Know thy levels

As Traders we love to complicate things.  We may use too many indicators, trade too many random tickers or feel the need to find that unknown stock.   One of the best things about trading is that there is no right or wrong way to do it and through screen time, trial and error and the analysis of our results we eventually find what works for each of us individually as traders.   I have been very guilty of overcomplicating things in the past and after a trading rut in Feb/March, have recently been successfully tuning out noise and simplifying my trading.  

I think scanning is one of the most overused buzz words out there.   I say overused since I find it better to have a core list of names where you have an idea of how the stocks trade and hopefully some key levels associated with them.   Stocks have personality and if you are all over the place there is a good chance your results will be inconsistent.    

I personally prefer to trade mid to large cap stocks (over $2.5 billion market cap) that are > $15 and very liquid, preferably over 1 million shares traded per day.  Of course, there are exceptions but I keep a master watch list (using Freestockcharts.com) of approximately 300 tickers and 95% of the time my watch list will come from there.   I have little need to scan as I just manually go through the watch list that I have built over several years.  Using Freestoccharts.com, It does not take very long to hit the space bar and run through this master list.  Here is the one scan I run weekly using www.finviz.com (great site) that will occasionally yield me a new name or two to add to my master list. http://finviz.com/screener.ashx?v=211&f=cap_midover,fa_eps5years_pos,fa_epsqoq_o20,fa_epsyoy_o15,fa_epsyoy1_pos,fa_estltgrowth_pos,fa_roe_o15,fa_sales5years_pos,fa_salesqoq_pos,sh_avgvol_o750,sh_opt_optionshort,sh_price_o15,ta_averagetruerange_o1,ta_sma20_pa,ta_sma200_pa,ta_sma50_pa

On my trading platforms, I keep a watch list of 25 core companies that I consider important and a weekly/daily list (max 30 tickers) that is changed to include tickers that I feel are the most actionable and have set daily alerts for.

 

I want to run through a trade from last Thursday morning, which shows my rationale for keeping that core list of stocks which allowed me to take advantage of an old price level in which I was familiar.  Previously, I had been stalking that $99.50 breakout level in Union Pacific (UNP) since early February and admit I got slightly carved up in the name during several failed attempts to get through the level which I front ran.   See chart below

UNP Pre-Breakout

However, I felt that when the level was breached that it could move big and swore that I would be involved whenever it finally broke out.  As luck would have it, the day it finally went the stock was already up over 2 points (daily ATR slightly over 2) and the likelihood of a major breakout intraday was slim.  I am a day trader and will only hold a position overnight when I have scaled out intraday and take home a small piece with a decent cushion.  You can see my prior post on this topic here in case you missed it.  http://www.younggunstrading.com/2011/02/cushion.html

The rails are strong and UNP is about to trigger so I take a smaller than usual position in the name given the current move vs. ATR and sell some into the 100 level towards the bell and keep 1/3 overnight.   I sell the remainder the following day in the 101’s and move on to the next trade.  The stock continues to run to over $104 over the next few sessions but I don’t regret my sale one bit.  A year ago I probably would have been pissed as the stock had given me no reason to sell but have learned to accept that I am primarily a day trader and will often only get crumbs out of much bigger moves in names that I am trading.   There are positives and negatives to every style of trading.  The flip side is when the market gaps down big and swing traders are getting stopped out, I am often in position to unemotionally dig through the wreckage for decent risk/reward scenarios on the long side despite broad weakness in the indices.

As traders we live and die by our preparation and our alerts.  In the past, too often I would lose track of names after they broke out as I was more interested in that fresh setup.  Recently, I have been adding back those same alerts for retests of the breakout level or earnings gap fills as these often provide powerful entries for the bigger move once prior resistance is indeed confirmed as support.

Fast forward to this past Thursday when the market gapped lower on weaker than expected jobless claims and comments out of Trichet which jump started a rip in the U.S Dollar putting pressure on the Euro/commodity complex.   Right on the open my 100 and $99.75 alerts on UNP went off.  I immediately called up the 1 minute chart and was looking for that $99.50 prior heavy resistance to become support.  In extremely weak panicky markets support will often not hold but this was just a gap down opening and nothing to be alarmed about.   The stock briefly dips below the level and bottoms at $99.42 and starts to bounce.  I was looking to enter when I got back above the 99.50 level with stops $0.07 below the low of the day.  I was filled at $99.55 and placed my stop at $99.35.  Win or lose I really liked my risk vs. reward in this trade as I viewed the 99.50 level as significant.

  

UNP 2 Hour Candles

Volume immediately came in and the stock bounced fast which is exactly what you want to see.  Any basing down near the support level and it most likely will not hold.  I sold half at 101.19 and the remainder at 101.05.  The sales in this trade as well as the prior are irrelevant as each trader must have their own plan and profit goals.   My emphasis is on the entries given it was being aware of the key significant level that worked both times.

UNP 5 MIn

 Thanks for reading!

If you have any questions you can email me at SteelerTrader@gmail.com and you can follow me on twitter at @SteelerTrader