This Is The Critical Part Of A Setup
Despite the luster
(pardon the pun) coming off the gold stocks yesterday, they did offer
some great, albeit non-traditional set-ups. Below I have shared with you a
couple of charts that illustrate three trades that were taken. The first never
played out, but when the opportunity presented itself again, I had to follow the
rules and jump back on. I am glad I did.
The key thing about these trades wasn’t so much
the chart pattern but the exact timing of the entry. You see, a set-up on a
chart can be valid for say, 3-5 minutes; however, in that 3-5 minutes, if you
jump the gun, the price can move significantly against you. The chart is only
the first step, the second and most critical is the tape reading. Watching how
the specialist handles each trade, the size and adjustment of the bids and
offers, that is where the answer lies. Too many traders do not realize that.
Here is a great example:
Here is a chart of
Newmont (NEM), extremely oversold on a 5-minute chart and due for a
quick counter-trend bounce. So while an entry at either of the points would
have worked, the one that offers immediate gratification keeps a trader calm and
objective.
Someone who is only trading
patterns may easily have tried to pick up the
NEM at any of the the
4 RED X’s as
seen on the chart. Would their trade have worked out? Yes, but it would have
been painful and they certainly did not maximize the trade. You see simply
being ‘oversold’ is not reason to jump into the trade (another reason why I feel
that trying to trade too many stocks can be counter-productive). The only
reason I pulled the trigger on the GREEN X
was by watching the tape, I knew (loosely speaking) that the selling pressure
had abated, that combined with the technical condition now made the trade
worthwhile. I went over every detail of this trade and the next one my room so
that the subscribers would have a solid understanding of what I was seeing.
The other two trades, similar in
nature took place at:
9:50 AM EST. While this
trade never panned out and was punted for a 2 cent loss, I was in position.
10:15 AM EST. Same
scenario, although this time at critical support and oversold. Exit into fading
momentum (10:30 AM EST), resistance and stochastic cross.
So, hone your tape reading
skills, it is one of the most overlooked yet most important skills a trader can
possess. Did you ever notice that there are no books on tape reading? There is
a reason, it is impossible to convey in words, it comes through observation
either solo or with the assistance of someone who has the skill.
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As always, feel free to send me
your comments and questions.