Let 'em trade 5 or 15 minutes before swing trading

Discussion in 'Trading' started by ShadowTrader_08, Sep 30, 2008.

  1. ShadowTrader_08

    ShadowTrader_08 ET Sponsor

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    Good Morning, Traders. Today's commentary is on something called the <i>5 and 15 minute rules</i>. These rules come into play for most of you when you are in a position that gaps either up or down against you. In this edition of the Focus Report, we'd like to point out how these rules can be put to use <i>before</i> you enter a trade as well. If you are new to our service and are not familiar with the rules, the User's Guide is here

    For the last two days, you've seen <b>LZB</b> listed as a long setup play in the <i>Bulls & Bears</i> section below. This stock acted in a way yesterday that makes it a perfect example of how the rules can be put to use to keep you out of trouble. The trade was called long at a trigger point of $10.30. This means that if <b>LZB</b> traded at or above $10.30 during yesterday's trade, you should enter the stock long either at $10.30 or as close as possible to it without "chasing". Entering some distance above the trigger point is ok as long as you realize that the stop stays in the same place, therefore you must decrease your size to take into consideration the fact that the distance to the stop is now increased a bit if you entered say more than 1% above. Although each stock trades differently and has different beta, 1% of stock price is a decent rule of thumb to use when entering. Add 1% to the trigger price and commit to not making an entry if you are forced to pay more than 1% past the trigger.

    So, how do the 5 and 15 minute rules apply to entries? Simply thus. If the market gaps up sharply, it will generally cause most stocks to gap up as well. Knowing from experience that most gaps fill you do not want to be entering stocks for swing trades right at the open. Rather you would wait for the stock to "show and prove" and see if it can take out either the 9:35 high or the 9:45 high. This means, either the high of the first 5 minute bar of the day, or the high of the first 15 minute bar of the day. This would only come into play, obviously, if the stock opens somewhere close to your trigger point. If it opens just below and flies through the trigger within the first 5 minutes of trade, put a buy stop a few cents above the 9:35 high and enter then. If the same thing happens a little later and you trade through the trigger within the first 15 minutes, then do the same, ie: wait for the 9:45 bar to form and then get long only once the high of that bar is taken out. Be very careful of the stock running too far ahead of the trigger point and putting your 9:35 or 9:45 high more than 1% from the trigger price. Generally if this happens on the 5 minute bar you can enter anyways with a tight stop under the 5 minute low. If it happens on the 9:45 bar, then use your best judgement. If there is much larger than average volume in the first 15 minute bar and you have made a decision that you are willing to pay up for the stock, then enter with reduced size as mentioned above because the stop is still under whatever daily or weekly pivot that you figured it to be when you came up with the trade idea. You do have a defined stop in mind before you enter, right? Yes, of course you do.

    The charts below is of La-Z-Boy daily which is the chart that the trade idea is based off of.

    <img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081001LZB.gif">

    Although the cheapies (stocks under $20) are not really our forte, we liked the risk/reward on the play and decided it was worth a mention. Note how during Monday's drubbing, the stock remained steadfast and held its uptrendline like a champ. A move into the green circled area should be all systems go with a stop in the red circled area. Easy peasy over $10.30, or was it?

    Note how in the two pictures below of the stock on the 5 and 15 minute timeframes you can see that although <b>LZB</b> trades close to $10.30 very early on, it drops like a stone soon after and remains weak all day long.
    <img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081001LZB5.gif">

    <img border=5 width=560 height=650 src="http://www.shadowtrader.net/focus_report_charts2008/081001LZB15.gif">

    Using the rules and waiting for at least a 5 minute high would save you lots of aggravation and money. The action that you see above is very common on stocks that are supposed to be breaking out over a technical pivot. Call it fear of heights or whatever, but in some way or another they just weren't "ready" to break and the combined effect of all the longs who were betting on the breakout getting out at the same time often makes the first few ticks the high of the day. That is why if the stock opens somewhere near the trigger point and then falls down, you do NOT want to be a buyer anywhere until the early high bars are taken out. Remember, the game is one of buying high and selling higher, not buying low and selling high. You want to pay up once the stock has proven that its going to do something. Having it pop and flop off of the open and give you an entry at a lower price is a gift horse you should look in the mouth. The scenario you want to avoid is "Well, I liked it at $10.25 and it traded above there and now its only $10.02 so I'm going to get it now and raise my size a bit since I'm paying less, etc." Rather wait to see if the stock can take out a 5 or 15 minute first bar high at a level either at or slightly above your trigger on a nice increase in volume.