Strategy Description: Note that the reverse can be applied to upmoves.
Note that you want to ensure that it's rational to expect a decent bounce. For example in the case of ADBE is was positive news, within a short term uptrend, that isn't over-extended enough to get a complete buy the rumour sell the news type trade.
Step 1: Consider how much dollars of risk are prepared to assign to the overall idea. Then equate that to a max size. In this case the daily ATR is around $3. You can expect an opening move (if it turns into an opening trend) when news is involved to be around 2x the ATR (provided the news is already somewhat digested).
In this case you may consider max size to be around 200 shares and max drawdown of around $200.
Step 2: Analysing price action. When trading news like this I'm usually looking to buy at support or sell at resistance, flip some quickly and then hold rest for a decent move back to either highs or lows. No matter what happens I should still get the flip (cover of risk).
The key is once the initial buy at support is under water, and a pattern of lower highs is in place you can be fairly confident of the "opening trend" rather than opening wash. This changes the mode of trading that should be trading within. It is most likely too late to join the opening trend; and you want to be careful betting to heavily against the "opening trend" because best case scenario you catch a rally back to resistance. Note that later the stock can set up for a reversal back to the highs if it reclaims vwap/resistance, however that's a completely different trade, and shouldn't hold any size whatsoever for that trade.
Step 3: Once it has shown it is within an opening trend need to adjust expectations accordingly. It is important at this stage to only trade it at extremes because the potential risk-reward and probability of success has got considerably worse.
Set an expectation for how much lower it could go. E.G. Could easily got 2ATR down on the open before find a temporary bottom, or could have 3-4 identifiable waves lower (seen on the m2), or likely continues lower until at least 10am-11am.. A combination of those 3 would be a good place to start. Note that a general decrease in volume could indicate the opening trend is nearly over, although not necessarily because volume will obviously decrease as the opening period comes to a close.
Look to base ultimate risk off that general idea, and try to end up with a core position near the lows.
Step 4: Based on the expectation of where it will bottom in general look to piece in a position, only buying washouts, and selling pops. An example of execution of this may be:
(1) Enter 2/5s of position @ 94.30 (AH support was 94.25), sell 1/5 into 50c pop immediately.
(2) Place a bid to add another 2/5s below the support once got the sale into pop (in this case the wash came to 94.00, but a reasonable bid was probably more like 93.80 so you probably missed this opportunity). If you caught it, be sure to sell 1/5 into small pop.
(3) Once you miss the wash be sure to cancel the original bid (because the next leg will be lower from the low of 94.00), so 93.50 might be a reasonable spot to bid for 2/5s. Again sell 1/5th into the first pop. So now you would have 2/5s position @ approximately a $94.00 average, with around 20-50c locked in on 2/5s of a position.
(4) At this stage probably thinking it should go higher so want to add to a position on confirmation. This is not the correct thought process. It has shown how weak it is, and therefore you MUST have a good average by buying dips not strength. That being said, you can adjust expectations on how far you expect washouts to go, e.g. a 30c washout versus a $1 washout.
(5) Look to sell all of the position you have accumulated into resistance or when it completely fails to bounce, and shows you are wrong to be accumulating dips.
Notes about this trade:
(1) It is not an A+ trade. It is only worth pursuing from the perspective of being over-extended and expecting a snapback to resistance. The risk-reward is not incredibly good.
(2) It is difficult to execute correctly. The best way to control risk is to make sure always selling and offloading some size on pops. Keeping size low is the best control you have have, and allows you to always be prepared for next leg lower (which likely comes). The moment you're full size and need to have a hard stop to control risk you have lost any flexibility and edge you have.
(3) Executing correctly on a trade like this requires really good psychological control, and uses a lot of psychological capital.
(4) DO NOT add to a winner until well above resistance (i.e. where you should have sold almost all). Given the opening trend and constant selling it is likely any minor change in price action is simply a fake move.
(5) Don't be afraid to sell some on a pop for less than breakeven. This allows you to add lower. Aka lose 10-20c, then buy back $1 lower, rather than hold for tiny sale at breakeven and instead baghold it $1 lower.
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