This column was originally published on RealMoney on July 28 at 12:07 p.m. EDT.
Tuesday's action featured all the elements that traders face in a typical week. I made money in the session, but could have just as easily finished in the red.
That's the thing about trading every day: Part of the outcome depends on pure chaos. External events occur that can't be predicted through normal analysis. Part of this news flow helps the bottom line, but most of it picks our pockets.
I traded 17 stocks in my short-term account that day, and three more in the longer-term accounts. This isn't a particularly large number, given my trading style. The tally includes new entries, as well as positions closed out during the session.
Many of my trades are incursion entries, where I buy or sell a few shares to test the waters. If price acts well and the position builds a profit, I'll often add to it aggressively. Alternatively, I take many small losses, as I dump stocks because they're going nowhere or develop an adverse reward-to-risk profile.
I'm a swing trader who is always looking to make a quick buck by daytrading. But I enter most positions with the intention of holding them overnight. Many of these stocks turn into daytrades because changing conditions demand aggressive profit-taking.
In other words, I'll take what I can get when the market turns against me, and jump back to the sidelines with little hesitation.
My biggest decision on Tuesday was figuring out where to sell
. I held the stock over two weeks, playing the run-up into earnings, which were reported on Wednesday morning. I waited all day for price to spike to new highs, and then took profits when it tagged $67.
The stock opened higher than my exit price after earnings, so why didn't I hold it? I'm a trader, not a gambler. My position was based on bullishness into the earnings report, but the actual results were impossible to game. Therefore, I had no reason to stay in the trade.
Am I upset that the position gave me "only" two-and-a-half points? No, because I don't try to hit home runs most of the time. My trading bread is buttered by reliable dynamics I translate into rational entry and exit plans. And I can always re-enter the trade after earnings volatility winds down.
Headed into Tuesday morning, I was holding Boeing,
ATP Oil & Gas
Wild Oats Markets
Black & Decker
( BDK) and three single-digit small-cap stocks. These positions were a combination of trades picked up near Monday's close, as well as longer-term holds of a few days to a few weeks.
ATP Oil & Gas
My first act of the day was to dump ATP Oil & Gas because I didn't like the opening action. I love the daily pattern, though, so it was my intention to wait for selling pressure to ease and then find a new trade entry. As it turns out, I bought the stock back in the late afternoon about 25 cents higher than my initial sale.
This doesn't make sense at first glance, but it's the right way for me to trade. I don't care about the relative price of a stock, because I'm more focused on the direction of the next swing. It's more dangerous to hold a cheap stock that's falling than an expensive stock that's going up.
You know why I'm holding this position right now if you can read the price chart. It shows a bullish cup-and-handle pattern. But some readers may be shaking their heads because I wrote
a relatively bearish column on oil just last week. So what gives, Farley?
Simply stated, I take buying and selling signals when they come, regardless of my market bias. Those signals have turned out to be an accurate market read over the years. I also never let my writer's ego interfere with my trader's instincts. Whenever there's a conflict, the trader wins, hands down.
Black & Decker
The one trade I held through earnings on Tuesday cost me money. Black & Decker was a relatively small position and I was already committed to keeping it. My GTC (good till cancelled) stop was placed above $90.50 and price closed well above that level the prior day. So I decided to hold on, but did my homework first.
I examined prior reactions to Black & Decker's earnings and thought there was little chance the blue chip would incur a large down gap, even if earnings didn't measure up to expectations. I was right in that regard, but still had my stop triggered during the post-opening selloff.
Finally, let me crow about two profits I took that day. The first was Visteon, which I bought on Monday. Notice the similarity of this pattern to the oil and gas stock shown above. It's a common cup-and-handle pattern that predicts higher prices. Sure enough, the stock broke out Tuesday morning and I took profits into the vertical rally.
Wild Oats Markets
The other gainer was Wild Oats Markets, which I bought last week within the congestion pattern. Notice the rising trend line over the highs since last April. This is my favorite technique to project rally targets. Using it, I waited until price jumped over $13.35 and then exited as soon as momentum started to die out.
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At the time of publication, Farley was long ATP Oil & Gas, although holdings can change at any time.
Alan Farley is a professional trader and author of
The Master Swing Trader
. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback;
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