Learning to Day Trade - Part 5

Risk/Reward

In this next part I’ll be looking at a few charts from yesterday (9/13/17) and determining the risk reward. I did not take any trades on that day.

Starting off with $HIMX. Shorting the bounce.

$HIMX

I marked $10.80 as being clear resistance after dropping about $0.50 using the price line tool. As you can see it tried breaking that level once, faded, and again later on and faded. The second attempt is considered a lower high at 9:57 AM. This is an ideal shorting opportunity. Short at $10.75 and risk it breaking $10.80. The potential downside is still pretty great even after dropping already.

  1. Entry - $10.75 short
  2. Risk - $10.85 (10c risk)
  3. Reward - At least $10.50 (25c reward)

It’s not easy to determine the reward so sometimes it’s good to go back to previous days. Always look at multiple time frames like so:

  • 1m / 10 day
  • 4 hour / 180 day
  • 1 day / 5 year

If the move was recent like $HIMX, you do not need to go back very far to see possible support/resistance levels.

The news on it may be several days old but that does not matter. After these stocks make big moves up, they usually correct after the hype wears off and start coming back down. $HIMX has had many opportunities to short after its big run.

$HIMX

On this time frame you can see possible support/resistance levels. I marked the one that ended up mattering at $10.30. It is never exact. It could drop below or stay above several cents. In this case it stayed above.

The potential reward ended up being $0.43 if you managed to catch the exact bottom - which is never possible and mostly luck. If I had taken this position at $10.75 I’m sure I would have covered almost instantly at $10.50 (25c) and not risk it any further.

I had thought about dip buying $HIMX when it dropped to $10.60 (15c reward or so) because it looked like the bottom. I was right on it being the bottom for a while but decided against it and watched the consolidation channel.

Next, $MYOS. Dip buying.

$MYOS

On this chart I marked the previous high of day at 9:33 AM at $1.96 and potential support at 9:45 AM at $1.70. This type of setup is known as a “dip buy”. You are buying when the stock dips and hoping it will squeeze and re-test the high of day for a potential profit.

I would consider getting in at $1.75 at 9:48 AM or 9:49 AM (when it started curling up) and risking off the $1.70 consolidation area.

  1. Entry - $1.75
  2. Risk - $1.65 (10c risk)
  3. Reward $1.96 (high of day, 21c reward)

It ended up going over $2.00 (an important round number) and up to $2.12 before dropping. Even if you had timed it terribly and missed a good exit opportunity, you would have only been down a few cents per share near the end of the day. I would never hold a stock like this for long. Take the profit and move on.

The problem I’m always faced with is trying to do this in realtime while the candles are still moving. As soon as I realize I should have bought I feel like it’s too late and I’m chasing the move.

This stock had no news. It’s anyones guess as to why it ran.


$HALO, shorting into resistance/bounces (the next day 9/14/17)

As you can see from the chart below I marked a possible support/resistance level from the past. I did this during premarket because I saw the stock gapping up about $3.00 a share. You could have bought right at the open and made $0.80 a share but that’s incredibly risky. It could have easily dropped and you could have been left with a large loss.

This is the news that caused it to gap up:

Potential entries:

  1. Short at approximately $16.20 when it made the lower high
    • On the 5m chart you can see the “shooting star“ candle that formed
  2. Risk off high of day
  1. Short the bounce attempt at approximately $15.58 when it had trouble breaking $15.60
    • Not a huge reward on this but it would have been good practice
  2. Risk off $15.60
  3. This is known as a “bear flag“ chart pattern

Both would have worked out well but I took neither. The potential reward is a little tricky to determine, but looking back at the 180D chart you can see clear resistance at $15.00. That ended up being $0.15 away from the lows. Remember: resistance becomes support on the way up, support becomes resistance on the way down.

I did manage to spot the bounce and determined the risk/reward when I saw it having trouble with $15.60. So I’m making some progress I suppose.

$HALO 1 minute candles

Like I said above, the 5m shows a shooting star candle at the top. This is usually a bearish sign and the trend is about to reverse.

$HALO 5 minute candles

I took these screenshots before the end of the day so the charts are still developing as I write this. What you don’t see is there was a nice $0.50 bounce off the lows followed by a fade. Making $0.50/share on a dip buy like that is pretty good but it would have been a tough call.

I’ll be watching this stock on Friday for a potential short or dip buy depending on what it does. Friday shorts can be risky though because no one wants to hold their shares short over the weekend and it can lead to some serious squeezing. Cover your short quick!



I will continue updating this post as I see decent plays that come about.


Part 6 - Trading Rules



Disclaimer

I am not a registered financial adviser/broker/anything. Use this information for entertainment/informational purposes only. Any tickers mentioned are not recommendations to buy/sell/or sell short. They are used as examples only.