Tuesday, May 10, 2011

Reader mailbag questions on important trading concepts and definitions...

I get mail from subscribers to my blog and from my Twitter readers.

Some common questions I would like to address are:


What are "confirmed weakness cues"?

This refers to a trader following rules for entry/exit which indicates a stock is going to distribute (sell off) on a particular trading session. Common weakness cues are: (1) A stock goes from green to red or vice-versa for longs...usually early on but typically after 5 minutes of activity on an exchange, (2) A stock trades below its opening price level after 5 minutes of activity (3) A stock trades below its previous session close after 5 minutes of activity (4) A stock trades below a recent and important (via repeated tests and an opposite outcome from the current session phenomena after 5 minutes of activity. This last one is a bit subjective and complicated to explain without charts and arrows.


What are "green to red" and "red to green" moves to short/go long into?

This refers to a stock on a session that trades above its previous session close price level and darts under that area after 5 minutes of activity. On a red to green, it trades below the previous session close price level and then darts over that area after 5 minutes of activity. This is a very important trading signal in many cases. Suppose a stock opens at 3.50 and the previous day it closed at 3.48 gapping up. After 5 minutes, it rises to 3.52 and 15 minutes in it falls to 3.46...it has gone green to red on the day.


What is the Opening Price Signal? What's a positive OPS? (Opening Price Signal.)

This refers to whether a stock is trading above or below its current session open price level. Suppose A stock opens at 3.50 and it advances to 3.60 over the next 30 minutes. It has a positive opening price signal since it is trading currently above the opening price level by 10 cents. It would be negative if it fell instead and 30 minutes later it was trading at 3.40 a share. Typically, a positive OPS is Bullish, a negative one Bearish. A switch or consistent printing of one type of OPS gives clues as to the directional headwinds of a stock on that day.


What is the Net Price Signal (NPS) of a stock? How can I tell if it's positive or negative?

This refers to the difference between where a stock is trading from the previous session to the current one and its direction. Suppose a stock closed yesterday at 3.50 and it opened today at 3.40 it is said to be net negative on the day due to the gap down. If it had closed at 3.50 and opened today at 3.60 it is net positive on the day. Those designations remain until a change in level occurs. Suppose our net negative stock fills the gap and "goes green" (trades above the previous session close in terms of price level) that flips the net status. Typically, net positive stocks are Bullish and net negative ones are Bearish in terms of directional headwinds on a session. A signal is generated thus and is used in conjunction with other common ones for multiple confirmation and thus increased confidence is possible for entries/exits.


Can I use software to track some or all of these cue signal designations?

Yes, but it varies. Not all platforms can simply track or alert you on changes to these levels for a heads up. You can use more than one tool on more than one computer and monitor screen to get them automated partially. I would not use any software to enter or exit automatically, without human judgment or intervention.


Should I use stops?

Do you walk away during a multi-bet roll at a craps table in Vegas? Mental stops are arguably preferable IF you have the discipline (which you must have to succeed as a trader anyway) to exit with they are clearly recently tripped. If you use real ones, you can be faked out on lighting fast noise or possible tape painting extremes that can prove costly in terms of artificial self induced slippage or commission costs. It can happen in seconds and not prove a real change in the trade that proves your instincts wrong. If not able to monitor live all day, this is another question altogether, and that means you should evaluate if you are a swing or day trader. Most decisions to enter, exit, or sell portions of an existing position can be made live if you can watch all day.


What is box and drop?

Taking a position at the same or nearly the same time in two different accounts by two different brokers at the same or nearly same entry price where one position is long and the other short, resulting in a net flat position aside from commissions and slippage. The long is held and eventually or vice versa, but usually it's the long. The idea is to reserve shares to short when waiting for the dump would result in a likely shortage of shares to borrow via competition from other traders. You cannot short too early or you might be squeezed and margined out or bought in over days of holding a play, so you box the position (take the 2 sides) and drop the long to remain only short when the pump is dumped on the day of the panic fall. This is a great trick to use.


What is morning panic?

This situation term was coined by Timothy Sykes in popular usage among penny stock traders. It refers to heavy volume dumping candles (usually with deep price ranges) out of or very near the open or in the morning before lunch. Traders panic to get out, causing even more reddening in just minutes. A stock so inclined can drop 50 cents or more in just 3-4 or so 5 minute candles. This can be faded with some slippage or played with special market orders to limit fill range but is often best enjoyed by an overnight short covering into it.


What is a Supernovae?

Another term by Timothy Sykes, his bread and butter play, this refers to a huge gain of 100%+ on a stock, typically over a 5 day or less period of gains, especially if each day sports big range daily chart candles with gaps on the rise. The chart pattern is quite distinctive, and if and when it pops and usually the day after the initial red day it's a great short. This is my favorite chart pattern, by the way. A drop in the afternoon on confirmed weakness cues is possible prior to the 1st red day session if it triggers, as well.


What is an afternoon fade?

Here a strong potential short decays neatly and evenly in the afternoon, usually with the "usual suspect" signals, which is faded by a trader. Often more reliable than shorting in the morning, and assumes you watch into the close from after lunch. A stock that reverses from early continued clear strength is a clear shift in sentiment, which is one reason why such a cue is so worthy of respect and observation and action upon.


Why do you keep harping about using caution in entering or evaluating stocks only AFTER 5 minutes of activity on an exchange?

See the above comments on shorting in the afternoon. In the 1st 5 minutes of trading, MM's (Market Makers) are all over the map, trying to trip shorts and other naive traders or they are forced to flood the market with shares to take a side relative to order stack ups from overnight entries for a number of tactical reasons. Additionally, the public, motivated by fear and greed, acts heavily and irrationally during this period, which means it can be hard to gauge the current daily headwinds by early moves in any direction during this time. It usually makes more sense to delay entries and sometimes exits until a clearer picture exists, which means waiting to act until the initial 5 minutes, or "noise candle" is over.


Why do you say avoid all big gaps in any direction?

Although gap trading strategies exist even for huge ones, most of the ones I use or suggest are inclined to be used in flat (no change from the previous close) opens or reasonably up or down debuts. Huge order stack ups in either direction often require top or bottom fishing entries and result in too much price changing before a common trading signal cue (like red to green, etc.) can be utilized, thus limiting their practical value. I want plenty of directional room to be available once I enter a play for profits to be made in a session.


Why is it that pro level traders pass on so many plays and carp about getting certain technical level prices or they take their toys and go home?

Entries and even exits are often seen again under better conditions, with better prices, it's usually better to pass unless your criteria are met. One big difference between amateurs and professional traders is their willingness to reject less than ideal entries/exits. This often is flubbed by blundering with entrances/exits in the first 5 minutes and is abetted by a refusal to wait until the stock price comes to you, as opposed to chasing. If you must participate, even under poor circumstances, you are a gambling addict, not a targeted speculator.


Are you going to write a book, or make a DVD or both someday for teaching purposes that I can buy?


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Anonymous said...

ill spend the money on your dvd just to thank you for all the information, nowhere else will give you the detail you blog!

Big T said...


I am working on the details of that, but I am a really busy guy.

My plan is to make a virtual notebook addition (.Pdf?) with any DVD screen capture/audio disc. This way, words, diagrams, charts, can be referenced and used along side...

Big T

Anonymous said...

Are you listed on Covestor or Profit.ly?

Big T said...

No I am not.

I am not especially wild about the security aspects of it all, primarily.

Additionally, I am not selling a subscription service to highlight my trades as incentive to opt in, etc.

My overall record in 7 picks nightly collectively speak better than any individual trades of mine.

Thanx for your comments!