I hope you are all doing well and ready for the week ahead. As some of you know, on Friday I took a 5-min opening range break out trade on $BIG from Chile and posted my recap. Unfortunately, the internet connection in Chile where I was trading wasn’t strong enough for me to be on the microphone and explain my thought process during that trade. The trade was unique in its own way because many of our good traders also took it but could not capitalize on the nice move and stopped out. I decided to send this email to remind everybody of an important lesson. Here’s what I saw in $BIG:
- Stock was gapping up on good news
- Heavy volume at the open
- Stayed above VWAP (first few minutes)
- The first minute was a strong white candlestick and punched through all moving averages.
I know many good traders stopped out at around 9:45 AM, but I did not. My stop loss was a “close” below VWAP. Although we did penetrate below VWAP, it never closed below it. A few minutes after it touched the VWAP at 9:49 AM, $BIG squeezed powerfully above VWAP. Even if I were stopped out before, that 1-min squeeze candle was a clear sign of re-entry for me. There is nothing wrong with re-entering if the trade comes back for you. It is better to manage the risk than regret it. Commissions are cheap and you can always re-enter. Professional traders often take a few stabs at a trade before it goes in their direction.
As I mentioned, I was thinking of getting out and was nervous. But sure enough, if I were stopped out, I most likely would have re-entered long when I saw the big squeeze candle at 9:49AM. I was already in the trade with full size, otherwise it could have been a good place to add. Shorts were then trapped and desperate to cover. I had a good level of confidence that the stock was going to break higher.
Sometimes the level 2 can also give you a direction and confirmation, but not always. In this case, I do not recall exactly what the signal was on level 2, but overall it was not an easy trade. Do not blame yourself if you were stopped out on that whipsaw.
Another trader emailed me and asked a question from a trade 6 months ago on $CIEN, in a similar situation. He asked me, “Why did you not take it to the long side based on my criteria explained above for $BIG and instead went short at the open? ”
My answer to that is the stock opened weak in the first 1-minute. As you can see, the first two 1-minute candlesticks were red and dropped below their moving averages toward VWAP. I did scalp it to the short side, but as you can see the stock did in fact bounce back and became a very nice 5-min opening range breakup. I also ended up taking it to the long side as well, like in the $BIG example above.
That is the beauty of the market. There is no correct way of trading; depending on your strategy, time frame, and analysis all trades can be correct and profitable. Often in the chat, Brian and I trade the same stock in the opposite direction, but in the end our trades are both profitable. This is another example of how important risk and trade management are more than the stock or the direction you are trading it.
To your success,
PS: All of these topics will be discussed in the future Success Workshop Webinar for lifetime members, presented by Aiman and me. The title of our workshop is “Surviving the Chaos: How to Trade the Open” on December 19, 2019, where we will go through many examples of how I trade at the Open; we will also watch some replays together. Stay tuned for the announcement next week!