Dear Diary, I Made Money Today
Dissecting A Winning Trade
There's a good reason you should keep a trading journal: analyzing your previous trades helps you understand what you're doing.
One of the best ways to find winning trades in the future is to dissect a past winning setup and successful trade execution so it can be replicated. History tends to repeat itself, and being able to recognize chart patterns that led to successful trades will help you bank more gains in the future.
THE GAP: GREEN LIGHT TO MAKE THE TRADE
One of my favorite screens to find clues in the current market is to look for gaps. What makes gaps so special and ideal for a stock trading setup? The strength of the market moving away from the previous trading day's closing price and gapping to a new level, be it up or down, shows new volatility with the stock. A gap also indicates a shift in the current market psychology for the stock, as there is now an imbalance of buyers and sellers from the previous day's close. This imbalance also likely will carry with it an injection of volatility that can bring profits to those who can trade the new volatility with precision.
DISSECTING A TRADE ON WYNN
One day while I was doing my general stock screening, WYNN (Wynn Resorts) caught my attention as a textbook example of a winning chart pattern setup. Let's look at how this winning trade caught my attention and dissect how I acted to enter the position, and how the market guided the decision on when to exit and bank another profitable trade.
On November 6, 2006, Wynn gapped higher on the open (Figure 1). Why did it gap open? Does it matter? I am a technical trader and have found some of my best trades are when I let the price action dictate my decisions and when I resist the urge to find out what is going on by visiting the message-boards, news wires, and headlines concerning the stock.
FIGURE 1: THE GREEN LIGHT TO PLACE A TRADE. On November 6, 2006, the price of WYNN gapped higher at the open.
...Continued in the March issue of Technical Analysis of STOCKS
& COMMODITIES
Excerpted from an article originally published in the March 2007
issue of Technical Analysis of
STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2007, Technical Analysis, Inc.
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