Friday, December 21, 2007

Catching a Breakout Early: CF Trade

On Tuesday I bought 300 shares of CF at $92.05. Today the stock broke out over resistance at around $100 and closed at $107.76. I sold half my position near the close at $107.34 for a $2293 gain (+16.6%). I am holding 150 shares and will buy more on a pullback to $100, if it's orderly and on weak volume. I've moved my stop on the remaining shares to $97.

As expected, I received a number of emails today. Arthur's is representative of the bunch:

Can you tell me why you entered this trade. I have looked at all of your recent trades and I am having trouble figuring out your entry points. It amazes me that you continually pick big winners just before they break out. You are either a great trader or you are very lucky.

I am hesitant to call myself a great trader, and I certainly do not believe in luck. I firmly believe that those who are lucky put themselves in the position to receive what seems to be luck. I'm not talking "The Secret" self help bullshit here. What I mean by putting yourself in position with regards to trading is undergoing the hard work of understanding markets, your system/setup/edge and risk/reward.

Let me get specific about the CF trade. First, let's look at the overall market. Early this week, I was looking to increase my long exposure, while still maintaining a healthy dose of shorts. While I do think the market is headed down, I also thought we would get a bounce going into the holiday since the market was so oversold and we had a historical trend on our side (Christmas/end of year).

I do not like to play bounces in broken stocks, so I was looking for strong momo stocks to play. One sector full of momentum plays is Ag. I've been looking to get long and ag related for a while now. CF, MON, MOS and AGU all looked attractive, but I went with CF because I liked the volume pattern and a cup and handle seemed to be forming. My target was $90-92, which was at the bottom of the basing pattern and would give me a good risk reward (stop would be placed under the 50 day at $87).

I am not precise with entries. I don't have to have that perfect entry at $90. Early in my trading career, I missed a lot of big gains trying to be perfect. Now, as long as the reward to risk ratio is acceptable, I'll enter early on a setup that offers an edge.

Unlike many traders, gurus and technicians, I can't give you a precise stochastic reading, fib retracement or precise reason for entry. While I do rely heavily on accumulation/distribution indicators, much of it is just having an intuitive feel for the trade based on experience. For me, it boiled down to the following:

statistical edge that overall market would bounce
strong sector
strong stock within sector
nice chart, price and volume pattern
acceptable reward to risk

That's it. I placed my trade, set my target and stop, waited and "got lucky".

Note: AAPL is up 8 points from my Tuesday entry and RIG is up 4. I took partial profits in both, along with in the DRYS and EXM and housing shorts.

12 comments:

sb3 said...

awesome trades! was curious to know if you use intraday charts along with the daily? also, what is the maximum % of your portfolio do you place in a trade?
feedback appreciated. happy holidays. chris

The Market Speculator said...

Chris,
For swing trades, I only use intraday charts for volume, to make sure a stock hasn't pulled back to my target price on distribution.

Of course, when I daytrade, which is about once or twice a month when I am home from work, I use intraday charts. I don't log my day trades on this site.

I don't follow what many pundits tell you to do when it comes to portfolio management. I don't worry about % of portfolio that's used for a trade. What I do look at is how much of my portfolio I am risking. I generally won't risk more than 5 percent of the portfolioon a trade (again higher than most). So with a $100,000 account, I would have no problem owning 250 shares of AAPL (which would take up 50 percent of the account), as long as I was only risking more than $5000 on the trade. My risk is usually much less than that. Five percent is the max.

BABY TRADER said...

Nice post...very interesting. Keep up the good work and good "luck" :^)

Anonymous said...

So truth be told, you are a great trader! and humble at that. thanks for posting and sharing your accumulated and hard-earned wisdom. this is a terrific blog and I am glad I found it. thanks.

Jonathan said...

What do you think about MDR forming a cup and handle on the daily timeframe with the possibility of filling the previous down gap?

The Market Speculator said...

MDR looks pretty good. Volume's been picking up on the upside since November distribution. On my own watchlist, I have it as a buy on breakout of $62.50.

Jonathan said...

Sorry, I completely fudged the stock symbol. I meant MDT. Hopefully that chart will make a little more sense with my previous post! lol

Thanks!

Felix said...

I notice that most of the time you get in on down days. What are you looking at that makes you think it should go up the next day? CAN SLIM would tell you to buy on the breakout but you get in early. Also, what books would you recommend?

Thanks for the blog.

The Market Speculator said...

Felix,
I do one of the following: buy pullback post breakout, buy pre-breakout, or buy breakout.

I probably use the breakout-pullback more than any other setups. I've discussed this setup on the site. Search breakout pullback.

As a part time trader with a full time job, it's tough to buy on the breakout. Sometimes, when I really like the tech pattern, I will set a buy stop in case there is a breakout. That's the best way to play breakouts as a part time trader.

I also buy pre-breakout when I see really strong accumulation in a strong sector.

felix said...

Thanks. I sometimes don't buy on the breakout but wait a day or two until the next day because most of the time they will drop the day after the breakout. I usually wait wait for an up day though but I like your idea.

Two questions.

1. If the stock does not pull back the day after the breakout will you buy it then?

2. How often do you see a pullback and do you set a stop loss a few points below your puchase price?

Could you recommend any books. Your site is geat. Very practical. Keep up the good work.

The Market Speculator said...

Felix,
I set my stop loss based on a combination of support/resistance, percent and risk.

masteroftheuniverse said...

Great blog. I'm glad you're doing well. I seem to be selling things too cheap, and paying too much for everything. Oh well, that's been the story of my entire trading career.


Jeff