Base and Break: DRYS

Grasp the following, and you will comprehend the base and break, which is the primary system in which we make our living.

1) A great daily that has been in our newsletters repeatedly over the last week.

2) Today the stock gaps up with volume: probably the best combination of all is a gap-up, base and break to target.

3) base and break - failed

4) base and break to target - successful

As soon as the stock gapped up (3%) it became our focus for the day (we're only watching around 10 stocks, so it stuck out easily). It was the only stock with volume on our list. The stock set-up at 86 for a base and break. First entry was to buy the break, and as usual, stop at any reversal.

Step 1: Buy this base and break at 86.

Step 2: Get out immediately as the stock has reversed back into the base.

If you can't move fast, then our type of trading is not for you. This is not the type of system in which you put on multiple positions and go get a coffee. This system requires attention and the ability to move quickly. If you freeze the 20 cent loss could turn into a 1.4 point loss.

As long as the stock does not fill the gap, and DRYS did not, do not lose sight. The stock set-up very well again at 86 in less than 20 minutes. Note how the stock was bought up from that deep spike down. This is a very good sign and shows how much buyers want this stock.

One more time, buy the break of this base at 86 with stop on any reversal. The primary target is, as always, the daily number.

Very smooth move straight from 86 as buyers tripped over themselves buying the stock.

As usual, the stock goes to target, spikes over, and reverses. Sell partial at target, and hold the rest for possible continuation with stop at the new intraday base. The new intraday base at this point was 87.6. Therefore, buy 86, sell partial at 88, then move stop to just under 87.6 in case the stock continues upward.

This is a perfect example of buying the base, and selling the vertical line. The stock set-up 2 points under the 88 daily spot. Active day-traders who bought at 88, which was actual resistance, made the mistake of buying on top of a vertical move a stock that is far away from the base. Swing-Traders have much wider stops than we do (for example 2 points compared to 20 cents) and can be more flexible with entry points.

Good interview

Grab a beer, sit back, and listen to the interview with Upside Trader.


And one more time: subscriber, female, with initials A.P. who used the university e-mail address in Califorinia, please contact us as none of our e-mails are reaching you...

Excerpt from (what will be) today's newsletter

The market was weak today but we had two good runs: VLO from the watch-list, and DRYS from the trading-list. FSLR, unfortunately, gapped above our number.

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The DRYS trade encompasses several lessons that are constant in our system, so let's go through it in detail.

1) Volume and relative strength were excellent. Volume was around 40% of daily in the first hour and stock was near highs as market was near lows.

2) Notice how DRYS gapped up and held the gap, even though the market kept going lower into the red zone.

3) Base and break 1 point under the daily resistance at 77. This was entry: buy on break of 77 with stop on any reversal.

4) Don't forget how often our stocks set-up exactly 1 point under the spot in a base and break pattern.

5) Always buy from the break of the base (low slope) and sell into vertical rise/spike (high slope). At 77 the stock is just breaking the flat base; at 80 the stock is vertical.

When we saw DRYS gap-up with volume we started feeling confident that the stock would go today. When the market started going into deep red zone and DRYS stayed green, we grew more confident. We bought an initial position just over 77, added two times between 77.3-77.5 when it became clear to us that the stock was going to make a run for resistance. In the first spike towards 78.5 we started peeling off the position, sold more into 79, and exited on the reversal below 79.5. We contemplated buying back the position around support at 12:40 P.M. but didn't.

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Trader's Segment:

One of our readers sent in the chart of the trade today. Let's take a look:

R.S. writes: "Since the sector was strong I decided to gradually scale into DRYS. I waited until I had a nice profit on the 1st buy; then made the 2nd. As it traded through 78, I loaded up and then sold on the first red candle. I've been tempted to get back in BUT I've learned to be happy with my profit and WALK away."

This trader bought an initial position into the base and break and added as the stock went through resistance. We wrote in this weekend's newsletter how "In moves that we think are significant, for example, a sector break-out, we are often more patient in taking profits and actually add as the stock starts to run." and this is exactly what this trader did today. Instead of selling into 78 (which would often be quite logical as the stock is becoming vertical) R.S. actually bought more. Why? Because of the fantastic volume and relative strength coupled with strong sector strength. There was also no fear as there was an already comfortable margin of profit (since initial position was from 77) from the initial base and break buy.

This is the reason why we write that exit strategies are often nuanced. You need experience in the market and to know when to not push your luck, and when to have conviction that the stock will run hard. Note that this was a very aggressive trade, and one that cannot be done in less benign environments (where we would recommend to sell into the number instead of buying more). All in all, an excellent trade.

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VLOVLO knocked on our number (54) several times before breaking it and going up exactly 1 point. Recall this weekend we spoke about exit profits, and how we like to take off profits at 1 point intervals. We weren't crazy about VLO intraday as the number kept being hit, something that increases the risk of sudden reversal. Nevertheless it worked well for a nice and easy point.

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Both DRYS and VLO moved quite fast and were easy to miss if you were watching many stocks. This is the reason we always write that you should focus on the best daily spots, usually around 10-12 stocks per day. If one stock has early volume (look at volume % in QT) then stalk that stock specifically. One of the biggest mistakes of new traders is watching too many stocks. They don't do any research the night before, run scans, and watch hundreds of stocks hoping to catch the move. They end up jumping on the move too late and find the stocks reversing on them immediately.

Make every trade a good trade, be it for a loss or profit; this means that every trade you take should be from a valid set-up. If no valid set-ups appear during the trading day, then sit aside.

Absolute key to this system is to be in control of your emotions, have enough experience and knowledge to differentiate between good and bad set-ups, and then to develop the patience to wait for the valid set-up instead of trying to trade constantly.

Don't be the panicked, frazzled, anxious noob jumping from one trade to another. Be the calm, rational trader who crouches in wait, and then leaps to the occasion as the stock breaks the base. In our opinion, the system of waiting for daily spots plus defined intraday set-up of buying off the base on stocks with good volume and relative strength, is one of the most consistent methods out there for making a living in this business.

Is Tech Back?

Too soon to tell whether tech is back or not but definitely something to be on the watch for, especially after AAPL earnings this week.

We listed many charts in our newsletter today, and it was heartening to see some good old tech names along with the commodities, which have been hanging around our lists for months.

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For the new subscriber with initials A.P. and who has the e-mail address of an educational facility in California: our e-mails to you keep bouncing back. It's possible that this is not the e-mail address that you use, but it is the one PayPal supplied us with, so please get back to us with a possible alternative e-mail.

Good interview

The following interview is by a fellow trader who has a style very similar to our own:

Worth listening to:

Impatient Trader Interview

Bigger Picture

Some of the best rallies come in bear markets. They're short and they rip the throats out of the bears, especially the weak ones with little conviction. But then the bounces fade and the inevitable downturn continues. Last week was a decent little rally and we'll see how much more fuel she has...but don't forget about the big picture.

From the look of things, it's a matter of when, and not if, we touch Nasdaq 2000.

WallStrip

Say what you want about the man, but this is an entertaining interview, and he comes across as funny and honest. He seems to be missing that filter normal people have between what is thought and what is said (short WallStrip?) but that's also what makes him come across as refreshingly direct.

We find it somewhat amusing how much bad press this man receives and somehow, perversely, that motivates us, in turn, to give him some good press. Sure he's into self-promotion, but that's his gig. No reason to hate. Anyway, he won a place on our blog (and no, we don't trade nor have any interest in trading penny stocks).

The Ultimate Blow-out

One of our very own, a "plain vanilla" futures trader (except of the French variety) causes a 7 Billion loss, and very possibly was one of the determining factors in this week's world plunge. Of course this makes the Fed action somewhat hilarious (ultimately it stands to reason that the Fed cut an intrameeting 75 pts because of a 31 yr old trader's fraudulent antics) .... as they say, truth is stranger than fiction.

Our guess is that on Jan 30, the Fed will still cut 25-50 points, only if to save face.

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"Separately, the U.S. Federal Reserve remains comfortable with its decision to cut interest rates Tuesday in spite of news today that the preceding stock selloff may have been related to a rogue trader, a Fed official said. The official said the Fed didn't know of Société Générale's unwinding of positions when it cut rates. Nonetheless, the Fed remains as comfortable now with its decision as it was Monday night, when it was made, the official said."


Source: WSJ

Update

We got our break of 42 support on the Q's and the subsequent bounce, all on excellent volume. If we can get this swine of a market to close on the highs, this would be an excellent indicator for a short-term bottom.

There are very few good looking longs going into tomorrow, and we'll be looking at very minor spots (30 min also instead of daily) in order to find something for our members.

QQQQ

QQQQ has support on 42 -- which is being touched as we write this post. A failure at this level and then a reversal above on excellent volume would be bullish. However, looking at things it seems that it is just a matter of time before we hit 36 support later this year. Nothing goes straight down, however, and some kind of bottoming action most likely will be coming soon. Nostra culpa for trying to game it before we actually hit support-- be it a small bet, no excuse, it's just bad trading.

We were looking for a 20% hair-cut earlier in Jan and we're almost there in Nas 100.

And to conclude, the Fed is an idiot.

Why the Fed needs a Technical Advisor

It would have been infinitely better to let the market open down, panic sell-off, and then around 2:30PM (classic reversal time) bring out a surprise cut and get the shorts scrambling for air.

Nevertheless, the market is holding well but we've still got 90 minutes to go.... we'll see how they close this pig. Any close around this area (Dow down 150 points) would be relatively bullish. Absolute nightmare scenario for the bulls would be a close on the lows.

And yes, we bought our 3rd installment of Nasdaq calls this morning. As stated before this is not how we trade, and it's a very small bet. Our buy today is very green, but two buys from last week are very red. We'll see how it goes.... even though losing it all wouldn't be a bad thing either to teach us to stick to what we know best. Short weakness, buy Strength (unless at key support/resistance level in oversold/overbought markets).

Cautionary Note

As said previously, we've gone long some index calls. If you are also going long, please use some caution and be prepared to scale in slowly as there is one important red flag in today's "bottoming" action: the leader stocks are not participating, thus far, in the "bounce". We're bought our pilot position and are prepared to buy some more tomorrow and next week (we almost always buy in three parts to these type of swing-trades) on further weakness.

If the leader stocks get out of their misery and start showing some green, we would instead add to the position today (since it would give better confirmation of a true bottom) If the Nasdaq closes well but momentum stocks close red, then be prepared for further weakness.

As we write this every single solar and Ag stock we follow (plus AAPL GOOG BIDU RIMM) is deeply red while the Dow has gone green.

Market Talk

Well, this has been, thus far, one of the most pathetic dead-cat-bounces we have witnessed. One of the problems is that there are just too many people stuck in positions that are deeply red and are waiting for some type of salvation rally to take them to break-even territory. The trade is just too crowded. Our guess is that investors will finally cry uncle and panic sell before we can finally reach any kind of meaningful bottom. This actually is the best case scenario -- gap-down, panic vertical move down, and then finally a tradable rally.

The next scenario is more painful -- a grind down with small intraday rallies that are constantly sold for weeks on end.

Either way, stay smart and wait for a meaningful reversal before going long. Never underestimate the power of the swing of the pendulum.

Market Talk

Let's take a quick look at the tracking stock QQQQ for the last 6 months. At point 1, she broke the short-term up-trend line in November and spent two months hovering around the 50dma (point 2). At the start of 2008 she broke the new support from November lows and fell steeply yet again (point 3).

Today's rally could be the start of a tradable bottom that takes the market back to the recent support (point 3) and if lucky, back to the 50dma. Don't think about being bullish or bearish -- just look at the following chart and interpret it. What does it tell you?

For you perma-bulls, there will always be strong sectors, seek them out (for example agr-fert/gold thus far still holding) instead of trying to catch falling knives on old leaders.

Let's see how far they can bounce this cat.

Market Talk

What a brutal day -- nothing quite kills the spirit of the bulls like a rally into an oversold market which is not just sold off, but crushed, with the market closing deeply red.

We should be getting some kind of relief rally soon, but for those of you tempted to buy longer term holds.... look at the following chart and imagine this was the chart of a stock for which you had interest:

You'd say "No thanks". This is one bad-ass ugly chart. However, for shorter term bottom lovers, the sell-off has been fast and furious and some kind of rally will be coming. There will be many temporary tradable bottoms coming up (and one should come relatively soon) within what we believe will be a much larger bear trend.



Here is a weekly chart of the Nasdaq -- as you can see we'll be hitting the trend-line soon and should find some support in that zone. However, it's hard for us to believe that the trendline will hold. Gun to head, we're guessing 2008 is going to be the year of the Bears.




Do you remember back in the bear market 2001-2002 so many were waiting for the one event to help the market? "They're going to catch Osama soon," one would hear. Historically, it hasn't been too smart to wait for some event (Osama, Fed) to save the market. It's going to be a deep, painful process that will probably go on for a while. Of course, hopefully we're wrong and the market ends +20% this year instead of the -20% we're predicting.

As always, this is just fun talk. We're short-term traders and will go with the trend, not our opinion. If the charts point long, we'll go long. But most likely, they're going to point short short short for a long time coming. Having said all that, we must add that we make much more money in a bull market than we do in a bear market (our type of momentum trading works much better in a bull market) so we hope that we are completely and utterly wrong!

Excerpt from this weekend's newsletter

The best opportunity of the day came as a long with FSLR base and break towards 200 (mentioned in Thursday newsletter). FSLR gave a lot of hints before she took off that she was going to run: she was acting strong all morning, never giving up her gap even when the Nasdaq started getting hit after the open. One of the reasons we love FSLR so much as a trading stock is because she telegraphs her moves so well before-hand.

Ideal entry was on the base and break lift-off with volume from 194 with fills around 195 or up to even 195.5 (with a 1 point or less stop -- at this point she either had to go immediately or would have been sold-off).

Another reason you should have been stalking FSLR before the break-out was the 2 day chart. Our readers know that we always have an intraday chart (1 day/3 min), 2 day chart (5 min), 10 day chart (30 min or 60 min), and daily chart open on each stock (they are linked so as you change one ticker, they all change over to the new ticker).

Notice how FSLR gapped up but stopped just under the previous day's high. A gap-up and basing under the previous day's high, with a daily number above and good volume and relative strength all constitute the stock communicating to you her intentions of wanting to make a serious run. We actually made a mistake in her because we were too eager. We were so sure about FSLR making a run that we bought her early before the breakout (193.5) and were later stopped out. It wasn't too smart but at least the second time we were patient and bought her on the base and break. This is a common mistake -- when one really wants in a stock one often jumps the gun. Instead (and here we are also repeating the lesson to ourselves) be patient and wait for the set-up.

Overall November has been a tricky trading environment for our type of trading, as it often is with trend changes. Most likely things will get easier as the market settles down and picks a direction, be it up or down.

Have Vision

As we have written in the past, our preferred time-frame is the 3 minute chart. We like using the 3 minute time-frame because we feel that it’s easier to spot volume spikes and base and break patterns than in longer time-frames. However, what is sometimes quite difficult, even after you have traded for years, is to see beyond the next tick, and having such a fast time-frame can sometimes make one too focussed on the immediate future. This is the reason we like having the 10day / 30 minute chart and a 3 month daily chart synched with the main 3 minute chart. Therefore, every time we switch the 3 minute chart to another stock, all charts change over. Nothing beats the 3 min chart for entry, but having the daily chart beside you reminds you of the bigger picture.

Sometimes, for specific reasons, you believe a stock will go in a certain direction. However, you can find no decent entry point (i.e. there is no base or any familiar pattern). What do you do? Have vision. Find a spot, enter fewer shares (due to wider stop), set a reasonable stop, and just leave the trade alone. More often than not, these are the most successful, most satisfying trades of them all. First, it’s a very good feeling having a plan and seeing it through. And second, it keeps you from overtrading.

One of the most important stages of the evolution of the trader is from the gung-ho newbie who just shoots and blasts away constantly during the day, and the more contemplative experienced trader who sits on the trade and lets the trade unfold towards the target.

Go beyond the next tick.

Spreading the Love

Aside from the usual suspects (Ugly, MtM, Jamie, etc) here are seven sites that have our attention:

Downtown Trader, as always, offers good chart commentary on a nightly basis. We like going through his charts because he has a somewhat different style than we do -- and we find the exposure to his method educational.

A lot of stocks we like to trade are actually IBD stocks (explosive earnings growth + sector leadership = momentum). Check out StockBee's site; he often has insightful articles about the IBD method, including this one.

Keep an eye on KnightTrader during the day; they have a great eye for what's moving and when new issues pop-up on the radar, they often appear on the site.

The new Timothy Sykes site has an excellent list of blogs worth exploring.

22dollars often has smart commentary/insight. We're hoping the author will update the site more frequently (but who are we to say that as we have been quite lazy with updating our own blog for a long time now).

Two excellent swing-trade sites are The Market Speculator and Chris Perruna; both traders use daily charts and are often involved in the same stocks we are, but with longer time-frames.

R's and $

Thanks to the ongoing debate in the trading blogworld on how to track performance, be it R or $, we've received inquiries over the last year about what we use. When we first started trading, and for at least several years afterward (especially after any significant tweak to the system) we would log basically everything (how much we risked per trade relative to the profit made; absolute win/loss ratio, profit/loss, and intraday and daily charts of every trade). Now that we have just shy of a decade of trading experience under our belt, we just track monthly performance in terms of profit/loss, and numbers of trades.

We find the R/$ debate irrelevant -- both are important and new traders should log everything (and experienced traders should go back to logging everything when they make changes to their trading methodology). Who said you need to choose one over the other?

As an aside, we are going slightly stir-crazy with the lack of volume/set-ups in the market ... if any of you are feeling similar emotions, just know that we're in the same boat. Let's hope that with the FOMC meeting out of the way within 24hrs, trading will become more interesting.

Market Talk

It has been years since we saw such indiscriminate selling. These are the charts of 5 of the most important momentum leaders of this year (AAPL BIDU FSLR FWLT RIMM):

A couple of things to notice:

1. Even with all this selling, look how much they are up for the year!

2. It is going to take a long, long time to undo the damage of just these last 3 weeks of selling.

3. No real prediction other than when we see this kind of panic selling, usually it means we are at least close to a short term bottom. All we would be looking for at this point is a dead-cat bounce.

4. If you're a long-term investor just itching to pick up some beaten up names, our advice would be to start picking out some spots, but to not use much ammunition. These kind of down moves rarely end so quickly and we could be in for much more pain before this is over.

To all those starting out

We’ve written about this subject before but we get asked about this topic so often that we thought we’d broach it again.

There are days we can’t find absolutely anything to trade. No set-ups, no opportunities, just nothing. Other traders like us (break-out traders) usually find themselves in a similar situation. But then on that same day there are thousands of traders who find lots of opportunities, many who have great days and even some who have their best day ever. We’ve always said – there are literally thousands of different ways to make money in the stock market, pick one, and respect others. We love break-out trading; for us, it’s perfect, stress level is low (since the numbers come from the night before there’s no real-time pressure to find candidates), there are strict rules to function within (thus less emotional and small draw-downs) and circumscribed risk parameters (to avoid blow-ups). However, we know that some people find it too boring and prefer to find dozens or hundreds of intraday opportunities (scalpers) and who make a very good living from it. Others make their living swing-trading. Others swear by futures. In the end all that counts is whether you can earn a living from trading, that is, whether you can make consistent money from trading.

So how do you find a system that will make you consistent money? The only real answer is trial and error. Start small (give yourself a lot of room for error) and ask yourself what attracts you. Do you prefer to trade actively and make consistent scalps, taking fast money? (And yes, scalpers can make a hell of a lot of money: like anything else, profits add up very fast if you’re a good). If so, then just start reading about the subject, go to blogs where successful scalpers share their techniques: Richard and his host of writers have excellent information and videos at Move the Market.

Do you prefer to do your homework from the night (via daily charts) before or at least combine that with intraday scans? Then go read about how Jamie, Ugly, Tyro, TraderMike, Dave at StockTickr, and Bubs trade.

Do you prefer swing-trading? Spend some time with Chris Perruna, Kirk Report, Market Speculator, Taz Trader, Knight Trader, DownTown Trader, Stock Bee, Pinoy Trader, and Bull Trader.

Most likely none of these sites will give you exactly what you are looking for but they will give you different ideas about the different kinds of trading systems out there. See what attracts you (for example, you might love to add a bunch of technical indicators to your charts, or you might love to trade with paint bars) and then research it some more via books and forums. Should you join a service or subscribe to a newsletter? Possibly, as long as it is inexpensive, it might be a good way to expose you to different systems (for example if you want to do futures, then signing up for a service for a few months to learn from the moderators wouldn’t be a bad idea, as long as they charge a reasonable fee, which to us is anything under $100 a month). But do not sign up for the $5000 options course, or pay $800 a month for a service, or $2000 for a set of CDs. That money could be much better spent learning in the market itself.

Then slowly get your feet wet by starting with very small positions while at the same time keeping meticulous notes on your trades (StockTickr would come in very handy at this point). You will start to learn very fast at this point, (while still possibly losing money – that’s normal. Very few people start making money right from the start). You’ll learn what you can handle, and most importantly, what you can’t. From there it’s a slow learning curve ahead and with the right amount of discipline and work, in our opinion, trading is just like any other job, and most people can make a living out of it if they put in the hours, the sweat, and the blood (with the exception of people who just don’t have the temperament for it, be it lack of discipline, or no control over their emotions, even though we would argue that even these people could change if they wanted to enough).

You might blow through your initial account but slowly your consistency will improve and maybe a year after that you'll start eeking out some profits and be on your way to becoming a professional trader (and if you don't want to call yourself a trader, just call yourself a market liquidity provider). Within the first years there will be times when you feel depressed, unlucky, when you will question yourself, that's all normal and part of the process. Stay grounded, man up, and good luck.

Excerpt from today's newsletter

Brutal sell-off in the market today but interestingly enough, there were some excellent opportunities; From the Forming List, on the long side we had CROX GRMN, and on the short side on HANS GES TSL CBEY. CRDN unfortunately didn't wait and was a mess through 74. Overall though, this is a tough market which is melting down to a much greater degree than most expected. Dip-buyers have been roasted for the most part in the last few days and there is full-fledged panic in the air.

Having said that, there was some good action on earnings/news on leader stocks such as AAPL BIDU RVBD CMI. In our own personal trading we are taking profits fast, especially on the long side (a bit too fast as we left almost a point in CROX on the table!) and if something goes against us, we get out a.s.a.p. A gap-down opening and some more panic selling could be a short-term capitulation move that could possibly last for at least a few days.

This market is ripe for a bounce, but that being said: Don't anticipate, don't think, don't analyze, don't try to predict. Have your set-ups ready from the night before, set your alerts, and when you see a base and break under the number, or at the number, and volume is heavy, pull the trigger with a stop under the base (and always always obey your stop). Other than that, just sit on the side-line and wait for your number. It's fun to talk about what the market might or might not do, but let it be just that, fun talk. That's it. Predict all you want, but when it comes to trading, leave all the predictions to the side, and just obey your set-ups. We had expected some sort of bounce coming in today (oh so so wrong), but with the exception of CROX, all our trades were on the dark side.

Sounds simple, but we guarantee you that if more traders would follow the advice of just following their set-ups from the night before instead of jumping from one emotional intraday scalp to another, there would be a drastic reduction in burn-out and blow-out rates.

Link

Listen to the interview by one of our favorite blog writers, Knighttrader, who has probably the most important blog in break-out trading on the net.

Click on this link to go to the interview on Wall St Radio

Link

Listen to the interview by one of our favorite blog writers, Knighttrader, who has probably the most important blog in break-out trading on the net.

Click on this link to go to the interview on Wall St Radio

Excerpt from today's newsletter

We had one trigger on Friday and one loss as CMG just triggered the stop before reversing and running for the rest of the day.

CMG was a bit of a heartbreaker. She had been on our radar for days but when it was time to trigger, she had very little volume. This was for us what we call a "conviction trade" in that once she broke the base, even though volume was very light, we "knew" she would go. However, the volume was so light that the risk was quite high in case she reversed. How did we deal with the trade? We took a small position with fills around 83-83.1, with stop at ANY reversal back towards the base (82.7-82.8). If you think that a stock will go and the pattern is very good but you think that the volume might come in after the actual break (which unfortunately is relatively common) then maintain the same risk by lowering your position size, but give it a shot. Even a 1/3 or 1/4 position can give you profits and more importantly, it will give you practice and experience in the base and break pattern.

Should you have entered at 83.5? No -- the base was 82.8 and she was almost 1% away by that time. The only place to have bought the stock was on the breaking bar with fills around 83 (and thus 30 cent stop). Remember, it's not the alert price that's important, it's the break of the base UNDER the alert price that one has to buy (unless the set-up actually is AT the alert price and not under). The breaking bar of the base is the most important part of our system.

There are multiple advantages to buying the break of the base instead of waiting for the actual alert price, an important one being that your stop is naturally lower. Thus, even though the stock fumbles around the number (which CMG, for example, did, and which technically triggered our 0.3% stop) you still can stay in and wait for the stock to consolidate without going negative (even though we always recommend selling at least a partial into the break-out). In good markets it often is advisable (as we write in the How to Use our Services) to sell 1/3 at 1%, 1/3 at 2% and either sellf rest into 3%, end of day, or make it a partial swing position by holding overnight (of course always know the earnings dates of your stock).

Remember, you don't always have to buy 2000 + shares of a stock to make money. Let's say you bought as we did at 83 (point A), with a stop on any reversal, but since the base was 82.7, that was the number that you believed would be your first fill, even if you tried to exit when the stock was at 82.9. At this stage of your trading career, you are only risking $200 per trade (something we recommend to new traders). Thus, you would have, for example 30-40 cent risk, which means you could buy around 600 shares in a gorgeous set-up but with miserable volume (if the volume had been higher, you could assume a tighter stop with less slippage). Thankfully she doesn't reverse and you sell first 1/3 of your position at 83.7 ($140 profit minus commission) at point B. You sell this first 1/3 to lock in some profits; we always sell partial into the break-out point if the stock is vertical by the time she hits it (and she was) and if we are wary (and we were because of the lack of volume).

Now you move your stop up to break-even and well above the base at 83 (point A) for the remaining 2/3 of the position (400 shares). The stock consolidates but you weather the storm easily since she doesn't come back to your stop (and you knew she would mess around the number since she's a NYSE stock with still mediocre volume). The stock breaks out into its second phase and you sell 1/3 at 85 ($400 profit minus commissions) at point C. You move up your stop for the last 1/3 of the position to 84.4 which represents the secondary base at point D. You can sell your last third at point E or hold overnight. Let's say you decided to liquidate the rest of the position because she still did not have great volume and you don't feel comfortable holding overnight. You sell your last 200 shares at 86 for another $600 profit. Therefore, you only bought 600 shares, with an initial risk of $200. Your profit, even considering how early you sold the first 1/3 of the position, was $1140 minus commissions: that's just under 6 times your initial risk.

Of course they don't always work out this well, but if you love the pattern, and if you have conviction but the ducks just haven't lined up (for example, missing volume) then take a shot, but a reduced shot. We're always telling you not to be trigger-happy, but sometimes it's probably just as important to remind you not to be trigger-shy, especially on "conviction trades".

Base and Break Pattern Illustrated

We wrote about the Base and Break pattern -- the key intraday set-up to our system-- in our last blog post. Today we wanted to illustrated it from an example from today's trading.

We listed CROX at 54 this weekend on our Forming List (this means that it had a potential trading spot at 54 on the daily chart).

Today it set-up in a very nice base and break pattern 10 cents below the pivot point of 54. We always tell our members that one of the absolute most important elements to becoming a successful trader is to keep your losses small. The base and break pattern by definition has very tight stops. In the following example, one would buy on the break of 53.9 (and the accompanying volume expansion -- remember you want overall high volume PLUS volume expansion at the key breaking point) with a stop at any reversal back into the base -- basically 53.85. This means that most likely you would have filled at 53.92-53.95 and would have had a stop under 10 cents. The target was a 1+% quick trade, meaning that your reward (50 cents +) greatly outweighs your risk (10 cents).

Base and Break Pattern

We received several e-mails asking us about the Base and Break Pattern that we mentioned in the March Review. We've mentioned this pattern numerous times in our blog (and in our website) and it is an integral part of our trading. In fact, all members automatically receive a comprehensive summary with 15 charts illustrating how this pattern works -- we don't want anyone trading our selections until they have been introduced to our terminology and our system.

The basic point of the pattern is this: most traders trade either off the daily chart, 2-10 day chart, or from intraday patterns. What we realized some years ago was that we could increase our win rate by combining the daily and the intraday chart: this means that we trade the daily numbers, but only if the intraday also sets-up in a recognizable pattern. The base and break pattern is simply a type of consolidation-break pattern (with a number of key nuances in regards to for example how a stock approaches the top of the base before break-out) that we spotted some years ago and which we have been working on especially in the last few years .

We realized that it has a very high win rate when combined with a daily pivot and volume and have been attempting to perfect it ever since. A good number of traders use some form of consolidation break pattern for trading, and some traders use similar patterns simply on an intraday level with no regard to the daily chart -- we don't really recommend this but once in a while, especially in gap-up situations, the set-up and volume are so overwhelming, that it's worth a try -- however, for us, these are rare cases (probably once a month).

As always, there are literally thousands of ways to make money in the market and we have respect for all of them. As a new trader what you have to do is to find a system with which you have found success and which seems to fit your personality and then start the process of making the system yours. This is exactly what we did with break-out trading -- a system that has been around as long as the market has-- we started working with it, adapting it, and slowly changing it until we molded it into something that we felt was ours.

Theory versus Execution

One of our members, N.S., wrote to us today; he's a young guy we like very much. He's relatively new to trading, but he has an incredible dedication to learning and evolving, and he's smart, picking up things very fast. We have a lot of faith in him and believe that in a couple years he will make a very good professional trader.

He wrote to us today about a trade he took. He was very upset because he didn't follow the rules he knew so well and froze when the stock hit his mental stop and kept diving and diving. Finally, he couldn't stand it anymore and sold near the low of the day, just before the stock bounced again. How many of us have done that early in our career? We'd venture to say all of us.

His entry was excellent -- it was off a stock with a good daily chart, from a solid pattern, and the stock was printing decent volume at the time. However, and this has been happening often in this market, the volume on the break of the intraday consolidation did not come through, as the buyers were just not interested. His original stop was around a dime, and the stock went up a dime before it reversed -- at that time his stop should have been moved up (and he knows that) for a loss of probably a nickel -- very small to say the least. His exit though -- now that's the problem. Have you ever noticed that often the times that you blow your stop are on trades that immediately reverse? It seems to be much easier to obey a stop on a stock has been above the number for a few hours or even 30 minutes, but when a stock reverses on one immediately-- that's the most dangerous time and new traders can often find themselves just watching the stock go through the stop and not pushing the sell button. There's something about losing money instantly that is especially irritating, like you didn't even get your money's worth out of the trade, not even any entertainment value! Awareness is everything and if you are aware that your weakness is not obeying your stops on trades that immediately reverse, you can tell yourself that before every trade -- OK, sometimes I freeze on immediate reversals, I know this, and I'm going to make sure it doesn't happen. This, in our opinion, is the best solution for this problem. Awareness of the problem, and recognition of this before entry of every trade (especially in markets like this which are not particularly favorable to momentum trading).

This kid, N.S., knows the theory very well -- and he has soaked up everything we have taught him. But the execution takes a long time to master -- the reason we have faith in him is that he learns from every mistake. We told him today that once you enter a position, then stop thinking. You know where the potential profit exit and the stop are before you enter, you know what to look for, and you know what to do. From here on, you're a machine. It's not easy, but we are firm believers that anyone who is willing to learn, and has true discipline and dedication, can become a good, consistent, professional trader.

Four Categories of Trading

There are literally thousands of ways to make money in the market and in this post, we will be covering only four methods. However, that being said, these four methods do count for a good percentage of trading methodologies currently in practice. Our apologies in advance if we have mis-labeled a blogger or if we have made an error of omission.

We personally partake in #1 and once in a while in #2. We do not trade in methods #3 or #4.

1. Scan charts at night looking for bullish/bearish patterns on the daily chart. Make a list, set your alerts, and the next day enter according to these alerts. This is simple break-out trading and this is what we do day in and day out. To summarize this in one line: trading based on support and resistance on the daily chart. The nuanced part comes in whether you take the trade or pass—and this is based on the intraday pattern, volume, market mood, et cetera. As far as we know, we practice this method, as well as Wall St. Warrior, Richard, DownTown Trader, Ugly, PinoyTrader, Tyro, Phileo, Bubs, Market Speculator, KnightTrader, and many others.

2. Repeat step #1 but also have a list of momentum stocks that are close to important spots, or which are trending in a clear direction. Use longer intraday time-frame for entry (for example, we use 10 day, 30 min or 10 day, 60 min while others prefer 5 day, 30 minute, et cetera). In terms of blog participants, basically same list as in #1.

3. Use a scanner to look for gap-ups/gap-downs with high volume and trade these stocks based purely on intraday patterns. This can be a successful method if one can come up with a sophisticated system for entry spots. In our opinion, this is the most difficult method to master as the decision process is more subtle, with more nuances and subjectivity than method #1 and #2. Candle-stick knowledge is a plus. Some successful participants of this method are Maoxian, Trader-X, Trader Mike, Estocastica, Trader Gav, Zoomie, Prospectus , Dave, and the promiscuous Ugly and Wall St Warrior who seem to partake in all three methods.

4. The last trading approximation really isn’t a method but it’s worth mentioning since probably most new traders enter trading via this methodology. No usage of daily charts, no usage of scanners, no real system: these traders often have a list of volatile stocks and look for intraday patterns to trade. These traders often hang out in large chat rooms, with hundreds of traders making different calls on anything that moves. They often buy/sell for very small moves, with a 1-1 risk/reward ratio. This isn’t really a system and this kind of scalping, in our opinion, has the lowest-win rate, and the highest burn-out rate. We know of no bloggers who would belong to this section.

We should actually include a miscellaneous section for Prop Firm traders who make money by trading literally thousands and thousands of shares every day. We do not know enough about their methodology to be able to summarize their way of trading -- however, we can say -- NYSE Trader does a great job consistently pulling in the money. (sorry dude if we have just mushed you -- don't worry, it shouldn't last for more than a few days).

Conclusion? As said, there are literally thousands of ways to make money in the market and what each individual has to do is to find their edge. However, in order to achieve the latter, one will require a disciplined system that can only come after a lot of pure, hard work. If you're lazy by nature, then trading might not be for you, and it might be best if you looked for a profession in the civil service (yes, yes, we're kidding, please no hate mail).

Volume Trumps Aesthetics

Here is a concise summary of how we trade:

Wait for solid patterns to develop on the daily chart and then add an alert in your platform. Next day, watch the stock for a good intraday pattern (very similar to the type of pattern one would look for on a daily chart, just on the intraday level) and high volume. If both conditions are met, then pull the trigger. If neither condition is met, pass.

But what if only one condition is met? Probably the biggest mistake we make as a group (and some of us are more guilty than others, but all three have to work on this) is that we simply pass on trades too often. We always want our stock to set-up in some good-looking pattern, be it a consolidation pattern, a semi-circle, always a pattern with some kind of symmetry. At least a few times a week one of our stocks hits our number with no real pattern, BUT with strong volume. More often than not we pass on the trade and the stock ultimately moves in the intended direction. This seems to be a constant source of loss of opportunity.

Volume trumps Aesthetics. This means that if your stock hits your number with high-volume, but has no clear intraday pattern, it probably is still best to trust the number, and give it a shot (caveat -- we are NOT talking about buying on top of a vertical spike, that will always be a No-No). We know this but for some reason we're very slow to act accordingly -- probably not because it's a habit that results in losses, but rather something that holds us back from greater profits, and since we do well enough with the current way of trading, we just can't get motivated enough to change this bias.

The inverse, by the way, meaning a pretty set-up but with low volume, is still an avoid with the only possible exception being the thin stock whose volume comes in after the actual break...but that's still a roll of the dice.

As a first step to modify our bad habit we have printed a sign for the office:

High Volume + Daily Number = Profits

Let's see if it works.

TGIF

(since so many blogs now are offering hot chick pxs to get reader's attention, we thought we'd go out on a limb too and offer some risqué content)

It's been a bit of a crazy week full of head-fakes and false break-outs. Between the three of us, we've traded only 6 times, average, this whole week but it feels like 600 (we don't know how scalpers do it day in, day out). If you want some examples of break-out failures this week check out charts of the Nasdaq, S&P, Homies (HGX), GS, and dozens more. With this kind of whip-sawing around, we're only day-trading these days with an empty swing account.

We made one trade today and spend the rest of the day catching up on our Blog reading. We're behind on our schedule so most of the following will be old news for faithful blog readers, but if you haven't already, check out

a post of collective wisdom on trading via Charles
Trin Talk from Richard
The always interesting StockTickr interviews, this one with DownTown Trader
If you're in or interested in entering a Prop Firm, you should read Ugly's post, as well as the relevant links

and an interesting site that's new to us called StockPickr

plus of course other posts coming from our colleagues listed in the Blogroll.

Blogs of interest

We have mentioned a number of blogs that we read in our previous posts and in our StockTickr interview . Aside from the usual suspects, here are some other ones definitely worth checking out -- most of you know them already -- but we've never actually acknowledged the following in any of our posts.

StockBee -- A smart guy who is very much on top of the IBD scene

StockTrading101-- Good overall summary of the day and some great technical analysis on charts

Chris Perruna -- Very good technical and fundamental analysis on some of our favorite momentum stocks

Wallstreetfighter -- when you need a break and a laugh, it's a great place to go. We should probably add some kind of semi-R rating for this site. Well, not really, but it's not exactly your usual stock trading fare....

Visual Trader -- this is the sister site to KnightTrader, one of our favorite sites. This one is geared towards lower-priced stocks.

IceColdStocks -- a very popular site featuring stock commentary on podcasts

TazTrader -- Good over-all commentary; geared more for swing-traders and valuable information for those of you interested in candlestick patterns.

Recent Issues

On our day off today we have been going through our master list of stocks; this is the list that we flip through each night, looking for possibly daily set-ups. This master list is dynamic and often has deletions and additions. Here are some new issues that we have added to our list over the last 6 months. Active traders will know most of these stocks. However, just in case you're missing a few....

DIVX EDU EFUT FFHL HLYS HMIN IPGP JCG MPEL NMX OMTR OPTM OSIR PNSN PWE RVBD SNCR VSE


Aside from the rather large Master List we have a mini-List which holds, in our opinion, the stocks that we need to pay attention to the most during the day. Our mini-list right now consists of:

Most important of all: NYX ICE MA BIDU GOOG RIMM AAPL AKAM HANS

ACOR AMAG ATHR ATI BRCM BSTE CAAS CAL CCOI CENX CEO CHAP CHDX CHL CME CNS CRDN CRM CROX CTRP CTSH DAKT DLB EDU EFUT FFHL FMCN FORM FSYS FWLT GES GFIG GHDX GLDN GMKT GRMN GROW GS GYMB HLYS HMIN ILMN INFY IPGP IPSU ISE ISRG JOYG JSDA JST LFC LIFC LRCX MBT MEND MFW MNST MPEL MR MSTR NCTY NDAQ NFLX NHWK NIHD NMX NRPH NTES NTGR NTRI NUE NVDA NVEC OEH OMCL OMG PCU PNSN PNTR POT PSUN RMBS RS RTI RVBD SHLD SNCR SNDK SPWR STLD STP SVVS SWN TEX TGEN TIE TS UA UAPH VIP VLO VOL WFR WYNN X ZOLL

Some good reading

Some good reading and reminders from seasoned trader Charles Kirk (we're not calling you old Charles, just experienced....)

My New Year's Resolutions

Trading Resolutions: Part II

What are some HCPG resolutions? We're not really into resolutions but if we had any, they probably would be best summed up by --- more exercise, less pizza.

Ten Lessons on Life that Apply to Trading:

1. Know Thyself (and as Polonius put it, to thine own self be true): None of us here at HCPG could ever be position traders, we don’t have the patience for it. We like daytrading and swingtrading for possibly 2-5 days, and that’s it. Know your own personality: your strengths and most importantly, your weaknesses.


2. Have perspective: Always keep the risk-reward in the back of your head before entering. If your stop is 50 cents, and your goal is 50 cents most likely all you’ll ever do is churn your account. Try not to enter until your reward outweighs your risk by a minimum margin of 2. It is very important in this career to be able to step-back and take things in with a bit of distance.

3. Don’t be stingy: sacrifice the dime for the point. If resistance is 50 on a great break-out with a beautiful daily chart, and heavy volume, don’t take profits at 50.11 to lock in the dime, wait at least for a point (if you're a daytrader that is). Risk the dime for the point.

4. Accept the consequences of your actions: don’t blame anyone else but yourself for your mistakes, not the market-makers, not the specialists, not the plunge protection team, not your mother, just the person who actually pulled the trigger.

5. Be the Turtle and not the Hare: find a system that works (of course this is easier said that done), and then be patient and wait for your pitch. Don’t hop around from one methodology to another trying to make money every single day. Sometimes you just have to sit aside and let others have their turn.

6. Don’t be judgmental: there are literally thousands of ways to make money in the market. Choose yours, and respect others.

7. Don’t be greedy: one of the most common mistakes of newbies is buying the vertical spike up – they watch a stock move up a point in seconds, and they join the momentum so that they, too, can get an easy point in seconds. Most of the time, the only easy thing is the immediate reversal as experienced traders sell into the spike.







8. Focus on your goal and work hard: Try not to get distracted by chatrooms, noise, phone calls, and CNBC (not to mention all the traders we know who have porn on in the background). During the trading hours, focus on the objective and nothing else.

9. Don’t be an idiot: as we have often said in our newsletter; losing is an integral part of this business, but if you’re going to lose money, then at least lose it on a great set-up that just didn’t work out instead of some lame trade that you normally would have never pulled the trigger on. Let’s say stock HCPG breaks-out on the daily charts at 50 with excellent volume and a great intraday set-up. You take a position at 50.06 and later on in the day are stopped out at 49.8. Now that’s a normal loss and one is that completely part of the business and in the long run, unavoidable. However, buying a penny-stock because of something you read/overheard in a message board/blog/party is a stupid loss and something that is completely avoidable. Remember how easy it is to lose, and how hard it is to consistently win.




10. Be Good: events are more interconnected than you think. Have some karmic fear: Try not to live a life which will lead you to be reborn into a toad. Be kind, work hard, help others, be smart, and eventually, everything else will fall into place.