Thursday, January 14, 2010

Once again today we saw more action to the downside in rambus, as previously reported there was a "fat finger" trade which was busted and rolled back. Why? I wonder that myself because it is clear there is selling pressure in RMBS, today the selling spikes were probably from the same firm or fund or whatever. Someone clearly wanted to get out of the trade because they felt that the outcome of the trial will be negative in regards to the PPS. To me all of the macro news means nothing, i just read the price action. I have no opinion or position in RMBS for the long term, if i start formulating an opinion chances are i will be wrong because i cannot control what happens over night. What i can control is my risk intra day and apply my tape/price action reading skill to help my profits. You to can apply the same skill set by understand the "signals".

The first signal yesterday in RMBS was the large downside volume of over 100k shares a few minutes after the open. This right away told me to keep RMBS on my radar, so i pulled up some OTM puts and watched, no position yet. I begin to realize people are betting on a large fall, because offers were being aggresively taken in the 20 puts with size. This was signal #2. Signal #3 was someone showed up with large size .15c above the next best bid on the 20 puts, this was a signal get in front of him and buy. I take the offers for 37c next thing you know RMBS falls a point on 400k shares, i sell out the calls for a 1 and 1.29. After the initial drop i took my profits and waited for more signals, eventually the signals came. Large bidders in the options followed by massive volume on the downside. The trading gods gave you three chances to capture the volatility in RMBS yesterday, most of the time you only get one move like this and its over.

Wham bam thank you ma'am. I let the gorilla show me where she was gonna trade, someone smarter than me and more in the know than me was pushing. i follow "gorillas", in my experience you never trade against the size or "gorilla".

Hopefully now you can understand how interpreting the tape and price action correctly greatly increases your profits. Scenario recognition comes into play also, you can use last weeks RMBS trading as a prior scenario. You can apply these principles to any stock, you just have to understand where the buyers and sellers are. If you do not understand that you can contact me and i will be more than happy to explain. I could even do another blog post on this topic.

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