The stock market open on a Monday can very often be a fantastic opportunity to lock in some gains for a nice strong start to the week. Everyone is back at it, some are looking to lock in gains from positions held from last week, news may have come out over the weekend and traders are scrambling to get a piece of the action or dump a position that’s reversing… in other words, volume and volatility. Two key ingredients needed to create the ideal pricing action.
Today was all wrapped up for me in about 12 minutes thanks to $DPW and $MARA. I played it very safe and waited for the setup to come to me. I took two scalps on each ticker and locked them in very quickly in order to minimise risk. In the first 30 mins of the session I’m looking for quick gains on volatile stocks, albeit on relatively predictable setups.
If you’re new to trading then watching a stock move in the first few minutes of the open can look scary and incredibly erratic, but as I’ve said in previous posts if you can simplify it and break it down to a very specific type of setup then you’re taking the gamble out of it and removing the emotion from the decision making process. When I first started trading low float / low priced stocks my heart would be pounding, and I’d feel under real pressure with my entries and exits. By understanding how a stock tends to behave when the bell rings means that you can wait for it to present you with the ideal entry rather than just grabbing a position just because it’s up 5/10/15% in pre-market and it looks like it could run to new highs today. Sure, if a stock is up big from the previous day because of some news/insider buying/pump then yes it could potentially continue to run and buying as soon as the market opens may well mean at some point in the day you’ll be sitting on a nice hefty profit… but why take that risk?
If you look at almost any stock chart you’ll see a fairly choppy run up or down, and buying into something just because it looks like it’ll go up on good news isn’t a strategy that’s going to give you any real consistency. The stock market can and will do whatever it wants… massive gainers can nose dive for what might seem to be no reason at all! Understanding where the support and resistance levels are, and targeting an entry that gives you minimum exposure to risk, and maximum opportunity to lock in gains even if it doesn’t give much follow through is key to achieving safe and fairly predictable “bread and butter” profits. Small but consistent gains add up, you don’t need to swing for the fences and go for huge headline grabbing wins! Yeah they’re nice, but they’ll come anyway when you get your entry and exit game strong, as some trades will run really nicely and you can stay in them until it gives you a reason to get out… as long as you lock in some gains along the way. Remember, as a trader you’re actually a risk manager. Buying a big percent gainer that’s dipping near a previous support level which is currently holding up will very clearly define your risk and give you the room to test the overhead resistance and/or day high which may well be 30-40+ cents up whilst your risk is only 5-10 cents below (depending on your entry). Now obviously there is a bit more to it than that, but the point I’m making is you’re looking for a very specific setup, and if all of these factors are met then it gives you the confidence to trust the plan. Restricting your trades to ones that give a 3/4/5/6-1 reward/risk ratio means the inevitable losses will always be outweighed by the gains. And even if it sets up perfectly but then doesn’t actually follow through then your either locking in a small gain or a small loss, but worst case you’re only losing what you’ve already determined to be an acceptable loss. Risking 5 or 10 cents a share to gain a potential 30 or 40 cents or more is a fantastic ratio, and if you can stick to this then the trades that don’t work out won’t eat up all your profits.
Having a strong trading plan is so important as it will focus you, and you’ll have the necessary clarity to make your entry and exit decisions based on the pricing action, rather than your emotions or ego! We never know for sure what a stock will do, so sticking to the plan will keep you safe and enable you to protect your funds and increase you win/loss percentage.
I highly recommend testing out your plan over a period of time, and then analysing the facts of how it holds up. If you know your plan means 60-80% of trades are green then your stress levels never need testing too much as the other red 20-40% will only ever be small and acceptable.
Let me know what works for you? Trade safe and trade the plan!