Strategy Description: This was a losing trade that I had the right idea on but under-estimated it somewhat, so want to go through it to see if I could have done anything better. I probably lost more than I should have, but given the size I had intended to throw at the setup it certainly could have ended up worse as well.
Coming into today I had 3 possibly scenario's in mind for what it could do on the open.
(1) Fail somewhere around yesterdays high ($15.09) either by lifting the high then slamming back below or just failing in that zone and coming off pretty hard.
(2) Gap and go on the upside for a soft gap fill (in the $16.2-$17 range) or hard gap fill ($17.22) and that would be the parabolic that would potentially mark the top.
(3) Would hold and grind higher continuing for a second day of float rotation. This would create quite a few tradeable patterns on the long side, but being day 2 you wouldn't want to get too aggressive.
It ended up being somewhat of a mix between (2) and (3). The opening drive ended up going far further than expected and it grinded for the rest of the day (not offering any tradeable long setups, except perhaps long into support) but at the same time not breaking down and reversing. i wasn't that far off with expecting it to potentially go to $17.20 however the fact that it went further than expected is what caused my losses, so by playing Monday morning quarterback am hoping to delve into how it could have been done better.
I had intended to short 2000 shares total as a full position size, so in my mind I was hoping to short 1/4 into the morning push. So I offered $15.94 for 500 shares. In hindsight this is obviously very low! But was it given what I was seeing at the time? I added 500 more shares at $16.94, and then stopped as it made a new high at $18.15. Facts for consideration:
(1) Yesterdays move throughout the day was $4 low to high. Reasonable to expect a $4 move the next day as well.
(2) Volume on open was bigger than volume on yesterdays open (bullish).
(3) $16.40 a level for soft gap fill zone.
(4) Starting into the morning push/parabolic is essential for getting low risk size on after it fails.
(5) $17.20 over/under was my idea for a place to limit risk to. It pushed straight through $17.20 without a moments pause and went to $17.80. Given this fact I should have been looking to completely cover up my position on a pull. The magnitude that it went through my risk spot proved that I was temporarily wrong.
I think point number 5 is especially important. Whether or not I started in too early or not is somewhat irrelevant. Had I covered on the pull at $17 (the pull low was $16.80, so that's pretty realistic) I would have lost $500 compared to $1700 on my eventual stop. So that's quite a difference. The other thing for consideration is that I could have broken down the orders even smaller by doing 1/8th at a time. Reason for this is simply realising that it's going to be tough trading the size I had intended to trade.
The other potential idea is that simply don't start into the parabolic. Thoughts behind this:
(1) When trading my usual size (e.g. 200 shares, starting into 1/4 means bugger all) I will always have plenty of bullets left and I don't mind eating the loss if I have to on the 1/4, even if it somewhat larger than normal. However, when I am intending to trade size; the repercussions of being too early on a parabolic entry are a lot larger than normal, and indeed a lot harder to manage the position and think rationally.
(2) This would leave to wait until the trend change is confirmed and risk is well defined to establish a position.
To sum up: I think it all comes down to size. Trading normal size I have no problem starting into the parabolic. However, when I am trying to absolutely hammer in something issues arise and losses/emotions will be bigger than normal. Accordingly I think it is reasonable to never push too hard on the parabolic and treat it like a normal position/idea until the defined risk trade occurs.
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