Follow The Money — Trade Where The Action Is
Let me begin
with a drastic example from Jan. 3, 2001. Shortly after 1:00 p.m. ET,
the Federal Reserve made a major announcement of its decision to cut
interest rates by 50 basis points to 6%. The market reaction was quick and
frantic. The Nasdaq Composite index shot up more than 200 points in just 20
minutes. In the same time frame (1:15 p.m. to 1:35 p.m.), Broadcom (BRCM)
surged from 78 13/16 to 97; SDL Inc (SDLI)
went from 142 to 173; Juniper Networks (JNPR)
from 106 11/16 to 118 7/32; and CIENA Corp (CIEN)
from 67 13/16 to 83 23/32. Short sellers were rushing to cover their positions
desperately while daytraders and short-term traders were attempting to catch
this explosive upward momentum.
When the hungry money hits its target, we can expect nothing but huge gains.
Remember, all of the four stocks above had been strongly downtrending,
and this spectacular rally happened in the midst of a bear market. Don’t go
against the hungry money. It will destroy you. Forget about the trend of the
market. Don’t try to rationalize the situation. Just follow the hungry money
and capture the moment.
I hear some of you saying, “That sounds ridiculous. You just can’t jump
in the market!” Well, let me share something Larry Connors (author of Connors
on Advanced Trading Strategies) told me. When I asked how he would react in a similar
situation, he replied, “I would jump in, because I know where my stops
are.” His response surprised me — I thought it would be more logical. A few minutes later, I realized his answer
was rational. I had been paying too much attention to the first half of his answer — especially the
words “jump
in.” I was forgetting the part about knowing where his stops were. Nobody knows how long a rally will last.
The only way to find out is by
jumping in. Yes, anyone can jump in, but not everyone would place a stop
immediately after jumping in. This may be the crucial difference between pros and
amateurs.
For those of you who are scared to jump in, I have a way to time the entry
point when facing an explosive situation. This method came from my
trading experience, and later I ran across other traders who had a similar
concept. I call it my “Double Three strategy.” It’s very simple to
use and has been especially effective for daytrading.
Again, this strategy works better with surging stocks.
If the same thing happens three times in a short period of time, we tend to take
it seriously. Things could happen once or twice, but if they happen three
consecutive times, arguably, this is no longer coincidence. That’s
the reasoning behind my Double Three strategy. I use three-minute charts, and I will
buy the third higher consecutive close. That’s it.
Let’s see how the Double Three strategy worked on Broadcom (BRCM)
and SDL Inc (SDLI).
Broadcom made its first higher close at 1:12 p.m. (see chart below), and proceeded to
make its third consecutive higher close at 1:18 p.m. I bought the
stock at the 1:18 p.m. closing price of 86. At 1:21 p.m., Broadcom hit 92, and
at 1:24 p.m., it was trading around 95. It was a great run.
SDL Inc (SDLI)
made its first higher close at 1:21 p.m. and recorded its third higher
consecutive close at 1:27 p.m. (see chart below). My entry price was the same as
the 1:27 p.m. closing price of 155 1/2. SDLI exploded and hit 174 1/2 at 1:39 p.m..
Of course, we can
utilize conventional methods such as pullback strategies. One thing to keep in
mind is that under explosive situations, stocks often do not pull back or sell off
until gains are far overextended. This example of CIENA (CIEN)
is one of those rare successful pullback plays.
It may not be easy, but sometimes we have to forget conventional trading
rules. Common sense says we should be looking for shorting opportunities if
stocks are pulling back from their lows. But the truth is that stocks cannot
go down forever. They have to reverse direction to the upside sometime. As I
mentioned earlier, if the hungry money hits its target, the only result we can
expect is an explosive price surge. Forget about the trend of the stock. Don’t
fight the hungry money. Just follow it and capture the momentum.
I would like to conclude with an insightful comment from Eddie Kwong, Editor-in-Chief
of TradingMarkets.com: “It is both difficult and scary for traders to buy
high and sell higher. But you simply have to accept the fact that there are days
when the market gets caught in a tornado. In a tornado, stationary objects are
pulled loose from their foundations and taken for a ride to unexpected places.
The traditional rules and patterns don’t apply on those days because they are
purely momentum-driven. Stocks that are in motion will continue as such.
Nimble daytraders will earn more on these days than they do in typical week. On
such days, you have to suspend your search for conventional setups and simply
‘go
where the action is.’ Going where the action is is an art that is only learned
through experience.”
Good luck and happy
trading.
For The Best Trading
Books, Video Courses and Software To Improve Your Trading