Comments please on trading recently volatile, high ranging NYSE stocks with significant increase in volume based on breakouts/breakdowns above or below previous day's closing price. For example: On 1/18 - MMM: opened below previous close price, once it broke through it ripped for several points. 1/18 - SPW: Not as smooth as MMM as it straddled the previous close and broke down early, but once it did break out with strength above previous close it too went up big. 1/18 - DNA: Opened above previous close and stayed there most of the day; once it broke down through the previous close price a little before 2 PM it had a significant drop. I'm a newbie and am asking the experienced traders here if this is a viable strategy - placing buy stops and sell stops above and below the previous close price (of course not placing the stop too close in order to confirm breakouts/breakdowns and avoid wiggles). Do any of you do this? Do you use other indicators, moving averages, etc.? Do you consider this low-risk or high-risk? What other variables would you consider? I ask because I've noticed that recently volatile, high-ranging stocks seem to ignore the futures and normal indicators and have a life of their own (especially if they're hitting new highs/lows). Stocks like LEN & RYL in the past month have exhibited patterns that would have been profitable based on using the previous close as support/resistance. Any comments or suggestions would be appreciated.
hapaboy, Buying/selling above the previous open/close or high/low is an old strategy and doesn't work well in the current market. If the market is strongly trending you'll look like a genius but now you'll likely get chopped to pieces. I'd recommend looking into buying/selling at % retracements into the previous days range with special attention to intraday s/r. My 2 cents. Good Luck and Big Profits
Hapa, you are on to something, but shorty is right, absent of a trending market, this may cause more frustration than it is worth. In his book Winner Take All, William Gallacher has a similar system called "Plodder". Basically you looked at a ten day chart and if the price broke the 10 day high you bought with a stop of the previous days low. Reverse this for short by selling with a break of the 10 day low, with a stop at the previous days high. each day you would move the stop to protect profits. Following DIA, it broke 99.4 it's previous 10 day low on 1/2/2002. Assuming that you left trade open that day, using that days high as the stop (99.86), you would have been stopped out the next day 1/3/2002 where the high was (99.98). Of course the day after the trade turned profitable. One thing that you may want to explore is looking at multiple timeframes. For instance, I was looking at a chart of GP earlier today. Had you went short when it broke 26, a level that held 5 times this year, you would have made money. Assuming you did not buy at 26 thinking the sixth times the charm. And assuming that you got a short off before it hit 23. Now and here is my point (finally) if you look at a five year of GP. It has major support at 20. Now being a bottom fisher, I would look to buy at 20 and see what happens. However, and this is a big CAVEAT there is a lot of concern of Asbestos liability in this stock, so if it breaks 20, we could se another Armstrong or Haliburton. (Not saying take the trade, just my thinking on it.) On the other side, if you can figure where people may put their stops for short positions, buying a days high may work. For instance on 10/18/00 this piggy piggy was short TYC when it broke to the upside. Of course if I had just held on for 3 months I could have made money, but that's the way it goes.
Shorty & Trdrmac, thank you VERY much for your comments. I appreciate both of you responding to this post, and I am aware that IN GENERAL this being a choppy market such a strategy may not work all around. I can see your points if trading stocks without sudden movement & volume, but with the criteria being picking stocks that have SUDDEN (last day or so) & EXPLOSIVE moves on HIGH VOLUME, don't the odds move in a trader's favor? I think Vadym said/says "trade what you see, not what you think" and what I see on the charts are decent moves. Furthermore, since you're using the close as your s/r, placing your stop a tad above or below (depending if you're long or short) it seems to be prudent and I believe would have worked on the above trades. RYL really would have worked nicely for several days in the middle of December, don't you agree? Again, thank you for your posts!
First off I goofed on the DIA, the breakdown took place 1/14/02 of the low set on 1/2/02. What I think is that on a trade like RYL you have to trade in a way that you feel comfortable and a way that makes you money. For instance, I would argue that if you had bought each time RYL hit its 150 day MA you would have made money. Just as you could say that the December breakout would have worked. Just for fun though, lets look at two recent 52 week highs from IBDs Friday Review. DYII is the first chart to look at. In one day it smashes down about 10 points. You can also find news to see why it dropped. Since it broke the 150 day let's say we pass on the trade. Now look at GAIA. The high for the day is 16.98. Would you buy based on a break of the previous days high? After seeing the DYII chart, and without any news on GAIA I would pass on the trade. But, could we look back at the end of the day and say oh yeah that would have worked? As for trading stocks that are making huge moves on high volume, I have never done very well at that, 99 being the exception. Someone who has done well trading gaps, news, etc. would have to provide some insight on that.
hapaboy, Don't get caught up in the trap of "discovering" a strategy and then finding charts that validate it! Remember this is a probability game and you could always find a chart or two that fits perfectly. Also, be careful when you see big moves on high volume. More often than not your are near a price extreme. You might want to consider looking for stocks that break through s/r with decent gains and volume "and then" waiting for a pullback near s/r to initiate your position. Of course, you can find those stocks that break through and take off, but they are the exception. They sure jump out at you when you see them though (there is the rub.) One last thought. Don't get caught up in short term memory trading. By that I mean, if you find an excellent setup and it doesn't go the way you anticipated the next day, don't just jump to the next excellent setup. Often the initial setup may take 2-4 days to develop and then move in the anticipated direction, long after it has lost the attention of most traders. Of course, I'm not recommending holding losing positions but waiting for this delayed action when the others have moved on. Good Luck and Big Profits
Thanks for the cautionary note, Shorty. What you say does indeed have credence, and I need to be very cautious with this approach. I do think it is worth pursuing as so many of the stocks I've been following have been terrific candidates, i.e. TYC, BRC, FLM, ACS today and many others yesterday. Combined with the old intraday high/low it could be a worthwhile strategy. Do you trade intraday or are you more of a swing trader? Thanks again and Good Trading!
I look for stocks with good volitility (atr $1.50 or better) that close in the top of their range (for longs) or in the bottom of their range (for shorts). Right now I don't trade durring the first 30 minutes of the day. I use the trin to help establish strength and direction of trend. I then look to trade in the direction of the trend for the day. So if the trin is .90 or less I'll think long. I'll look to buy stocks that 1) take out the previous days high and 2)break above their high of the first 1/2 hour. It seems to me that stocks that can take out the first 1/2 hour high or low have the most potential for true "trend days". I generally place the sell stop .25 below the buy point. I sell some of my position with a small profit, move the stop to break-even and look for a larger gain with the rest. I use a five minute chart with 20 period ma. I am a rather new trader so none of this is in stone... I'd love to hear from others who trade similarly.
Thank you for your comments. What kind of results have you been having with your 1/2 hour breakout strategy?