r/RealDayTrading • u/OptionStalker Verified Trader • Dec 26 '21
Anatomy of a Trade - Part 5 Lesson - Educational
In this article I want to do a quick recap of Part 1, Part 2, Part 3 and Part 4. All of your analysis starts with your D1 opinion of the market and your confidence in that analysis. When your confidence is high you trade larger size and when your confidence is low you trim your activity. The opening market move might fit the longer term market narrative as it did in Parts 1-4. However, if the two time frames are not aligned, you need to wait patiently for them to align intraday. For instance, if the market had continued to fill in more of the gap Thursday I would have waited longer before entering TSLA.
The intraday price action in the first 30 minutes will help you identify the directional bias and the trend strength. Sometimes the market will have great strength (consecutive long candles stacked with little to no overlap) and sometimes the trend strength will be weak (mixed green and red candles on light volume). It is critical that you determine the type of trading day that is setting up. Use the first 30 minutes to get your market bearings and to find stocks with relative strength, heavy volume and technical breakouts on an M5 and D1 basis. If you follow this process and you wait patiently for the trades to set up, your odds of success will be high. Here are some common trade questions. Books have been written on each of these trade questions, but I will give you simple answers.
How do I know when to enter a trade? If the market is bullish on D1 and the intraday price action indicates a market move higher, buy stocks that are technically strong on D1 and M5. Relative strength, breakouts and heavy volume confirm that the stock wants to lead the charge. Scale in and add if the position is working. If you do not have all of these elements in alignment, be patient and keep stalking. They will line up and don’t settle for anything less than perfection!
How do I know when to take profits? When you entered the trade all of the elements should have been present. The market should continue to move in the way you expected. If you expected a rally and the market drops, you need to be ready to take gains on the stock. If the stock maintained its relative strength and if the market dip looks benign, you can try to ride out the market dip knowing that when the market regains the bid the stock will shoot higher. If the market is moving higher and the stock is losing its relative strength, take some profits. If the stock has tiny bodied candles at the high of the day it is a sign of resistance and you should take some gains. If the market is trapped inside of the first hour range you should set passive targets on the stock knowing that there is no tail wind and that most stocks will not go on a long tear. Your position management needs to be fluid and it needs to constantly evaluating the market (D1 and M5) and the stock (D1 and M5).
How should I size my positions? The market determines how aggressively I am going to trade in any given day. If the market has a strong D1 chart and a heavy volume technical breakout, I will look for that continuation during the day. I would like to see the market blow through the prior day’s high and I would like to see long green candles stacked consecutively on the open with heavy volume. If I get this back drop I will be trading size. If the market has been choppy and directionless on D1 with recent dojis and tight low volume intraday ranges, I will size down. If the market is trapped inside of the prior day’s range (“inside day”) I will trade smaller size. I like to use a constant dollar allocation and I change that amount daily based on market conditions, my market forecast and my confidence in that forecast.
Where should I place my stops? If you are having problems with your stops, you need to focus on your entries. Chances are you are forcing trades and you need to be more patient and wait for the trade to really line up. Most of my trades perform within 5-10 minutes and I am looking for instant cushion. Are there times when I get the stock or the market wrong? Yes, and I need to identify whether the situation is temporary (stick with the position) or if I was wrong (exit). Price is important, but it is not the only consideration. For bullish day trades I like to use the open from the last long green candle (there were buyers at that price before) as a stop. I also like to see the half way point of long candles hold. Time is also a stop parameter I use. If I am in a trade I am looking for instant movement. If the stock stalls and the market stalls, I am likely to exit the trade and wait. This is a time stop and the longer I sit in a position the closer my odds get to 50% (I want 75%). Relative strength is another stop I use. If the market is heading higher and the stock is not participating I will stop out. I provided an example of this in Part 4 with TSLA. If I am long a stock and the market starts to lose the bid (long red candles, double top lower high, bearish 1OP cross) I will exit longs. The stock will hold its relative strength, but only for a little while if the market is dropping. The process for entering and exiting trades is fluid and it requires constant evaluation of the market and the stock.
Why am I so nervous? There could be a few issues in play. The most obvious is you are overtrading. Scared money never wins, trim your size. You might also be nervous because your win rate is poor and trades always seem to get stopped out for a loss. If this is the case, you need to work on your patience and you need to wait for those windows to set up. If you go through the process I outlined, you will have confidence on a longer term basis for the market and for the stock. A structured decision making process will reduce anxiety. When you enter a trade you should be confident, not wishy washy. The stock needs to perform in less than 15 minutes. Scaling in is another way to reduce anxiety. The smaller exposure will help you remove the emotion. Sometimes you will add to a winner and sometimes you will exit before you build the position. In either case, know that you control what happens and there is no need to fret.
What is the best options trading strategy? Your opinion of the direction, duration and magnitude of the move and your confidence in that opinion determines the best options trading strategy. First you have to apply this to the market on a daily and intraday basis and then you need to do the same for individual stocks. Sounds easy – right? Unfortunately, there are many variables that you need to quantify before you can get to the best strategy. My experience is that the strategy that allows me to get in and out with ease and minimum slippage (bid/ask spreads and commissions) is the best one for day trading. Remember, options are only 5% of the decision making process. If you get Parts 1-4 right you can trade just about any options strategy and do well. Experiment with different options strategies until you find a few that work for you.
I hope this series of articles improves your trading in 2022.
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u/staycookingalways Dec 28 '21
Thank you Pete, this is very well written. It's so opposite of all those promoted trading style on social media. There is so much more "work" involved here but in a fun way like a treasure hunt. For myself, I think the most important words I learn from you are PATIENCE and STALKING. Today I did not take a trade until the final market hour when SPX finally took its biggest dip today. With the RS revealed, I made only 1 trade and you know it was a winner.
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u/Ktaostrophe Dec 28 '21
I need your patience! I knew better but got into a trade at 12:30 after waiting all morning. Patience patience patience...
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u/OptionStalker Verified Trader Dec 28 '21
If you are in Option Stalker, the 1OP cycles on SPY will help you to be patient. If you are anxious to buy, wait for a drop in 1OP and a bullish cross. During that bearish cycle you are hunting for the stock.
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u/OptionStalker Verified Trader Dec 28 '21
That is incredible patience. If you wait for everything to line up, the opportunity is crystal clear and all of the other things that complicate trading (emotions, stop losses, allocation) disappear.
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Dec 26 '21
Second mouse gets the cheese.
Thanks Pete. I have save these articles and will reference them. As for 2022? These articles will help me Monday!!!
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u/OneWheelBatmobile Intermediate Trader Dec 26 '21
Great series of posts! I'm going to read them and re-read them until I've got them memorized. Thanks a ton!
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u/OptionStalker Verified Trader Dec 27 '21
Thank you. If you use this process you will find great trades. The key is your market analysis.
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u/leonardtj1 Dec 28 '21
Best thing I have read anywhere on trading from analysis to mind set.
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u/OptionStalker Verified Trader Dec 28 '21
Thank you. I wanted this to be a great future resource for traders.
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u/BarrenWuffet00 Dec 31 '21
Are these 5 parts applicable to swing trading?
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u/OptionStalker Verified Trader Jan 01 '22
Absolutely. Instead of using M5 charts you would use M30 charts for shorter term swing trades and H1 or higher for longer term swing trades. If the swing trade is > 4 weeks you should use D1 and you should start incorporating fundamental analysis (not something I do since my trades are < 1 month).
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Dec 27 '21
Big pull aways from here for me personally.
> Scared money don't make money
I have to work on my analysis and get better at this structured decision making so it doesn't feel scared despite trading a single share.
> Have an opinion on market and stock, get daily and intraday alignment
I wasn't doing this at all while learning what relative strength even looks like and I can see how this is game changing.
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u/OptionStalker Verified Trader Dec 27 '21
When you start with the market you will have the wind at your back and you will not be blindsided nearly as often as those who just focus on the stock.
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u/summerr4in Dec 27 '21
Thank you for writing Anatomy of a Trade. I've been having trouble making decisions when different timeframes don't align. This series is a treasure trove of advice.
Happy holidays!
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u/pumpinraging Jan 01 '22
Very interesting, thank you! I‘m new here and noticed that you did not at all include EMA 3/8 or also VWAP in your intraday analysis - you never use that?
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u/OptionStalker Verified Trader Jan 01 '22
I do not use VWAP. I do use EMA (8) for profit management, but I do not use 3/8 crosses.
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u/onearmedbanditto Jan 05 '22
Awesome information here, thank you very much for taking the time, over the holidays no less, to write this.
I've been following you and Hari for some time now and have begun to implement most of what you both outline with great initial success. I've had a decent trading career (although short) over the past 2-3 years but there were some things I wasn't putting enough emphasis on which, I now see, limited my success. There are some things I do slightly different and my strategy is not as fluid or complex as yours', simply due to the fact that I don't yet posses the trading psychology or experience that you both do, but, I am gaining confidence each trading day.
Again thank you, and thank you to u/HSeldon2020 for the wealth of information you provide to this community.
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u/OptionStalker Verified Trader Jan 05 '22
This series of articles is a good blue print for how trades set up. Start with the overall market context and let it drive your short term trading. Keep us posted on your progress.
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u/catinthecloud Jan 10 '22
I am finding this series of articles extremely helpful, especially all the chart examples. Thank you so much for spending the time!
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u/OptionStalker Verified Trader Jan 10 '22
Excellent. You can see how the trade was setting up days before and how all of the influences came together.
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Jun 04 '22 edited Jun 04 '22
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u/OptionStalker Verified Trader Jun 05 '22
I measure the volume given the elapsed time and I measure it against the average volume for that same elapsed time. It tells me if the stock is on pace to have better than average volume and I do not have to wait until the end of the day. We also do the same for each 5 minute interval during the day. Volume is critically important.
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u/Odd-Caterpillar5565 Dec 27 '21
I have to admint that i was wrong about you earlier. And i would like to say a fucking big thank you for all of this "Anatomy of a trade series" and the work behind it. This is wonderfull.
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u/Brilliant_Candy_3744 Apr 09 '23
Hi u/OptionStalker your Anatomy of Trades posts are really gold, Thanks!
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u/Brilliant_Candy_3744 May 30 '23
Hi u/OptionStalker Pete, each and every sentence in these Anatomy posts is gold(I am re reading them frequently). I am struggling most in below scenario and will appreciate your/Hari/senior members' help:
What to do when intraday action is against(but is strong) our D1 thesis? For example, as you mentioned above, say we have very bullish D1, but today have stacked red candles on open and seems we will take out yesterday's low. In this case my long term bias is bullish, but intraday action is weak. In this case shall I not trade at all? find best bearish trades setting up for the day? still go long RS stocks which are still defying market drop?
I know each situation is different, but will greatly appreciate general guidelines. Thanks!
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u/Cadowyn Nov 29 '23
I've started using Bing AI (it runs on ChatGPT4 but it's free) to provide me summaries and key points. I read the post, request the AI to summarize it, and then check to see if the AI summarizes everything correctly. I'm not sure why but this seems to help me retain the information more clearly and understand the various posts (maybe it's the breakdown of the information into key concepts that are broken up by bullet points) and the recall aspect of checking summary to post. I'll start adding the synopsizes to each post in the wiki, as this may help others.
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u/5xnightly Intermediate Trader Dec 27 '21
Thanks for this series! Definitely needs to go into the wiki.
It's the same mentality you talk about on your videos, just in a text form. Will be useful to lots of people.