Trading Pre-Market Breakouts on Earnings

10Nov
2017

11/10/17 – It’s earning season and one of our more aggressive plays is to take breakout trades above pre-market highs.

On the daily chart below, WTW had earnings and gapped up, making new highs.

On the 5 min chart below, we can see the pre-market high was $51.50. A common question I receive is, “On breakout trades, how does a trader determine the risk for the trade, so that a trader can properly size the position?” One way to determine where to put the stop is to look at the lowest point of the day, which includes the pre-market data. Unfortunately, we can see that if we use this method on this breakout trade, then the stop would give us a risk of over $2.25 ($51.5 – $49.25), which is too much for a $50 priced stock.

If the first method doesn’t provide a trader with a good stop level, then I will use the 1 min or 3 min bar that traded above the pre-market high. On the 1 min chart below, we can see the low of the bar that traded above $51.50 was $50.53. Therefore, with an entry right above $51.5 and a low of $50.5, that provides about a $1 risk level, which means our target to achieve a 2:1 reward:risk level would be $53.5. The reason why I will use the low of the bar as a stop level, even if it isn’t the low of the day, is because if a stock is going to break out, then it should make consecutive higher lows and higher highs for a breakout to the upside. Therefore, the stock wouldn’t trade below the low of the entry bar over the next couple of minutes. As we can see on the 1 minute chart, the stock price reached about $53.49 in about 6 minutes after prices broke out above the pre-market high. In addition, prices never traded near the stop level of $50.5 within 30 minutes of breaking the pre-market high.

Waiting for Triggers

25Oct
2017

10/24/17 – It’s earnings season and one of our favorite plays is to trade options on stocks that tend to run into earnings, given the correct market conditions. However, even though we may find a stock we want to trade, it’s always important to wait for a trigger before getting into a trade.

Below are 2 examples of stocks that fit our criteria. The stock price for Texas Instruments has been going straight up since mid-September. As this stock approached the earnings release date, we patiently waited for a pullback and a bullish setup before we traded an option. We entered the position at the close of the circled bar below.

In our second example, we wanted to take MCD before the earnings release date as well. Over the past 2 weeks, this stock has been running as well. However, we didn’t see a nice pullback setup as we did in TXN. Therefore, we decided to skip this trade and as we can see by looking at the circled bar below, it was a good decision.

In both of these scenarios, we could have taken the trade with a few contracts during a breakout. Unfortunately, per our rules, the technical breakout triggers occurred too early for the way we trade options on earnings runners. Therefore, our next logical trigger would come from a pullback. Waiting for triggers will help increase your likelihood of choosing a profitable trade.

 

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Using Wide Range Bars to Determine Target Levels

04Oct
2017

10/2/17 – On Monday, many large tech stocks, including the QQQ, gapped down below Friday’s range. On such a day, we look for triggers to go short and let it ride all day (see article written on 9/17/17). In addition to dollar levels and half dollar levels, we can use wide range bars created in recent history as price targets as well.

Below is the daily NVDA chart. On 9/15 (see circled bar), NVDA opened at 172.86 and closed at 180.11, which created a wide range bar. Prior to Monday, the stock continued to close lower for 3 days. With the correct setup, if the stock broke the low of 9/21 (see line below), then the next target level on the daily chart would be the opening price of the wide range bar created on 9/15. As you can see on this day (see arrow below), NVDA broke the low of 9/21 and closed lower than the opening price of the wide range bar.

Source: www.tradingview.com

 

Why I Like Trading NVDA

18Sep
2017

9/18/17 – In videos, blogs, and articles, you hear traders talk about why they like trading certain stocks. Given the right market conditions, these stocks tend to trend all day long with multiple potential entry points. NVDA is one of my favorite stocks to trade for this particular reason.

Before I get into why I felt this stock would run, let’s look at what happened on Friday. On the daily chart below, you can see it opened at about $172.86 and closed at $180.11. You can also see with an open price of $172.86, the only time this stock traded above this level was on August 8, 2017. Therefore, it was gapping over a month’s worth of daily ranges.

Watching the pre-market action, on the 1 minute chart below, you can see the stock kept climbing higher until a few minutes before the open. In addition, the high of the pre-market was above yesterday’s range and above the highest price over the past month. Therefore, if NVDA broke the pre-market high, given what we know by studying the daily chart, there was a good chance this stock was going to run.

On the 1 minute chart above, the first aggressive entry was the break above the pre-market high, which was $173.48. The 2nd entry was a break above the high of the 1 minute bar (circled above). The 3rd entry was the break above the trend line around 9:37 AM ET when we had 3 bars with lower highs and lower lows (see arrow on chart). In addition, you can see prices never closed below the yellow line, which is a 10 simple moving average.

On the 5 minute chart, the first bar was very large, so the break above the high of the 5 minute bar was a little risky. However, this was the 4th potential entry. Because the bar was very large, I would have waited for a pullback pattern, which we got around 10:25 AM ET. That was the 5th potential entry (see arrow below). Throughout the day, there were other potential entry points, such as breakouts above the daily high, other pullback patterns, etc. if you missed the ones within the first hour of trading.

One thing to mention about trading NVDA at the open, this stock tends to have a large bid/ask spread. As time progresses throughout the day, the bid/ask spread narrows. Therefore, before trading any stock that is new to you, make sure watch how it trades for the first couple of minutes at the open and if you want to trade a stock with a large bid/ask spread, make sure you use limit orders and/or cut your normal share size down to compensate for the additional risk. On days similar to today, it helps to enter and exit your positions at multiple levels throughout the day. But, make sure you hold onto enough shares to let them ride all day to capture large movements.

How to Use Market Context to Manage Risk

06Sep
2017

9/4/17 – Almost every article one can read about becoming a successful trader discusses risk management. In addition, almost every article that discusses becoming a successful trader talks about letting the winning trades run. So, how do you know when to let a winning trade run and when to let it run to a certain point and get out? On Friday, NVDA and the general market gave us clues that if we were in NVDA right out of the gate, we should get out when we were up.

Below is the daily chart for NVDA. You can see it was gapping up above the $170 level, which was above the previous day’s high. In addition, the jobs report that morning was a good report and all of the indices were gapping up. So, we were looking to go long if we received a buy signal.

The charts below show the QQQ on the left and NVDA on the right. The premarket high for NVDA was about $170.74, which is indicated by the white line. Therefore, an aggressive entry was a break above the pre-market high.

Now, if you look at the boxes on both charts above, which shows the 9:35 bar, you can see NVDA was going up, but QQQ was falling below pre-market lows and below the previous day’s close. At that time, all of the indices were fading as well. Moving to the 1 min chart below, you can see the break of the pre-market high occurred around 9:38, so we had a buy signal. However, when the general market faded, I watched the 1 minute chart for any inidication to exit the position and saw the price action circled below and decided to get out. As prices consolidated and failed to break out higher, and given that the general market wasn’t running, this was my signal to get out when prices broke the low of the pin bar in that consolidating area. Generally, I like to hold positions with the direction of the general market. If the general market (QQQ, DIA, IWM, and SPY) are not moving together in the same direction or if they are moving in the opposite direction of my position, then I will exit my position.

How to Use Pre-Market Price Action and 1 Minute Chart to Find High Probability Trade Setups

12Aug
2017

8/7/17 – Today in the trading room, the moderator mentioned TSN was a potential gap-and-go play. TSN had earnings this morning and gapped up over the $65 level. On the daily chart, you can see prior to today, the next potential stopping point was around $67, which is evident by the two spikes at the beginning of February and end of April.

Watching the pre-market price action on the 5 minute bar chart, you can see the prices bounced between $65 and $65.5. Right before the market opened, prices closed near the high of the pre-market session (see circled bar below). When stocks exhibit this type of price action before the market opens, there is a good chance the stock will run in the direction of the gap within the first few minutes of the regular market hours. An aggressive way to play this would be to take the trade at the break above the pre-market high. A more conservative way to play this price action is to wait for confirmation on the 1 minute bar chart.

On the 1 minute bar chart, we are looking for a pullback after the initial run. Ideally, the pullback will be created by at least 3 bars, where there are at least 2 lower highs and 2 lower lows. The bar circled below is the “trigger” bar. In addition, what makes this particular play more attractive is the low of the trigger bar was only a few cents away from the high of the pre-market high. Therefore, the pre-market high was acting as support for this price movement. The play is to go long at the break of the high of that bar. The entry was about $65.8, the target was $67 (found by looking at the daily chart), and the stop was about $65.2, which created a 2:1 reward-risk ratio.

 

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