Tuesday, November 10, 2009

Trading YOUR Setups

Much of trading in general, but specifically intra day trading, is about recognizing setups and taking advantage of the situation. Today provided me with one such case. Lets discuss PCLN.

As I went through my checklist for my favorite setups, PCLN hit many of my criteria. You will also see the chart of PCLN (GREEN) and the SPY (RED) below as a measure.

  1. Catalyst- PCLN had earnings after the bell yesterday.
  2. True Relative Strength- (if you look at PCLN from 8:40 CST and on it outperformed the market).
  3. Volume- just as important as relative strength is the action of the name on extensions vs. consolidation periods. PCLN extended on larger volume and consolidated/pulled back on less volume. Option bids held firm during pullbacks (a sign of sentiment).
  4. Range- PCLN had an out sized range, as well as large daily volume and a breakout on the chart.
  5. Macro Environment- I had the market behind my back (market rallied from 1086 to 1094 on the open, and as of midday held the 1086 level).
All of the above are signs to me that PCLN is in play, and a trade with edge (higher probability of succeeding than failing). Does it guarantee a profitable trade? NO. But then again, there are no guarantees. All we can do as traders is put the odds in our favor and create an edge for ourselves.

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