If you’re a momentum trader like me, this post is definitely for you. I’ve been reviewing my trades lately and I was surprised to find out that 80% of the time, I’m selling too early. It’s true that you’ll never blow up an account taking profits, but knowing when to take profits can be difficult. This blog post was written as much for myself as for anyone reading it. Writing stuff down helps you improve as a trader: remember that.
First of all, let’s talk about taking profits into an ABCD-type setup. A stock that has an ACBD-type pattern usually has some sort of continuation after an initial move—not always, but usually. This is where I often go wrong. I will buy the perfect spot in a breakout pattern and then BAM—I’ve sold most or all of the position. If it’s the first breakout day on the daily chart, why would you sell everything into the first move? Maybe it’s my own itch to touch the mouse, or just the urge to take profits. So here’s an idea for you and I: sell a third, or half. Risk the rest and use the previous HOD as support. I’ve been studying these,and about 70% of the time a stock that ABCDs will have some sort of continuation. So try taking partial profits, and then sellingthe rest into a secondary move. Or, hold for a lottery ticket runner if you have a great average. Take JRJC, for example, during its big initial move on Monday: it gave you essentially no reason to sell if you bought at $6.50 - $7.25, because it had no retracement whatsoever (it eventually hit $9 afterhours!). Or, on Tuesday, let’s say you bought below $8 first thing in the morning: you had no reason to sell until the lower at $9.3 after the second HOD breach at $9.6. If you had bought at $8 and sold into the first move at, let’s say, $8.75, you gave up more than $0.50 in potential profits. Some people say, “sell when everyone wants something.” In this case, It should be: sell when buyers/sellers are indecisive = lower highs.
Next up are scalps. It’s important to know the difference between a scalp long and a long that’s worth holding for a bigger move. Don’t quote me on the stuff in the last paragraph if you’re in scalp mode. Don’t get me wrong—my scalp longs are my favorite plays. I usually go long and risk .05-.10 to make a quick .30 and sell. I don’t marry a scalp, and I’ll sell almost immediately. I’ll often risk to over/under whole or half dollar marks on these.
Then you have short squeeze longs. This is my area of expertise. These right here are my most profitable trades. I’m seriously considering cutting all other types of plays out of the playbook and just looking for short squeeze plays from now on. So what do I look for when I spot a short squeeze in the making? First of all, I’ll check finviz.com for the short % of float. If the stock has 20-40% of the float short, my mouth drools. I’ll also check shortvolume.com from time to time, as it shows you more accurately how many shares were shorted on a stock the day before. Of course, the stock has to have some sort of momentum on the 1 min chart to be in play. USU, PLUG, LIVE, JRJC, CAMT, STXS, SR, and WWE are all examples. These are the plays that have taught me how lucrative it is to be long into short squeezes. I won’t go into detail how I got so familiar with these plays, but suffice it to say that I was a stubborn short one too many times, and I learned the hard way.
So, how do you spot one of these setups? Let’s take JRJC on Tuesday as an example. After its run to the $9.50s, it pulled right back to $8.40s, and then re-ramped to $9.05. I was long at $8.5, $8.53, and then $8.7 for the $9 push. That $8.7 add was questionable. What I saw was that JRJC was holding the $8.50’s after the flush to $8.40. It’s all in the half dollar marks. They act as mental support and resistance for traders. So I hit the longs, and I was going to risk .05 to make .30-.40. And that’s the move I got, and more. Grinding action is what determines a lot of these squeeze moves: the panic volume slows, a lull in the action occurs, and the many stubborn or bent shorts that don’t cover get squeezed back up towards highs. I simply take advantage of that when I see it. Having the ability to see these setting up gives you a big edge. Additionally, it’s easy to cut these plays quickly if the support doesn’t hold, because if you’re wrong, a “potential” short squeeze could go the opposite direction quickly. That’s why I only risk .05-.10. On these types of plays, don’t use lower highs to sell as with the ABCD-type setups I talked about above: sell into momentum. Remember, it’s just a short squeeze; nothing more. Take profits and move on.
Lastly are ABCD patterns WITH short squeeze setups. These are the best trades and often the biggest moves, because they are very dangerous for shorts. You’ll definitely want to sell these into lower highs, instead of the first push. Why? Because these moves can go a lot further than you think. If you sell the first move, I can almost guarantee you that you sold too early. Again, use finviz.com or other tools to determine how big the potential short squeeze could be. DGLY was a perfect recent example. A huge short float + an ABCD type setup that led to a massive ramp.
I won’t go into bottom play longs. These are for very experienced traders. I recently tried to play the bottom on KATE, and you saw how that worked out for me.
Let’s recap. There are several different kinds of longs: scalps, ABCD patterns, short squeezes, and bottom plays. On solid ACBD type setups, selling into lower highs and topping action may be more profitable than selling into the initial move, because you can usually expect continuation. Study your charts and see it for yourself. These solid breakout plays are where I have left the most money on the table. I will fix this, and this blog post was the first step.
Learning from your mistakes is easier than repeating them.So study up, folks. I’ll see you in chat.
Yours from vacation,
DerrickJL
