Trading for Dummies, Q&A #56

Macromedia, 30-minute Chart

Questions:

1) Why would you be paying attention to this stock on Thursday, October 23?
2) Is the trend up or down? Would you be looking to get long or short this stock?
3) Where would you get long/short this stock on Thursday, October 23?
4) Where would you put the initial protective stop?
5) When would you stop trading for the day?
6) Where would you exit the position?

Answers:

1) Because it was unusually active, and very volatile.
2) Down. You'd be looking short.
3) Short at 18.68 on a sell stop below the 10:30 inside bar.
4) Initial Protective Stop: 19.13. (max. 2.41%)
5) Right after you enter the position or lunchtime, whichever comes first.
6) End of day. Could cover half, carry half, or just close it all at once.

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When a stock breaks down as violently as MACR did yesterday I usually avoid it, since price can snap back violently. Fortunately the stock continued to be weak all day and the shorts weren't driven out. MACR opened down 27% and drew a fairly narrow 10:30 inside bar which was decent to execute against. Initial risk was 2.41% and the stock closed the day at $17.57 giving about a 6% gain from entry, for a reward to risk ratio of 2.5:1.

The main thing you have to remember when trading is that you don't want to complicate things. Keep it simple and try to limit the number of decisions you have to make every day. If you want to judge how quickly someone will burn out, just look at the time-frame he trades. People who trade 1 minute charts will last about 1 year, 5 minute charts maybe 5 years, etc. ;-)

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