July 3, 2015

Trade Recap - FIT

Morning everyone! Let's take a look at my FIT trade on June 25th.

FIT was on my radar because it recently IPO'd and it's been a great momo stock for retail traders and institutions alike. On June 25th at around 2 pm, I pulled up the 1 hour chart and performed technical analysis (TA). My journal notes included "BO (breakout) of recent tight trading range and downtrend line (DTL), long biased but will short failures."


Next I pulled up the 5 min chart and performed TA. FIT had sold of big time in the morning and gave back all gains from the huge gap up (which is not surprising if you look at the previous big gap up two days prior--stocks tend to trade like they have been trading):


After the sell off, FIT started an uptrend but it was mostly in a trading range from 10:45 am onward. So how do you trade trading ranges? You buy low, sell high, scalp. You absolutely avoid chasing strong moves in the range because they are designed to get your emotions revved up (especially FOMO), which results in bad entries with terrible risk/reward, and the eventual draining of your account. I know this because I was one of those traders for years! Thankfully, I've always used small size to avoid draining my account while I pay my stock market tuition lol.

As I said, you want to buy low, sell high in a trading range, so I was watching and waiting for a test of major support or resistance to execute a trade. At about 3:30 pm, FIT popped to 37 major resistance and I got ready. It blew past 37 and closed with a strong bull trend bar above the resistance. Now I could've shorted with a limit order on that close but that's for advanced traders or traders that can trade with lower probability trades. I can only mentally handle high probability trades or else I get stressed out or lose confidence in myself. So what I needed was evidence that this breakout failed and therefore longs who bought the breakout were trapped (which would then be a high probability short). The key evidence to me is an immediate reversal signal bar, then I'd look to short the close of that bar or below it. Well that's exactly what happened.


FIT immediately failed and produced a strong reversal bear bar that fell quickly but popped a little before closing. I shorted the close because the breakout clearly failed and FIT was back into the trading range as well as near the top of the range (remember buy low, sell high in a trading range). So add up the fact that the breakout failed, long buyers were trapped and a short entry near the top of a trading range, and you got a high probability, low risk trade! Oh and I was risking to the high of the entry reversal bar and my targets were 1R (1 x risk) for half, and 2R for the last half.

As you can see above in the chart, FIT played out perfectly. I did leave quite a bit on the table but that's not my focus or concern. My focus is on executing high probability trades and taking profits at 1R or 2R for now. The intoxicating feeling of hitting home run trades is a siren's call and death knell for your account. I know this because I spent years chasing or pressing for home run trades like all the pros seem to do. This never worked for me, or even for the pros when they were beginners!

If you read the bios of most pros, they started their trading careers losing most of the time. Then learned to focus on small wins to build their accounts and their confidence. Only after years of practice and experience, they started hitting home runs as a mere side-effect of how they mastered their small game.

Okay I'm rambling, but hopefully you enjoyed the trade recap on FIT and sorry for the delay. I still have a day job that likes to divert me away from trading quite often. Oh well, gotta roll with the punches.

Take care,
Jory

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