Thursday, April 29, 2010

A failed support long trade

One of the rule of thumb rules of support buying is you want heavy volume when trading breakdown/breakout but light volume when you buy support or short resistance. Why? Because if stock has heavy volume it can go straight through the price. This is what happened with our CAM trade today -- we missed a great trade in it by seconds. It happens, and we're not particularly upset (especially since we've had a very good day trading other stocks from our list) but it's always a good reminder of how easily panic selling can go through support. The traders who go after these type of trades often take a lot of pain -- sometimes it works, and sometimes it doesn't. That's not our style -- not knocking that type of trading, but it's just not what we do.

This is the chart we were looking at -- we have 200SMA initial support and then secondary/tertiary overshoot strategy at 36 and 35.5

A few notes -- CAM was a buy on that first test at 42 near open, and as we always write (included in early morning blog post), a short on the second test (of 42) Now that would have been the best trade of the day!

We always write to wait for reversal before buying -- when it's slow you can wait for the candle to hammer up and buy the next candle. On a move like this it's impossible unless you want 2 point stop (we don't). So price actually did reverse when we bought and we had stops below on both -- buy you can't see it on the candle as it went too fast.

All in all we lost combined 64 cents combining all three trades (one win, two losses). A 3 point gain would have been, of course, much sweeter, but you can't get them all every time.

Retrospective musing? With that much panic chances that it would simply stop and reverse at our support levels was not likely. We should have either not gotten involved, or waited for a more clear sign of reversal with smaller size and wider stop.