DummySpots.com

A nice dummy spot example from today (these are 10min bars):

A gap up, a little noodling, a pause. Note the low volume on the poor little 10:00 inside bar (aka Dummy Spot).

A trade on the break of that bar’s top with its bottom as the stop would be a dream trade: A 50-75 cent risk would have resulted in a 6 to 10 DOLLAR reward, depending on how you manage your stops. Let’s see, that means risking $100-150 would have gained $1200-2000. Wish they were always this pretty…

Here’s a quote I ran across this evening while flipping through one of his books for the umpteenth time:

A compulsive desire to be rich may indeed drive you to learn about the markets and make money, but only at tremendous personal cost. A driving desire for fame usually has at its root a fundamental lack of self-confidence and self-respect, and any fame achieved on that basis will be empty and meaningless. The extent to which you are motivated solely by the desire for money and fame is the extent that you will fail as a person, and usually as a businessperson as well.

Victor Sperandeo, Trader Vic: Methods of a Wall Street Master

On trading mornings (i.e. off from the “other job”), I’ll spend quite a bit of time lining up potential suspects before the market opens. I make my general list as you’d expect: yesterday’s breakouts, heavy trading in extended hours, gaps, etc. Basically stocks which are set up for a potentially heavy-volume, high-volatility day. Then the first 10-60 minutes after the open is the high-intensity task of paring them down to a few prime candidates and looking for good setups in real time.

My list always includes what I (as others) call my “usual suspects.” These are stocks which, even if they’re not moving on some breakout or news, still very often produce good daytrade setups because they move around virtually every day. These amount to 10 or 12 stocks I always look at and include names like BRCM, AAPL, CWPC, BIDU, and lately GM, believe it or not.

Starting today I’m adding an entire group to my everyday list. You may notice that they have something in common:

• JRJC> China Finance Online Co. Ltd.
• CESV> China Energy Savings Technology Inc.
• CHINA> CDC Corp.
• CMED> China Medical Technologies Inc.
• CNTF> China Techfaith Wireless Communication Technology Ltd.
• CTDC> China Development Group Corp.
• CHNR> China Natural Resources Inc.
• CAAS> China Automotive Systems Inc.

Dave is one of the few people I follow routinely, and I’ve learned to pay particular attention to the things he repeats regularly. One concept he has been kind enough to share is a clear, definitive method of money management. Even if you don’t follow his way to the letter (and he would tell you that you shouldn’t), there is much wisdom to be gained from studying it.

The following quote is from his latest article:

Someone recently emailed me criticizing my methodology. They said that “if it wasn’t for the money management, it wouldn’t work.” Well, I think I have to agree with them. In fact, I can’t imagine any system working without money management.

I heard an interview with the CEO of Devon Energy this morning. The host asked him where oil was going. He said, with a completely straight face, “we are predicting that oil will be in the $50 to $65 range, with possibilities above or below that.”

Talk about going out on a limb…

I got a little reminder about nuances, timing and my old friend denial today. Here’s an intraday chart of the Qs with 5-minute bars:

Just this morning before the market opened (see previous post), I said the following:

if the Qs gap down, then immediately begin to rise, you could anticipate a spike at 10:00EST, and short the downward break of the highest 10min or 15min bar, with its top as a stop.

Had I simply followed Da Rules and traded what was actually there, I’d have had a clear setup to go long against the 10:00EST spike, which was downward. Instead, I got obsessed with the idea of going short, and hung around to see what I wished, instead of what was there. Sneaky, insidious Denial. Argh. Ok, that makes the 837th time I’ve learned that lesson, give or take.

I ended up going short off of the 10:30 bar, which is to say, I ignored the signals the market gave me. A rise from the opening to 10:00 would have been a perfect short. But the stock fell for that first 30 minutes. At 10:30, I caught what was the exhaustion of a 30-minute uptrend, not a fade, and the subsequent sideways action eventually took me out. Eventually, slowly and agonizingly. Those words themselves can be a good sign that you’re pointed in the wrong direction. And no amount of hope can override that.

Cheers. I’ve gotta get out my little notebook and underline a couple of rules… again.

Here we are, the morning after Google, after Greenspan, after State of the Union. What now? The nicest play would have been to get short off of the “nr19“ bar I mentioned yesterday:

The volume on the Qs was not fading as I like to see with a pullback (in this case, a pullback into a downtrend), otherwise I’d pronounce this a daily-bar Dummy Spot. Still, I’d have no problem going short off of it with such a nice tight stop. With a high of 42.32 and a low (sell trigger point) of 42.07, that trade would have given an “R,” or initial risk, of only 25 cents. Risking $200 would mean shorting 800 shares, or close to $34,000 worth of stock (BTW, I always use risk to determine position sizing, more on that in a separate article).

With that trade, one would look pretty smart right about now (Wednesday AM, 2/1). However, that setup is only a slam-dunk in hindsight,and if looking back were worth anything, we’d all be rich. I did NOT take the trade, and was sidelined waiting for all the potential “events” to get out of the way.

For me, the way to play the “Great Google Breakdown Setup” this morning is to use the gap to trade a liquid Nasdaq stock (I personally won’t touch Google today), for example: if the Qs gap down, then immediately begin to rise, you could anticipate a spike at 10:00EST, and short the downward break of the highest 10min or 15min bar, with its top as a stop.

If the market gaps low and continues lower, it’s the old “catching a falling knife” routine, and will be hard to get a good setup today. By good setup, I mean a clearly defined, low-risk entry point with an obvious tight stop.

Should be fun. Cheers and good luck.