[SEEKING INPUT] - Stock Setups with an Edge

[Tall Mike]

Hello ET community,

Newbie trader here looking for some advice on a trading methodology I am researching. I am sure there are people who already trade this. Not claiming to invent this, but rather sharing my observations and looking for some input in things maybe I am not considering or missing.

Description of the trade set up:

1. Large gap up from the night before
2. Strong momentum in the direction of the gap on the open
3. A pullback and consolidation of CLEAN (this is a must!) price action around mid-morning that holds the opening gap.
4. Once I see clean price action consolidation while holding the opening gap, that is my trigger to get in with the anticipation of continued momentum in the direction of the gap.

Things that will immediately disqualify a stock from this type of trade:

1. Any type of hard price rejection on the open that forms a lot of candlestick wicks or something of that sort
2. A breakdown below the opening gap
3. Extremely messy price action - The type of set up I am looking for has to be textbook. It should be easy enough to see where if you show 10 different people the same set up they would all agree and can easily see what I am looking at. No room for subjectively with this.

It is probably best to show you with a picture, rather than me continuing on trying to explain (SEE PIC ATTACHED).

I feel like this is the textbook example of the trade I am describing above.

As a beginner, I think focusing on one type of set up could be beneficial to build some skills around this and get good at one thing instead of jumping all over the place.

QUESTION - Am I falling victim to hindsight bias here? Could I have really seen this perfect set up in real-time?

Id appreciate any input on this. Feel free to rip it to shreds .

 

[SteveM]

QUESTION - Am I falling victim to hindsight bias here? Could I have really seen this perfect set up in real-time?
Id appreciate any input on this. Feel free to rip it to shreds .

This sort of thing can work....a few months ago I saw study that showed buying stocks that gapped up on the morning following an earnings release, and holding for 2 days had a positive expectancy.

You could probably test some of this stuff out pretty simply in excel - "if xyz stock gaps up by x%, pulls back by y%, and I place a limit order to buy at y% and hold until the end of day, what do the returns look like?"

 

[MrMuppet]

@Tall Mike , look I don't wanna rain on your parade but I think you're being way to one dimensional here.

Lot of beginners fall victim to "price action" trading and don't make any progress because it's just too simplistic.
Trading is not about memorizing some price pattern and trying to find it over and over. The price pattern is just a framework for risk and size: Where do you get in, where do you get out and how much are you going to throw at it.

What was the overall market doing, what was the price history of the stock you're trading, what macro drivers is the stock correlated to, where there any news, did the entire sector catch momentum or was your stock an outlier and if so, why?
Has your stock a history of autocorrelation? What's the daily return profile aka. how much of a move can you expect. What is the average daily volume of your stock, how does option volatility, skew and term structure look like? Is it part of an index?

Put your setups together from situations, then apply price action and some common sense. Price patterns in isolation stopped working probably 20 years ago when people started using computers to figure out the impact of context.

 

[Tall Mike]

@Tall Mike , look I don't wanna rain on your parade but I think you're being way to one dimensional here.

Lot of beginners fall victim to "price action" trading and don't make any progress because it's just too simplistic.
Trading is not about memorizing some price pattern and trying to find it over and over. The price pattern is just a framework for risk and size: Where do you get in, where do you get out and how much are you going to throw at it.

What was the overall market doing, what was the price history of the stock you're trading, what macro drivers is the stock correlated to, where there any news, did the entire sector catch momentum or was your stock an outlier and if so, why?
Has your stock a history of autocorrelation? What's the daily return profile aka. how much of a move can you expect. What is the average daily volume of your stock, how does option volatility, skew and term structure look like? Is it part of an index?

Put your setups together from situations, then apply price action and some common sense. Price patterns in isolation stopped working probably 20 years ago when people started using computers to figure out the impact of context.

No worries, I definitely appreciate the input.

I just want to gather as much information as I can so that I can keep researching and figuring out what does works instead of what doesn't.

Your probably right, and I suppose now its back to the drawing board to build on this concept a little more, instead of just looking at those few factors.

 

[MrMuppet]

No worries, I definitely appreciate the input.

I just want to gather as much information as I can so that I can keep researching and figuring out what does works instead of what doesn't.

Your probably right, and I suppose now its back to the drawing board to build on this concept a little more, instead of just looking at those few factors.

Nah, it's a start, no need to throw everything away

If stocks are your thing, get both books by Mike Bellafiore (the playbook and one good trade) and try to get your trading journal going. You will generate your ideas from trading and journaling, not from data mining and research.

It's the process that needs to change, not the setup.

Good luck

 

[wootspurser]

It is actually good to make a trading methodology but I have to burst the bubble here as no single methodology is going to help you with multiple trading. You have to keep bringing alterations to your approach as the market keeps changes. I would suggest you read and learn more and more about it.