The Master Profit Plan Your 5-Step Trading Plan Workbook by Vadym Graifer_9 ppt

230 FIGURE EX26 Open-low–break setup. ( RealTick graphics are used with permission of Townsend Analytics, Ltd. ) ing shares into that round of selling was perfectly valid, too. I felt that I had the overall trend with me, that I had BRCM action with me, and that it was worth holding on another quarter of my shares for movement under $42. I then had a quarter of my shares left. It was now time to make a con- fidence level. This is different from a trailing stop, which means that if you hit the stop-loss level that the trade is exited at, take the stop. A con- fidence level means that if you hit the confidence level, you’re less confi- dent in seeing better prices in the prevailing trend. I judged the confidence level based on retracements. You can see how BRCM held at above $42 and went to $42.60 before backing off again. If we were to go over $42.60, we would show a higher high, and I’d be less convinced that we would see a lower low. So instead of taking a stop here, I used the next round of selling under $42.60, and my stop was at breakeven. Then I tried to get a better fill somewhere under $42.40 for the remaining shares. The risk is that you get a breakeven stop. The reward is that you get a better price under the confidence level for more profit. This is your decision. You can see how this level held well enough to give us a move at under $42, which is what I wanted for the remaining quarter of my position. The tape-reading principle of faster selling is shown on the chart at the circle—the one with the vertical price bar that is labeled 3. On the vol- ume chart, you can see the volume spike to the sell side. These two things combine to say to “cover it all.” My target profits were met. I had confirmation according to tape- reading principles, so I took my profits and moved on. And, by doing so, I missed out on nearly 1 point more in potential. Do I care? I don’t. I played the trade as well as I could within my system. So I’m happy with my assessment, my aggressiveness, my scal- ing out to lock in profits, and my final exit on my remaining shares. Everything was in sync for this trade, so I have no reason to regret missed profits. PART THREE Practical Examples 231 EXAMPLE 27 Fading Breakout This example on Adobe Sytems (ADBE) describes how to fade the break- out setup. Again, to fade a setup is to initiate a position contrary to what the setup should bring in profitability. You will see how volume indica- tions on this setup offer a higher probability for a short setup than a long setup on the break of resistance from the open. Thus fading the long setup means initiating a short position after the failed breakout of the resistance. (See Figure EX27.) In the chart, the resistance is clearly marked from the open high at the $37.50 level, which leads to a move into support near $36.70. From this support, a reversal forms and moves the stock back up to the $37.50 level. Quite often, 30-minute highs will form a significant level that traders key in on for watching for some kind of reaction from the market. 232 PART THREE Practical Examples FIGURE EX27 Fading breakout. ( RealTick graphics are used with permission of Townsend Analytics, Ltd. ) In this case, the stock trapped the buy-side players and rewarded the short- side players. As the stock moved higher into the $37.50 level, you can see volume indications that showed a steady buy-side slant. Near the 10:30 a.m. period, however, volume began to increase, and eventually the volume spike corresponded with a price spike. Tape-reading principles suggest that minority action is slow and stable and that majority action is erratic and unstable. Given the increase on the buy side in relation to the volume as well as the price increase being more vertical into resistance, there is higher probability for the breakout to fail on that retest. Traders want slow and steady buy-side volume into resistance because it shows good sup- port. A volume increase and a price spike into resistance show that the probability is higher for the buying to have been exhausted and that there won’t be enough buying on the break of resistance to keep the stock mov- ing higher for profitability. This leads traders to fade the breakout in the hope of seeing the break of resistance trap more buyers with unsustainable upside movement resulting from exhaustion buying. Traders initiate a short position on the break of the resistance and look for the trade to move back below the resistance point for better confidence. Traders then look for a break of the most recent support to confirm that the downtrend is intact from that faded break. This support level in the ADBE example would be around $37.30. This is regarded as support from the level that paused briefly before reaching back over the 30-minute highs. Scalpers who wish to initiate a 1:1 reward/risk ratio for this trade would look for a cover into this support with a stop at the high of the level from which the trade would be faded or shorted into. Those traders who wish to scale out of the position would then exit a portion of their position into this support level and trail the stop to breakeven levels. If the position were to break this $37.30 level, traders could then begin to pick out their next support target based on the previ- ous price action and to look for an exit on the remaining position. In this case, we would see support at the $37 level. Unfortunately, the stock never got that low and moved back into resistance, where the remaining portion of the trade would be exited at breakeven levels. PART THREE Practical Examples 233 EXAMPLE 28 Short of the Range Resistance This example of Brocade Communications (BRCD) illustrates trading within a range. Tape-reading principles within the range show why taking a short position into the resistance level at the early range was a higher- probability setup rather than initiating a long position looking for a breakout. On the day of the trade (See Figure EX28) the stock was in an after- noon downtrend on good volume consistency, showing that the near-term price action was suggesting more downside ahead. Given that the stock gapped up the next morning into the previous day’s resistance level com- bined with the previous day’s afternoon price action, we would be look- ing for a short setup from the open. Having missed the early entry on the open-break play at $26, we were forced to wait for a range to form in 234 PART THREE Practical Examples FIGURE EX28 Short of the range resistance. ( RealTick graphics are used with permission of Townsend Analytics, Ltd. ) order to assess the action within the base to determine if shorting the trade was still a good possibility. As we watched the range forming from $25.75 to $26, we saw that any move back into resistance would be associated with higher volume. The tape-reading principle of large buy-side volume associated with no increase in price suggests distribution and a resistance level. In this case, traders want to initiate a short position within the range at or near the resistance level with a stop right over that range or at the most recent high, depending on their risk tolerance. Regardless of the risk tolerance, any break over resistance from this point would make it less likely for us to expect a break of the low. Therefore, our exit strategy for a stop loss must be more focused. Once entry was taken on the short side at the nearest point to $26, our exit strategy for profitability became important. We had our stop-loss strategy in place, so our profit exit strategy was our focus. In order to gain an idea of where we could exit in full or scale out, we needed to look at the most recent support levels. The first idea that we had for exit was derived from the principle that gaps tend to be filled. If this was the case, then being able to scale out along the way down to the previous day’s closing price at $25.30 would be our target. If we were looking to be more conservative in our profit objectives, then the previous day’s most recent support area near the $25.45 level would be our target. This was again based on the principle that what was resistance would now serve as sup- port. The previous day showed a move into the $25.45 level at about 2:45 p.m., or 14:45 on the chart. This level should get support on the open retracement. Now that we had our targets selected, it was important to use our tape-reading principles to aid us in determining just exactly when it was time to exit. Again, as the stock moved, as long as it was stable and steady in volume indications associated with a gradual descent in price move- ment, we were confident that we could hold for better profits. As soon as the trade became more erratic, where the price dropped fast or the volume rose precipitously, then it was time to exit in full or scale out of the posi- tion. In this case, our profit objective wasn’t met because the faster sell- ing phase of the breakdown occurred almost immediately into $25.60. However, by utilizing an entry into resistance near $26, we provided our- selves with a profit cushion that we wouldn’t have had if we had waited and entered on the setup trigger. This goes back to an entry strategy that is based on your own aggressiveness and risk tolerance. By entering into resistance, we assured ourselves of a good entry with a full position, but we gave up the downtrend confirmation, thereby making us less confident PART THREE Practical Examples 235 about the trade. If we had waited for actual confirmation, we would have given up our profit cushion, but we would have been sure that the down- trend signal was valid. As it turned out, the trade never got to the desired level, and those who were looking for a 1:1 reward/risk ratio type of profit were happy enough to exit into the $25.60 level. Those who were looking to scale out had to take at least a breakeven exit on any remaining shares. However, the example does a good job of illustrating volume indications during the range-formation process to dictate an entry and then to show us the exit point based on the faster selling associated with the price drop the $25.60 level. 236 PART THREE Practical Examples EXAMPLE 29 Open-Low–Break Setup This example (See Figure EX29) illustrates an open-low–break setup in which we initiated a short-side entry on the break of both the open lows and the previous day’s support area. The reasoning behind the short- sided entry was based on the previous day’s action into the close as well as the NDX indicator moving into a larger resistance area overall. We saw a series of lower lows into the close after a nice uptrend throughout the day. A possible pullback was in the cards, which, while profitable, wasn’t a huge reward/risk type of trade and would be one for traders who make larger-sized trades and look for smaller profits. Those looking to scale out of this type of trade would most likely be stopped out at breakeven on the remaining profit. PART THREE Practical Examples 237 FIGURE EX29 Open-low–break setup. ( RealTick graphics are used with permission of Townsend Analytics, Ltd. ) The entry was taken on this trade after an open range consisted of the support from the previous day at $19.90 and the day of the trade’s high of $20. Once we were unable to break over $20 on the open and then broke the previous day’s support as well as open support, the short side should have been taken for a position with a stop at the break of the open high. Once the entry on the short side was filled, we needed to look for a profit strategy based on the previous day’s support levels. In this case, we had a support level near $19.50. If the trade had begun to move into this area, we wanted to be looking to exit in full for smaller profits on a larger share size. In this example, we wanted to be aware of the majority action behav- ior. In this case, we saw faster selling into $19.60. This was illustrated by the more vertical price movement to the downside associated with the vol- ume increase on the sell side. Given that we were seeing exhaustion on the sell side, it was time to cover into that faster round of selling for a quick 2:1 reward/risk ratio or less. In this example, the $19.50 support level gave us an area in which to look for erratic behavior, indicating majority behavior. Once we saw this type of action moving the stock into the $19.60 area, it was time to enter the cover order and look for a fill to exit the position in full. We see on this chart that after the open faster selling, the stock recovered and moved back to the entry level, showing that any remaining shares had a lower probability for profitability and would have been exited at no worse than the breakeven level. 238 PART THREE Practical Examples EXAMPLE 30 Open-Low–Break Setup This is an example of an open-low–break short setup on F5 Networks, Inc. (FFIV). It leads to a good reward/risk ratio, but it also shows a degree of missed potential because of traders taking faster prof- its at higher levels. (See Figure EX30.) The open range was from $20.30 to $20.55 (shown by two lines). Once the stock began to lose the $20.30 level, a short position was initiated with a stop at the high of the range, $20.55. Given that we had our stop-loss strategy in place, we needed to be looking for areas of exit based on our risk tolerance. If we wanted to take faster profits for a 2:1 reward/risk ratio or lower, we would have looked PART THREE Practical Examples 239 FIGURE EX30 Open-low–break setup. ( RealTick graphics are used with permission of Townsend Analytics, Ltd. ) [...]... Cup-and-Handle Setup The situation shown in Figure EX32 is another good example of a cupand-handle setup, this one on KLA-Tencor (KLAC) We saw the stock basing nicely through the lunch period Then at around 2 p.m it began to form the start of the cup During the retracement of the cup, we saw the volume begin to pick up a little Normally, we would want the activity to die down when it forms the bottom of the cup... different things The trade still gave a good $1.75 per share on that last half of the position Those who held the quarter of the shares left, needed to trail their confidence and stop levels In this case, with the pullback from $45 into $44, we would then place a stop at breakeven and a confidence level at $44 If the stock broke $44 again, then we would have to use the next round of buying to exit the remaining... (See Figure EX33.) As we watched this trade from the opening, we saw stable selling to about $17, and then what we call a rinse effect happened on the break at $17 A rinse effect is when a stock barely moves out of the risk parameters, which takes traders out of their positions, and then the stock resumes the desired movement, after the traders take their stop loss We saw sharp movement, which could... We saw the breakout at $17.45, and this moved the stock to $17.85 or so Upon seeing this breakout, traders would have entered prior to the trade setup trigger with a stop at $17.30 or on the break of $17.45 and hoped to get filled on their full share size As the trade began to get euphoric, meaning that there was a panic on the buy side as shown in the vertical price movement associated with the volume... $17.75 would be the most likely on at least half the position A confidence level would then be placed at just under $17.45 on the principle that what was resistance should now be support If this failed to hold, then the rest of the trade would be exited at no worse than a breakeven level if we saw enough buying back at over $17.45 If the trade fell deeper, then it would be exited at $17.35 on the remaining... However, don’t let it deter you from trading on your discipline I firmly believe that for every missed profit like this one, there are 10 other trades where you are happy enough to have taken the profit when you did and actually increased your account over time rather than waiting for trades with bigger profits Essentially, take the home runs when you can, but don’t beat yourself up about missing a few One... buying, then we would exit somewhere between $43.25 and $44, depending on the action In this case, we made a base at the close, so that we could exit under $46 or decide to hold the remaining portion overnight to see if there would be a gap up the next day to sell into at a price higher than $46 These are each valid decisions that need to be made as we see these volume/price correlations throughout the. .. setup many times, we left all the levels and points of reference on the chart unmarked So it is up to the reader to identify them We essentially had a tight base near the $26.30 support level, which, when broken, offered the short setup trigger The base formed was the support at $26.30, and resistance was just above $26.40 In this case, with barely a 10-cent stop-loss range and the stock being liquid enough,... movement, which could be characterized as a minicapitulation After this occurred, the stock regained its foundation and then moved nicely back to the $17.45 resistance area The action from $17.45 to $16.80 and back to $17.45 formed the cup of this trade The handle, represented by the two diagonal lines, showed a base forming near the $17.45 resistance FIGURE EX33 Cup-and-handle setup (RealTick graphics are... $26.10 and then a reverse back into resistance The important aspect of this behavior is that, on the retracement back into the highs, volume stayed relatively light and the trade was unable to break back over the $26.30 level with any conviction The principle that what was support should now act as resistance held true, as the $26.30 support level was behaving as a resistance level, and the downtrend . open range consisted of the support from the previous day at $ 19. 90 and the day of the trade’s high of $20. Once we were unable to break over $20 on the open and then broke the previous day’s support. Instead, at the second test of the $ 19. 30 level that held, the exit in full was taken. What happened next was that the trade made a lower high, broke the support level near $ 19. 30, and then hit. post their own bids and offers to a central order book to provide liquidity. Instinet was the first of them. During the market boom of the late 199 0s, many new ECNs appeared. ISLD (Island) One of the