Let large gains come to you, here’s how

  • October 5, 2005
  • Dave Floyd


Dave Floyd is a professional FX and stock trader
based in Bend, OR and the President of Aspen Trading Group. Dave’s approach to
FX combines technical and fundamental analysis that results in trades that fall
into the swing trading time frame of several hours to several days. To learn
more about how Dave trades,

click here.

As mentioned in this column in recent weeks, I have been finding Rubber Band
trades to be the most effective strategy — today was no different, with one
important distinction.

With the S&P’s under some pressure this AM, especially after the ISM data, but
coming into some technical support and oversold levels — we were keen to play a
bounce in oversold stocks as well. Based on our technical parameters we
identified
(
FNM |
Quote |
Chart |
News |
PowerRating) &
(
AMGN |
Quote |
Chart |
News |
PowerRating) as our candidates.

The basis of a Rubber Band Trade is to expect immediate and dramatic
counter-trend price action. This was not the case today in FNM. We went long at
$41.90 and watched as larger offers were taken, but the result was no big pop
higher, as we would have expected. The larger offer at $42 was our last ‘test’,
if the large $42 offer was taken aggressively, $42.25 should be squarely in
sight. This did not occur however despite FNM going $42.01 bid / $42.05 offered
in the midst of a strong S&P rally — it was becoming clear that FNM was not
going to follow through.

Most traders will fall victim to the “let’s give it some more time” trap. The
problem with this approach is that once the S&P’s stop the push higher, stocks
like FNM will be under more selling pressure than the stocks that moved tic for
tic with the market. For a scalper, there is only one option — sell your shares
when S&P momentum begins to fade.

We did just this and were able to net a profit of 13 cents – $130. If you hung
in there looking for the elusive move higher, you were still waiting at the time
of my writing of this article (8:30 AM PDT) and were now under water.

There was a similar situation in AMGN as well.

Unfortunately, price action higher after our long entry at $79.80 simply did not
pan out. Just like the scenario in FNM above, we closed the trade at 79.89 for a
9-cent winner – $90. Prices continued lower after that (at least until 8:30 AM
PDT when this was written)

Exit strategies on HVT trades really boil down to two things:

1. One’s ability to read the tape, i.e. recognize slowing momentum and larger
buyers or sellers that impede price direction

2. The technicals, i.e. stochastics are overbought/oversold or prices are
fighting a key support or resistance level.

As you know, the technical confirmation will often lag the ‘tape reading’
confirmation. The two trades discussed above highlight the tape reading exit
strategy.

I know this will invite some questions, mainly,

“Why did you look to go long rather than shorting these stocks and be in harmony
with the trend?”

The nice thing about Rubber Band Trades is that they offer immediate and large
gains when timed properly — this is the essence of HVT trading. I have very
little interest in nursing a stock trade throughout the day — I do that in the
FX markets where I feel position trades are better suited.

So, the answer really boils down to what you want from a trade, are you a
scalper looking for the quick kill or a milkman? (Milkman = a trader who goes
for every last nickel)

As always, feel free to send me your comments and questions.

Dave