I have been incorrectly executing on a core play of mine recently so I thought it would be worth going through and clarifying some of the nuances of the play. The core play is an overextension into a level, offering scalp opportunities, to build into a reversal.
There are a few core concepts on this trade:
(1) Pretty well defined risk-reward. Clear spot to stop out.
(2) High probability trade, based on the quick profit taking on half/quarter. And based off trading the first wash to support/pop to resistance.
(3) Offers really good risk-reward if reversals occur.
(4) Offers an INCREDIBLE entry if reversal occurs.
The trade requires slightly different execution, depending on the setup; so intend to go through a few different ones to try and clarify the nuances:
Note: On the charts ignore the arrows, aren't necessarily referring to the trade I'm talking about.
(1) First example: Lower priced stock, DGLY. In this particular instance, looking to short into the high, with a stop when it proves the trade idea wrong. Hope to position for a reversal with a good average. Three nuances I wanted to go through show up here:
(i) On lower priced stock it's important to focus on providing liquidity at favourable prices (i.e. avoid covering short into strength, because 10c is a pretty large move).
(ii) Identifying when to use a zone to scale rather than an exact level. In this case the high of day was $6.78, but $7.00-$7.10 was a really significant level on the daily. The proximity of this level requires it to be taken into account when scaling entries - so entries should be scaled over the $6.70-$7.00 range, rather than $6.50-$6.78.
(iii) You want to be a little more careful when a consolidation occurs near the level of interest. In this case there was an hour long consolidation slightly below the high of day (which indicates some form of trend continuation). Which in turn, also suggests that the $7.00 zone may come into play.
(2) Second example: Slightly higher priced stock, PTLA. Can't see it from the screenshot I took but the premarket high was $20.15, and the high of the day was $19.70 (which you can see). Again this illustrates scaling over the multiple levels.
(3) Third example: REN. My dumb dumb trade of the day was getting long at the big resistance from the prior day, but $20.00 was an obvious level to scale short against. This particular trade would have worked nicely, however, the thing that wanted to illustrate is how quickly it can move, so quite important to get the good entry into the $20.00 push, prepared to add a little more if it doesn't cleanly break $20.00, and take into account the liquidity of the stock (wide stop to at least $20.35).
This one nicely turns into a reversal, and gave plenty of opportunities to rinse and repeat the trade.
(4) Higher priced stock. More algo games in this range. TGT. This trade is pretty textbook. This one illustrates the importance of having a 10-20% ATR stop below the level. You can see on the arrows that I got faked out - where I shouldn't have been. Turned into a nice reversal trade as well.
(5) VRX. Finally one that didn't work (a high probability setup, so if executed correctly 1 in 5 completely failing is about right). Key nuances here are that the high volume break of the psych level and high of day ($30.00) probably indicated that it was a true break (at least for now). This particular instance wasn't a breakout buy, because it was overextended into the level; but was a good stop-out. Probably the one mistake the arrows show is that I started scaling too early. Should have been scaling 29.79-30.00 (not from 29.69+).
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