced with a gap up, you have less than a total disaster; you can cover the short legs, take your gains from those, and add to the long legs for a discount. Most of these gaps will fill intraday, if you trade the monthly contracts the price will come back sometime, usually, unless you're caught in an initiation gap, these often do not fill.
When the gap fills, close your long legs and you have made bank from both sides of the spread! This is called "Legging Out."
"Leggin In" is when you buy a contract and later short another against it. Disadvantage of leggin in: if price immediately moves adversely, you get a low premium for the short leg, so is usually best to open the spread legs together (oops how that sounds!, lol). Happy trading!
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