Illusion Creators That Pay
Recently, I wrote a piece on finding stocks that are gapping or moving strongly due to fundamental factors such as company earnings, a brokerage upgrade or downgrade, or an unexpected news release. There was a lot of interest on this subject so I thought I would share an opportunity that presented itself in class this week and explain the whole process for you.
Why Find Strong Gapping or Moving Stocks?
As short term stock market speculators, our job is to simply find stocks that are trading at price levels where supply and demand are out of balance and then trade them back to balance. Price levels where supply and demand are out of balance are referred to as support and resistance in the trading world. We can use powerful tools to identify support and resistance levels such as Fibonacci retracement levels, Pivot highs and Lows, and a few more that we teach in the Professional Trader Part 1 and 2 courses. Support and resistance levels are where prices are most likely to turn, which means entering at these levels is lower risk, higher reward, and makes for higher probability trading.
The Sources for Opportunity:
As I mentioned in the prior piece on this topic, www.nasdaq.com and www.briefing.com give you more than enough quality opportunities in a given day. This week at the Professional Trader course was no exception. The only issue was that there were too many opportunities. On April 21st, we followed our routine and checked the Nasdaq site for pre-market movers and then checked Briefing for upgrades and downgrades and found that a financial firm was upgrading a stock CTXS from a hold to a BUY, a direct statement.
The Illusion (opportunity in disguise)
The gap up on 21st as seen on the chart above was the morning of the upgrade but let’s first focus on the price action from the 18th as that is where the key information is for the astute market player. Notice price on the 18th was trading near the highs for the session and then there was a decline into the close. That decline happens because there are more willing and able sellers at that price level. How do we know this to be true? Because if that last statement was not true, price never would have declined, it would still be trading at that level. The next morning, the upgrade happens which creates the illusion for the public that price in the stock is going to move higher. While this can sometimes be the case, what determines that is where price is at the time of the upgrade with respect to supply and demand. This upgrade obviously invited the public into buy CTXS which caused a gap up in price. The gap up in price at the open was right into a price level where we had already determined there were likely many more willing sellers than buyers (a supply and demand imbalance). We sold (shorted) to those buyers who took the upgrade as a buy signal seconds after the open for a very low risk/high reward trade that also had a very high probability of working out. Shortly after we shorted, price declined because it had to, supply exceeded demand. Had it not been successful, no big deal. It would have been a small loss as we entered very close to our protective stop loss.
The Illusion: When earnings are good and someone upgrades the stock, BUY.
The Reality: When price reaches a level where supply exceeds demand SELL.
You see, what the public does not understand is that while earnings and upgrade information is very real, the reality of how you profit in markets is a whole separate conversation. The illusion traps which are opportunity for the astute market player are everywhere. Each day there are opportunities like this. Not all trades will always work out but that does not matter at all. If we are holding our profitable trades for gains at least twice our losses (in class we tend to practice 3:1), the pressure of being right all the time goes away.
In class on the 21st, short term traders in CTXS who focused on reality simply got paid from those who were blinded by illusion. Should you trade the open like we do sometimes in class? The answer depends on your level of understanding of markets and support and resistance. The open is where the biggest and strongest sharks are in the same pool as the smallest minnows. If you are not 100% sure you think like a big shark, stay away until you change your thought process. I love the open because I am trained to think like a Great White, because my background is in institutional order flow. This is how markets have always worked. Don’t let the veil of illusion shrink your trading account. Instead, let those who fall for the illusion trap help grow your account.
If you happen to live somewhere in Europe and want to learn and practice this and other low risk/high reward trading strategies, join me in London May 17th – 23rd for the Online Trading Academy Professional Trader Part 1 and 2 courses.
Have a great day.
- Sam Seiden, sseiden@tradingacademy.com
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Sam brings over 15 years experience of equities, forex, options, and futures trading which began when he was on the floor of the Chicago Mercantile Exchange. He has traded equities, futures, interest rate markets, forex, options, and commodities for his personal interests for years and has educated hundreds of traders and investors through seminars and daily advisory services both domestically and internationally. Sam has been involved in the markets since 1991 both on and off the floor of the Chicago Mercantile Exchange. He has served as the Director of Technical Research for two trading firms and regularly contributes articles to industry publications. Sam is known for his trading, technical research, and educational guidance.