One technique I use with great success is to use momentum to show me where to place stops. I use something I call near time momentum. Near time momo is the the price level to which the stock fell or rose to just prior to when you enter the trade. It could be 1, 2 or 3 candles previously.
I have seen these momo levels ( you can't really call them support or resistance levels) survive over 1000's of trades. Upon entering the trade, it immediately goes in your direction and away from your stop. It's also called stress free trading. The fleeting moment between entering the trade and before it starts to move is the only time that your position is at risk.
I figure that since the price level wasn't breeched before it will take something else to happen before it will. Whatever information the markets and the stock was affected by then will have to change. Day traders have a big advantage if they can process what is happening in a timely manner and act accordingly. It is a matter of getting into the flow and letting it tell you how to trade with the direction of strength.
When you see these price levels and sense the momentum changing, you need to quickly enter the trade and set the stop a penny of two higher (or lower as the case may be).
Don't hesitate when you see the momo change or you will be putting on too much risk. Don't fumble with position sizing. You should already know what you either can play with or have left to play with beforehand. Don't be thinking about the reward as you or no one else knows where it is going to go. The only thing you can control is the risk. Do it, and fast with this technique. Like the majority of my trading, it doesn't require too much thinking, only observation.
Here's VXX from today that illustrates the concept.
First chart is entry, second chart is exit.
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3 comments:
Thanks Scott.
Scott, you should talk about how you also press your winners. It looks like you added to VXX here after your entry. I know you tend to double down once it's working, but you've never talked about that.
Taking quick trades like this can be a zero sum game with stops getting hit unless you press the winning trades.
Hi Scott, great trade! Forgive me if I've missed it, but have you posted before on how you sense a change in momentum? Looking at the entry for this trade, I would not have guessed that the momentum would change right after the red candle at 14:30. I wouldn't have clued in that change was in the air until after the price went above the top of this candle and started looking like a break-out. Of course an entry at this later time would mean incurring more risk. Thanks in advance for sharing your thoughts on this.
Eric
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