Trading for Dummies, Q&A #65 & #66

Mitek Systems, 30-minute Chart

Questions:

1) Why would you be paying attention to this stock on Monday, November 3?
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 Monday, November 3?
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) Up. You'd be looking long.
3) Long at 2.43 on a buy stop above the 10:30 inside bar.
4) Initial Protective Stop: 2.20. (max. 9.47% see discussion on risk below)
5) Right after you enter the position or lunchtime, whichever comes first.
6) End of day. Could sell half, carry half, or just close it all at once.

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MITK took off last Thursday and has tripled since then. I finally noticed it this morning before it gave a bar to execute against at 10:30. You can see that the initial risk was nearly 10% which is way more than I would normally take on, but if you reduce your position size you could have done the trade.

Let me explain. Normally I think about positions in $12,500 increments... if risk is very small (say less than 1%), I'm very happy putting on a $50,000 position. I then reduce the position size by $12,500 for each additional percent of risk I face, always trying to keep losses in the $500 - $1000 range. The initial risk in MITK was so great that the position could be no larger than $10,000 to keep within the scope of losses I'm happy to take.

In any event, MITK closed at $3.05 for a gain of over 25% from entry, so even with the absurdly large initial risk of around 10%, the reward to risk worked out to better than 2.5 : 1 in the end.

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First Health Group, 30-minute Chart

Questions:

1) Why would you be paying attention to this stock on Monday, November 3?
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 Monday, November 3?
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 19.02 on a sell stop below the 11:00 up bar.
4) Initial Protective Stop: 19.37. (max. 1.84%)
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.

..........

FHCC was a much more standard play than MITK. The position looked like it was going to be a scratch at best until the last hour when price broke lower to close at $18.40. The gain was 3.26% from entry which was very fine (1.7 : 1 reward to risk) considering that I was mentally prepared for a scratch on this one.

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Screen capture of my intraday Watch List:

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