Trading the ADX Break 1-22-2014 the adx break... · 2018. 7. 23. · Back to psychology. In his...

Trading the ADX Break

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We’ve all heard the story of thousands of lemmings following their leader off the cliff to their deaths. That lemming story is bullshit; they don’t do that. They have, however, been known to swim across bodies of water that were too wide for their physical ability, causing mass drowning. Either way, the lemming story is a good one that explains mania. Many may think it’s strange to start an essay on a day trading pattern by discussing the psychological subject of mania and other forms of “social proof.” But, the ADX break (a.k.a. pfpd/potential final push down, or pfpu/potential final push up) is an embodiment all these subjects.

Social manias are mass movements characterized by an outpouring of enthusiasm and mass involvement.

“Common to all manias is a vision of salvation, a new way of life, which if realized would radically change everyday life, ushering in a new world of freedom and justice.” In other words, people think that if this thing (the subject of the mania) works out, they’ll be “set for life.” This mindset results in mass brawls at soccer games, real estate bubbles, and stock market bubbles.

Now, to the stock market. Market movement really just reflects the collective psychology and actions of all participating traders during any time period.

Imagine that for weeks on end, story after story hits the news about how the stock market is making new record highs.

Finally, the Average Joe gets a flash of brilliance. Average Joe (sometimes called the “dumb money”) finally throws his cash into the market, and the market goes even higher. He’s like a lemming following the leader.


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Seasoned traders (the “smart money”) take notice of the constant media attention to the new highs and he gets very cautious. He tightens his stops, takes profit, or prepares to go short. He’s seen this “irrational exuberance” before.

After the last minute “rush” to buy the market capitulates and sells off. Average Joe who bought at the top is left feeling like a moron, while seasoned traders make a killing selling shares at the top, and/or shorting during the downturn.

Back to psychology. In his book, Influence, Robert Caldini Ph.D. lays out his research on human behavior. He says, simply, that if a group of people are doing something, others think it must be right. He calls this mentality “social proof,” and it is especially true when we are feeling uncertain about something.

Additionally, if we feel bonded with, or familiar to a group of people doing something, we are even more influenced by that group. A shy kid who normally would never do anything wrong might sneak into a movie theatre when prompted by his friends. It’s that peer pressure thing.

Now, “There’s a flip side to that coin” (as Robert DeNiro’s character said in Heat).

Let’s say that one day a stock is trading in a range, but then gets some bad news. People start to panic and bail out. Some people get so scared that they sell at any price. Like the story of the lemmings jumping off a cliff, they just want the hell out! The selling gets manic, and the “dumb money” sells at the very bottom. Then the selling stops. The bubble bursts. The smart traders come in for the kill; they pick the bottom and make a killing as the stock climbs back from the brink.


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I read one analyst who said most money in the market is made when things go from bad to less bad. From a long perspective, that’s true, and it’s true in the action of WLP in the chart above. In this time frame, things got bad…then not so bad. The people who bought at the bottom, the ones that could read the indicators, made money.

The “bad to less bad” thing is true in the reverse. When things go from great, to less great, short sellers make a bundle, too.

So, without being a mind-reader, how do you know how to trade these tops and bottoms?

That’s what we’re going to talk about. We’re going to talk about one indicator used in day trading called the ADX line that helps a trader find these intra-day tops and bottoms. But, despite the emphasis on


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the ADX line, we can make these trades without it. The ADX line is just an easy way to summarize the market action in these (often) manic trades. A seasoned trader can predict reversals by watching only the candles and volume. The ADX line just clarifies things.

The ADX line is an indicator that reveals trend strength. It doesn’t tell the trader the direction of the trend, just the strength of whatever trend the stock happens to be in. As a stock climbs higher and higher (or lower and lower), the ADX line climbs, too.

The ADX calculates the buying and selling based on the last 14 bars of the particular chart (14 is standard, but could be changed). So, at any moment, the ADX line will read differently on the one-minute chart versus a five-minute chart, versus a daily chart.

Here’s the thing….an ADX of over 40 is a strong trend. An ADX of 50-75 is a very strong trend (either rising or falling). We’re going to concentrate on those high ADX values that can often mean the bubble is about to bust.

When a stock is falling hard and the ADX climbs to 65 (for example), a smart trader knows that it is likely to bottom and soon reverse.

Using a high ADX to both short stocks that have made a big run up, or to “pick the bottom” on fallen stocks can give awesome opportunities. In fact, a good trader can make a good living out of trading just these setups.

A fellow day trader once told me, “Find a pattern you love and make it your bitch.” The ADX is my bitch. I love it because it can be so predictable and so profitable.

In fact, the ADX break provides one of the safest and most profitable trades of all the day trading patterns.


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Let’s face it. New day traders often have trouble. They often blow up their accounts or get frustrated before they can become consistently profitable. One of the reasons for this failure is that they’ll take ill-defined trades.

The ADX break setup, when traded correctly, is probably the most well-defined day trading pattern out there.


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Why is that? The ADX break gives a very definite entry and stop/loss point. For the new trader, the less subjective analysis in a trade, and the more objective criteria in a trade, the better. There’s less doubting when there’s a nice rule-set like that.

A few years ago, I did a brief study of ADX breaks and found that on average, the ADX break trade, when played by the rules, had an average return of 4.3% from entry to peak. Now, no day trader gets an entire 100% out of an intra-day move in a stock, but you get the idea. These trades can be very profitable with very low risk in a short period of time.

This small study found that using 1000 shares, the average profit was $979.17, with an average potential loss of $229. That’s a risk to reward ratio of 1 to 4.28.

The study also showed that in six out of 16 ADX breaks, the price went below the entry (not below the stop) for a period of time before resuming the uptrend.

But, here’s the great thing. The study also showed that there were no stop-outs when entering these trades correctly. These stats tell us that the trader must be willing to fight the urge to go to break-even too quickly. Despite the results of the small study, stop-outs can happen. So, a trader must be able to emotionally and financially handle a potential loss from a stop-out.

We know the ADX break pattern works. The challenge is to get great at finding ADX break trades and recognizing the ones worth putting your money to work on.

When a trader gets adept at identifying which chart (1, 2, 3 or 5 minute) will give the best entry, getting stopped out is not very likely.


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Much of that process is finding which time-frame the pattern will be the cleanest on.

When an ADX break pattern is forming, a trader should identify whether the 1, 2, 3 or 5 minute chart is giving the best shape for a good entry and stop loss. If the two-minute chart looks ragged, perhaps a switch to a three-minute chart will clean things up.

In stocks, when everyone is selling, everyone sells. They panic. That’s represented in the charts, of course, by a crescendo of red candles. Eventually there’s a point when the sellers are no longer in control, and the buyers swoop in for the bargain. That sentiment reversal is represented in the charts by a hammer, doji, double bar, bullish engulfing, or other reversal sign.

What’s a good ADX break for a long trade? In general, the perfect ADX break trade happens when bad news (or just unknown selling) comes into a stock when the overall market is flat or trending up, while the ADX lines rises to a minimum of 40 and mass selling comes into the stock.

On bottom feeding plays, higher ADX’s (50, 60 and 70+) usually give better, longer lasting and faster rebounds. A “V” bottom chart is ideal. The stock then finds support, forms a reversal signal at the bottom, buying comes in, the ADX “breaks” and the stock rebounds handsomely.

ADX breaks work on any time frame, but I typically (not always) use a two-minute chart for entries on a stock that has fallen hard and has nice “shape,” and a five-minute chart for exits. A shape change on a five-minute chart is often a great indicator to get ready to trade the ADX break from a two-minute chart.


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Typically, after sell-off capitulates, I buy at the first break of a previous two-minute candle’s high for the entry with a low of day stop.

If a stock is falling erratically (whipping around), I may use a three-minute or a five-minute chart for the entry. If it is falling very hard and fast, and then gets “clean,” I may use a one-minute chart for entry. Experience in the saddle helps you read these trades better and better.

The very best ADX setups are stocks that have fallen more than 5% (ones that fall 15% or so can be huge money makers!) and find support at a daily moving average.

Let’s say RCL is trading in a consolidation at 10:25 am, and all of a sudden it starts to fall hard. A quick look at the news (if you choose to do that) tells you that there’s a report that RCL lost a court case. The stock falls from $43.50 to $42, to $41 and it keeps falling. There’s massive selling going on.

So now you ask yourself, “How far will this puppy likely fall based on the charts?”

You look at the daily chart and you see that the 200 day moving average is at $39.25. The five-minute chart shows an ADX of 35 and growing and the selling is massive. There’s panic out there.

As RCL falls, more and more sell volume is coming in. People are bailing out like crazy. The red candles are getting longer and longer, giving the chart a “waterfall” appearance. All the while, the ADX line is climbing higher and higher. The ADX is now at 55 as the stock price falls to $39.25 (where the 200 MA is on the daily).

Now there’s a strong probability of a potential rebound and you are ready.


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The stock is now down 9% in a matter of 10 minutes. The holders of RCL are jumping out windows, slashing their wrists, popping cyanide pills and you’re licking your freakin’ chops.

You try not to let your emotions get the best of you... you’re patient as you stalk your entry point. At this point, you remember that the first one in the battle gets slaughtered; you want to go with the flow when thing reverse. You know that if you go in too early, you could get corn-dogged.

Now you notice that the falling price slows, and a hammer candle forms on the two-minute chart. The massive red selling bars turn to blue buying bars as buyers see the bargain.

The price of RCL now starts to move up and you buy 1000 shares at the first break of a previous two-minute candle's high at $39.45. You immediately place a stop one cent below the low of the day at $39.24. In this case, your maximum loss (unless there’s slippage) is $210. You can handle that loss without shedding a tear. You know that with some luck, RCL will make up a good bit of its 9% fall. Your risk/reward is great.


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In this hypothetical trade, RCL first goes below your entry of $39.45 down to $39.30, and then, within a minute or two, is up five cents from your entry. Here’s when you fight the urge to put your stop loss right away at break-even because you know this setup is near-perfect, and the market isn’t really fighting you. You know that stocks oscillate on their way up or down. The chart had beautiful “shape”… you scream “You hump!” at the chart, as many traders are known to do.

Then, a minute later, you’re cleanly above your entry and holding. Thank God.

RCL climbs further and holds nicely above your entry. Feeling confident now, you place a stop at break even. You relax a bit. RCL makes a nice initial rebound to $39.99, and starts to hesitate at


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the whole number. You decide to tighten the stop on half (or a third) of your shares to protect some profit. Now, you have at least $270 in the bank.

You get up from the computer and get a shot of whiskey because you see that RCL is fighting to get through $40. You want to throw up, but you remember that the worst that can happen now is you’ll make $270 and break even on the rest. Big freaking deal. You come back and see that RCL is at $40.75. Wow. Now you feel like you mastered this game!

So, you look at the five-minute chart and find that there’s an area of consolidation between $40.40, and $40.50. You up your stop to $40.35, just under that consolidation. You fight the urge to micro-manage the trade, and make yourself a corn beef sandwich… because now you are the master of corn beef.

You go back to looking for other trades, and in your patient demeanor, two hours later you see that RCL is all the way back to $43.50. The news was actually pre-mature and RCL didn’t lose that lawsuit.

You punch out at $43.50 with a profit of $2,295.

Son of a bi@#$!

Let’s review:

� We consider the trade if the stock has fallen hard. Not a “grind down,” but a waterfall.

� We want the ADX to rise cleanly above 40. The higher the better.

� We want to see that nice shape. � We want massive selling that turns into massive buying. � Falling to an area of support (like a MA on the daily) is a

beautiful thing. That makes the trade even better. � Enter on the first break of a previous two-minute candle’s

high (in general). Or, a hammer or doji at the bottom on the two or five.


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� A capitulation candle such as a long “blow-off” red often precedes the turn.

� Never take more shares than would be harmful if you were stopped out.

� Shape is important! � If you want, take some profit and be patient on the rest! � Don’t take an ADX break if the overall market is falling hard,

unless the market itself is doing an ADX break. � In general, a very high ADX (60 plus) will give you a better

comeback. Let’s analyze the charts of DDD below. The ADX is high, over 55 on the two-minute chart.


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DDD fell and went into a decent waterfall shape (not perfect, but okay). On the two, the chart formed a green doji, a nice reversal candle. We also see the MACD forming an “hourglass” with the ADX, and massive selling turning into massive buying. Nice! We enter on the next candle above that doji’s high at $82.56 (first break of a previous two-minute candle) with a stop at the low of day (lod), or $82.26. On 100 shares, that’s a $300 potential loss. Within 12 minutes DDD is at $83.30 and you are up $770. On the five-minute chart, you see that there was nice shape change on the way down, and it also formed a beautiful hammer.

Trading “reverse ADX breaks” can keep you busy, especially in the later part of the trading day. Stocks that have done very well, have a very high ADX, and then go into “shape” on the five minute chart can be shorted for some easy coinage. Remember that stocks fall five times faster than they rise. So, there is more patience necessary to pick a top to short on these high flyers. Let’s say CCL has news. A lawsuit about people puking their guts out from tainted food on a Caribbean cruise is dropped. The stock climbs and climbs and you notice that eventually, it gets parabolic (goes into shape). The ADX gets to 55. Now, this scenario is even better if the stock goes into shape into an area of resistance like a 200 day moving average. In this scenario, now you get a doji on the five minute chart. You see the blue buying turn to selling. In general, for these reverse ADX trades, you buy at the first break of the previous five-minute candles low, with the stop at a penny above the high of the day. These short trades, like long trades, tend to oscillate.


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Now, let’s look at the charts of FAST above. FAST had been moving up all day. Then, just after 12:30, with the ADX going to 55, FAST gets “shape” on the five minute chart. But, the key is that it gets shape into 50 day moving average on the daily. Wow, load up the brinks. The chances of FAST hitting resistance at that daily moving average with shape and ADX of 55 are great. This one is worth the risk. Now, a shooting star candle forms. So, it’s just a matter of finding the right entry. The five minute chart looks the best, so you enter short under the shooting star on the five, with a stop at the high of the day.


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In this case, I bought 1000 shares at $47.90 with my stop at $48.09, a potential loss of $180. I rode this puppy down to $47.56 where it found support and where I gleefully exited.

The FDO chart above was one of the best reverse ADX breaks I’ve ever seen. It represents the psychology of “unbridged, giddy, euphoria.” FDO was trading in a range, and a false rumor (I found that out later) shot the stock up $3.50 in about 15 minutes. You can see that the price went parabolic, and “blew-off” (notice the hangman) to $68.50. Due to the intense action, the entry was the first break of a previous one-minute candle’s low at $67.85 with a stop at the high of day. Within 15 or 20 minutes, a trader could have made almost $3.00 a share with the short. For those of you lacking math skills, that’s a quick $3,000 on 1000 shares.


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But, you have to trade these puppies safely. Seeing the fast trading action in front of you, it is very tempting to jump in before the trigger in an attempt to squeeze every penny out of the trade. But, remember, the money is in the middle, and the danger is at the edges. Wow, that was good. Let me elaborate and quote that.

“In trading, the money is made in the middle, while the danger is at the edges.”

It goes without saying (but I’ll say it) that you should always make sure your share size is appropriate for your risk tolerance and you must always set a hard stop after the entry. A mental stop is a bad idea as these ADX break trades are sometimes accompanied by intense action. If you screw up your entry, or something goes awray, the price could crash through your mental stop and then the temptation will be to hope and pray the price comes back. It usually will, but you never know. These trades tend to reverse quickly in the beginning and then slow up. They tend to find support as they fall to moving averages on the five. I find that once I’m safely in the green, and go to break even, I do better by not micromanaging these “can’t lose” short trades (or long ones). I suggest looking for something else to trade, or just walking away from your platform. You may find yourself up $2 if you come back two hours later.

A huge intra-day fall in a stock can make for a terrific setup. When a stock gets news that causes a drop of 15 or 20% (or more), and forms an ADX break from that mania, then back up the money truck! Usually a huge fall like that is from overblown news that people overreact to. Let’s take a look at GALE in the chart below. The stock fell so far that it crashed right through the 15 MA on the daily chart and just kept falling. It finally capitulated with a hammer


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candle on the one-minute chart when the ADX was above 80! Plus, the shape was beautiful. The entry was $5.68 with a stop of just 13 cents below at $6.55. Notice the massive selling (a million shares a minute) just before the capitulation. Remember, the money is made when things go from very bad to not so bad.

So, can you get corn beefed in an ADX break trade? You bet you can. But, this happens mostly from entering too soon, and trying to catch every nickel of the trade. Catching a falling knife is a very hard thing to do without getting hurt.


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Wait until there’s a definite reason to get in. Here are some things to look for:

1. The spread. Often a spread can get wild as a stock is falling. 2. Clean candles, look for the right shape on a chart. 3. Look for a reversal candle. 4. Look for massive selling that turns to buying. 5. An ADX break. 6. The first break of a previous two’s candle (in general).

The correct shape on an ADX break is key. I can’t emphasize this enough. Your chances of succeeding when the chart has the right shape is dramatically higher.

The right shape represents the psychology we want to take advantage of; panic selling (or unbridled euphoria). More and more people are bailing out of the stock. Remember that when more people sell, that causes more people to sell.

What does that look like in a chart? The red selling candles get longer and longer. And then, ideally, they’ll be a capitulation or a “blow-off.” That’s when the mass exodus ends in a crescendo. And, then the reversal candle.

That perfect shape, when speaking of both a falling or rising stock, is a “waterfall” or parabolic shape. An ADX break with small, erratic, “unclean” candles isn’t what we are looking for.

There are several ways to find ADX breaks. Chad Harper, from our trading room, created a workspace with a scanner that scans the universe of stocks in real time looking for the highest ADX’s based


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on the one minute chart. It is helpful to periodically look at that scanner and see if any of those high ADX have the right criteria for a trade.

Jesus from TradeStation created a scan for us that looks for stocks that are at their low of the day, have been down at least three one-minute candles in a row (falling) and have an ADX of at least 30. The purpose of this scan is to find trades before they are capitulating. This scan has some inherent disadvantages because if a stock is falling, but has a green candle that breaks the “three-red-candle” criteria, it will ignore that stock. It also only updates once a minute. However, it does find lots of good ADX break setups.

Any radar list can be altered to include certain criteria such as high, low, bid, ask, etc. It can also have any ADX. Double clicking that column will order that universe of stocks from high ADX to low, or vice versa.

But, probably the best way to find these trades is to have several experienced traders always looking for these high quality trades.

Let’s look at the chart of LAMR below. LAMR formed a nice ADX break trade when the ADX was at 60. But, what was really nice was that LAMR fell to the 50-day-moving average on the daily chart. There, right where we would expect, it bounced.

The entry on this stock on the five-minute chart was $49.78 with a stop at $49.55. At the close, LAMR had bounced to $51.64. On 1000 shares that’s $2,090, or 3.7%!


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These well-shaped ADX break trades rarely fail if entered correctly and with the overall market. They also can give huge returns.

It in uncanny how stocks that have fallen hard intra-day find support at moving averages on the daily charts. With LAMR, it was the daily 50 day MA. Big drops down to the 200 day MA work incredibly well also.


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Okay. It’s confession time. So, here are some of the many stupid things I did my first year day trading. Don’t laugh. You’ll probably make all of these mistakes yourself, but maybe you’ll learn faster and hit less landmines if you remember the pathetic stuff I’ve done. Now, don’t get me wrong. I’m busting my butt learning this. I have a passion for it. I love it (and sometimes hate it). But, there’s so much to know, and so much emotion to get through that these mistakes are part of the tuition of learning. So, here goes…

Day trading is a tough skill. There are a thousand things you’ve got to know, and even then, you’ll never be perfect at it. In addition to knowing the patterns and the market, all trading systems have some intricacies that take time and practice to master.There’s a learning curve! When you are consistently making a few bucks trading 50 or 100 shares, then switch to live trading and master being profitable at that same share amount. Don’t be too anxious. The market will be still there when you are ready.

At first, I didn’t have a limit as to how much I allowed myself to lose in a day. That was a mistake. Have a loss limit ($200, for example) based on a reasonable risk tolerance for your account size If you lose that amount, that’s it. You’re done for the day. Stop trading, or virtually trade. Stopping trading for the day does do two


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things. It pisses you off because you want to keep trading, but that makes you introspective on what you may have done wrong. If you don’t stop trading at your loss limit, you will go into the “trader’s death spiral.” You’ll make riskier trades, revenge trades. Then, you’ll really be sorry. Don’t trade angry, and don’t trade when you feel you have to. Your loss limit should be based on your individual circumstances.

Many times…. I mean many, many times, I made a great trade at the open and therefore thought “I’m good at this.” So, I subconsciously thought the next trade was a “sure thing” and did not run through all of my checklists. The market would laugh and take back my money. I’ve only done this a few hundred times. Maybe I’ll learn soon. It’s easier to make money on your first trade because the market has the strongest trends at the open. When its lunch time, and the volume is down, the trends are less forceful, and it’s harder to trade. Do your diligence with each new trade.

It seems rudimentary, but a trading journal helps! You can improve on your skills faster if you write down. The few minutes this exercise takes you “away from the trading screen” is worth every second. Xerox those trading sheets, get a loose leaf binder and a three-hole-punch and keep a record of how you screwed up (and did well) with each trade and commit to keep doing that. Someday, if you keep doing it, you won’t have to. Get SnagIt and use it. SnagIt forces you to put your trades into words and preserve them.


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One great thing a trading journal/SnagIt can do is help you determine what set-ups, and what times of day, are most profitable for you. You may want to specialize in certain set-ups after a while.

I remember when I first started, my heart would race the instant I pushed the button. I’d see those dollars running up or down, and panic. I’d make stupid decisions based on fear or greed, and not the charts. Then, I miraculously took Rick’s advice and found that trading a hundred or two hundred shares removes much of the emotion, and helped me focus on the trade. I recall that our pal Markie-Mark said that he “almost threw up” when he made his first day trade.

You’ll do this a hundred or so times, too. I jumped into trades way before the pattern fully developed, or thinking my stock wouldn’t be affected by what the market was doing…. only because I wanted to be in the game! But, sitting it out and waiting is part of the game. Just like EOD, wait for the trade to come to you. You may wait 30 minutes watching something develop, waiting for the exact time to jump in. Then, it doesn’t happen. That’s just tough noogies. Some put their maximum amount of trades per day in their rule set.

When I entered a trade, I’d focus entirely on the one-minute chart. Remember, that chart is for entries and exits, and not for trends. Look at the five minute chart until you see the pattern, and then go to the 1 for the entry or exit. Watching


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only the one-minute chart will drive you nuts and cause you to make pre-mature decisions. The one-minute chart may come into play a bit more in the opening minutes, but after that, concentrate on the five, the DOW, and the NAZ.

On TradeStation, there’s a button that will show you how much you are up or down in a position(s). Turn that baby off. Watching that thing will cause you to make decisions based on money and not the pattern. If you trade to trade well, and forget the money, you’ll do better.

That sounds dumb, I know. But, even when you are great at this, you’ll have 30-40% of the trades go against you. You have to know before you press the button where your exit will be if things go against you. And, that exit point needs to be rational, based on the system. You can’t say, “I think AIG is ready for an ADX break, so I’ll enter here, and put a stop $0.02 cents below it because I’m not willing to lose more than $10.” Yes, your losses will be small, but it won’t work most of the time. You’ll nickel and dime yourself to death. You have to be willing to lose money to make money based on the system. If you look at some 5-minute charts, it may look like some stocks go straight up for an hour or two. But, it doesn’t happen that way. If you look at a one-minute chart, you see more oscillation. Prices go up and down, and you have to allow for a proper amount of “wiggle room.” If you are fearful about losing too much money before pushing the button, you are trading with too many shares, or are unprepared.


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Control risk through your knowledge and position size. If you are trading 100 shares of a $100 stock ($10,000), you need to do the math beforehand and know that if it goes against you, you’d be stopped out at (as an example) a $100 loss. Assume this will happen to you before you push the button.

(well, it did, but it was two months later). Once, I was trading a volatile rare earth stock called REE, and got caught up in the excitement. It was rocketing up, and I quickly bought 1000 shares at $12.40. I tried to immediately enter a stop-loss but hit the wrong button. I wound up buying another 1000 shares. I sold those 1000 quickly for a small loss. But, REE fell fast, and before I knew it I was down $500. Then, I felt that I “couldn’t sell now” because $500 was too just much to lose. So, in my head, I turned this day trade into an EOD trade. That was another mistake because EOD trading has a whole other set of criteria, and REE didn’t fit those. But, I reasoned, “It will come back.” I held that stock for a month and sold it for $9.50. I lost $3,000 on a trade that I should have had a maximum loss of about $200. Okay, recently REE came roaring back, and if I would have held on, I would have made several thousand bucks. But, REE could have gone down to $3! I’ll never do that again. I have a friend who does this a lot. Psychologically, he’s not wired to be wrong. I think every trader should be required to learn to lose gracefully. Losing small is actually a sign of a good trader. My psychologically impaired friend has been pretty lucky. Most of the trades he


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held because he didn’t want to be wrong have come back. But, in the interim, he can’t use that capitol to stay in the game. And, he gets negative about it. The saddest thing is that he’s brilliant at trading. He’s just got that one trading flaw that’s keeping him from becoming a multi-millionaire. He knows it, too.

Sometimes you’ll run across a stock that had some intra-day news and it rockets one way or the other. The spreads go nuts, and they trade erratically. Jumping into one of those stocks can be a disaster. Sometimes they move so fast, you could be down 25 cents on a ten dollar stock the second you hit the button. Or, you could read it right, and make a lot of money real fast.

If the action in a stock doesn’t make sense, don’t trade it.

Many times, I’d get in a trade, make a few bucks, and then get out. Then, in the next few seconds, the stock would run up and I’d feel cheated. I was mad at that stock. So, I’d re-enter the trade based on emotion (not the set-up), and lose what I made in the first trade.

Recently, I realized that I don’t have to buy 500 shares and then sell those 500 shares at the proper time. I can actually make money on the first 250 shares, and place my stop at “break-even” and let the rest go for a “homerun.” Duh. As an example, I’d trade an ADX break with 500 shares. I’d get in at say $20. The stock would move to $20.20. I’d be up $100. Then, I’d place my stop closer and closer to the selling


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price as the stock moved. Maybe I’d get stopped out at $20.30. I’d make $150. That was dumb. On a good ADX break, that $20 stock may go to $22 in the next three hours. Now, I’ll sell half when up a decent amount, and place my stop at break even or give even more “wiggle room” and let the rest ride. It may go higher and higher all day. Selling some for a sure profit satisfies the greed part of your mind.

My buddy made over 250 profitable trades in a row. I was seriously impressed. But, then I realized that to do such a thing, you’d have to be breaking the rules or be extraordinarily lucky…but luck always runs out! 30% of trades will go against you even when you are great at identifying the patterns. But, if you cut those 30% very small, and make decent money on the 70%, you’ll make money.

I often would see a stock that I initially missed on the breakout that was now in a full-fledged Brinks pattern. I’d get all excited and enter on the blow-off candle thinking “this thing is going to the moon.” Well, it didn’t. I entered at the high and paid the price. If you miss it, you miss it. Don’t chase it.

I sometimes traded without looking at the spread. The spread on NFLX, for example can change wildly from minute to minute. Sometimes it’s 10 cents or more. Don’t forget to look at the spread, especially in stock you are not familiar with.

If a stock isn’t trading an average of a million shares a day, leave it alone. You can


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have severe slippage. That means you could set your TSL for $19.20 and it will sell you at $18.90 because there are so few orders placed in the market and none may be at your level. That hurts.

Trading pre-market is different. But I didn’t know that when I did it. The most important thing is that you can only trade using limit orders. You can’t put in a trailing stop loss. Also, stocks can trade kind of wildly because the bid and ask can be so far apart, and stocks are more thinly traded. Watch out if you don’t have experience trading pre-market.

I love the open. So, on Monday, Wednesday and Friday, I kind of pray that nobody walks in at 9:25 am. If you can arrange your schedule to not see patients between 9:15 and 10:00, you’d be better off. Your practice can be negatively affected by day-trading. You’ll be subconsciously wishing patients will stay away while you are in a trade. If you do trade at work, be sure you know how to use the stop loss and trailing stop loss feature of your platform. Don’t walk away unprotected.

There’s enormous benefit to looking at the daily charts of the stocks you are day trading. If the daily pattern indicates a long or short breakout at a certain level, you can be ready for that setup.

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Trading the ADX Break 1-22-2014 the adx break... · 2018. 7. 23. · Back to psychology. In his...

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