Dan Bustamante - CFOT Instructor
We gave a webinar the other night and one of the stats that we through out was the failure rate of traders, around 90%, allegedly. In my opinion, this comes from traders attempting to day trade stocks and futures in and out all day long. Put simply, it's a strategy that doesn't work and before you lose money the hard way learning this let's discuss why I like bigger market moves.
Below is a Yen Futures trade (6J) from this week. This was a 2 day trade set up, so not day trading, and the move was large enough to net +$,1200 alone on a 1 contract position.
What this really starts with is looking for large market moves or as I like to call them, "market inflection points" - places on the price chart where the weekly/daily or 60 minute chart can allow for large price moves. Using this same concept of looking for larger market moves is what allowed for one student last Summer to make large +$20,000 trades.
Just yesterday we saw the Amazon takeover of Whole Foods which led to many other grocery stores to trade lower. Instantly I began to see on streams that these stores were now shorts (stocks to be bet against) but that's just dead wrong. The day traders woke up saw that they gapped down and without analysis done decided that they were ready to be shorted. After they've already sold 6%+ from supply zones the day prior.
One, you never want to chase price after the fact. I believe in finding market turning points ahead of time and it's what we teach in Core Foundations. Second, when you have price dislocations on stocks like TGT and SFM it usually creates buying opportunities for a passive trade. By no means am I recommending just going out and buying stocks when bad news hits, we use PTA's (Potential Trade Areas) that tell us ahead of time if we want to even consider looking at a trade and even then we need to qualify it.
To explain this concept a little more in depth let's use this weeks grocery store sell off as the example.
What we're looking at if you click on the chart, is a daily chart of ticker: SFM, Sprouts. The day trader sees this as 'the stock has gapped down, it must go lower' - When in fact, this stock gapped down into a larger time frame support area. This is one of the problems with day trading stocks: There's no context involved, usually just 'gut feel' which is not a repeatable process.
The $17-$18 area on this chart - before the news - is already a viable support area. Why? Because it held as a support area near August 2015 and then again this year, creating a double bottom. The trading opportunity was a test long near the $19-$21 area, yes you would be buying this on a day that it was down nearly 7 with a target back at $23-$25 and a worst case scenario at $17-$18 where there was past support. Now the most important part of all of this: The analysis (The potential trade areas) are decided AHEAD of time, before the trade. If you cannot do this before this stock dropped or before your trading week starts the odds of you taking the trade when the time comes and actually executing it properly are slim, hence why most attempt to day trade stocks for $0.20-$0.60 cents at a time: They have no clue where it's going or belief in their 'system'.
Now what you're not seeing is the weekly chart of SFM. This too had a PTA (Supply) around $26-$28 a share and the chart has been trading lower for some time. Why does this matter? It matters because I can understand that this trade is not a buy and hold back to $35 a share but a short term passive trade to the areas mentioned above. Now when you do it in this manner it allows you to asses your risk/reward before you even take a trade measuring the best case and worst possible case scenario so now you're trading in control with an actual plan. This surely beats having to wake up each morning and scanning for new stocks to trade 30 minutes before the 9:30 bell opens and then getting in and out of them over and over during the trading day. It's less stress, less work and has (in my experience) better odds of success.
This concept of finding large market turning points ahead of time and putting those scenarios together pre-trade works on any asset class in the world. After all, we're simply looking at price charts to determine whether assets are overvalued or undervalued and then executing on those ideas.
I hope this article helps.