TRADING

To be consistently profitable in the market, traders need a playbook that sets out their plan for exploiting opportunities that present themselves, and Steven Spencer of SMB Capital demonstrates using three different scenarios.

The price action in TSLA from the past six trading days does a nice job of demonstrating three distinct types of trades. Not all trades makes sense to all traders. But if as a trader you can figure out which of these trades fits your personality best and then build a detailed trading plan on how to attack it, next time it occurs, you can start to improve your consistency. Most of the experienced traders Bella and I have interviewed over the years who are struggling do not have a well-defined playbook and this is the primary cause of their widely varied results.

Trade 1: May 23 – Consolidation Break Swing Trade. After three hours of consolidation, TSLA breaks above its morning high of 90 and in the same candle takes out the prior day’s high, as well. This is what is known as a “break of consolidation” with momentum and volume. This is where many swing traders entered long positions in TSLA looking for a move above the post-earnings high. The exit occurred on Day 4 on the large gap up in the pre-market.

This pattern generally appeals to trend followers who are more patient and willing to hold a position for a longer period of time. The trade almost always ends on the open of the 3rd or 4th trading day with a large gap higher that is unsustainable and leads to Trade 2. To understand that this pattern repeats itself in momo stocks, look at TSLA’s behavior following its earnings release. On Day 4, it gapped higher and failed on the open. Two other stocks that offered this pattern in May were NFLX on the break above 220 and DDD following its secondary at 40.

Trade 2: May 29 – Momentum Reversal Trade. This is a very popular trade with swing traders and intra-day traders who are attempting to make profits quickly as trend followers exit Trade 1 following a break of the trend and loss of upward momentum. The risk/reward is not as favorable as Trade 1 but you “get paid” much more quickly so almost every trader wants to be involved in this setup as it appeals very nicely to the instant gratification part of our brains. There is a low risk way to execute this trade that does greatly increase the risk/reward but many are not patient enough to go this route.

NEXT PAGE: The Range Trade

Tickers Mentioned: TSLA, NFLX, DDD