July 21' Lund Loop AMA
When you buy pre-breakout, when do you consider the trade to be “wrong?”
This approach involves breaking your standard, full-size position, into smaller buys over time based upon intraday price action.
Accumulating a position intraday – over multiple days - is more of an art than a science, but that doesn’t mean we throw out our risk management, we just reframe it.
By being patient and adding incrementally only when the chart/price action warrants it, we will ideally have a better average price by the time our full position is filled.
And if we’re buying against well-defined intraday support levels on a 5 or 15-min chart that provides us with objective chart-based stops, we’re also managing risk aggressively and strategically.
How to size positions in general
I wrote about this previously in a post entitled “The Most Important Concept for Successful Trading.”
The key to this concept is that you reverse engineer the process.
When sizing a position, traders often pick an arbitrary number of shares, one that has no relation to their entry price or to a logical stop loss level.
Then if the trade moves against them they often hit their max loss in terms of dollars and close out their position – just before the stock hits a logical stop/support level, bounces, and moves back in their favor.
By taking your account equity, the max dollar or % you’re willing to lose on any single trade, and the spread between your entry and your chart-based stop, you can easily calculate your optimal position sizing.
After doing this for 35 years I can do it in my head, but back in the day, I had a spreadsheet that did it for me automatically.
Hit me up if you want a copy.
Do you take (intraday) volume into consideration when buying on weakness?
I’m not a conspiracy theorist, but after spending five years on the broker-dealer side of the market and seeing the mechanics of volume reporting, let’s just say I’m skeptical of intraday volume numbers.
Let me clarify this a bit.
The smaller the time frame the less likely I am to pay attention to volume.
So besides the opening hour and the closing 30 minutes, I don’t factor volume into my intraday trading unless it’s something like an obvious spike at a key spot, like a pivot point or support/resistance level.
I’m much more likely to factor volume in on a daily or weekly.
All technical analysis is made up of just two things – price and volume.
When I was starting out, I weighed volume into my decision-making much more than I do now.
But just like technicals alway trump fundamentals, price always trumps volume.
Today I’d say that my attention is about 85% on price and only 15% on volume.
How do you narrow down your universe of stocks to trade?
I like to cast a wide net in terms of the stocks that I put on my watchlist.
But in terms of the stocks that I regularly trade, they’re nothing special or exotic.
Back in the day, I used to try and trade stocks that nobody else knew about, but that was just my ego getting in the way. Those stocks are avoided for a reason, and you don’t get extra credit – or money - for trading them.
My regular trading vehicles are the FANGs, the financials, the EV stocks, and so on, the ones we’re all familiar with.
Many of the stocks I have on my watchlist I never trade, either because they’re too thinly traded or move oddly, but I keep them there as sector representatives.
Then when those sectors get hot, I look for the go-to names in that sector to get involved with.
I used to do scans to try and identify which stocks were hot, but I spend so much time on FinTwit and looking at charts these days that those hot stocks now surface organically.
For example, I’ll go through my charts, flag those that look good, then see my picks confirmed by commentary on FinTwit by traders whose opinions I value and trust.
Basically, less is more, keep it simple stupid, and so on.
How do you determine if a stock is a short-term or longer-term trade?
The chart of every stock I enter is set up for a long-term trade. And every trade I make I expect to be short-term.
Here’s what I mean.
I look for patterns and setups on daily charts, that if triggered, have room to run for days or even weeks.
But after I enter them, I’m willing to bail and book a profit if intraday price action dictates that I should.
For example, say I enter a stock as it’s breaking out and it runs for a while on a 5-min chart, then pauses, bases, starts to move higher, but stalls and reverses.
At the point that it breaks below the intraday base, I might take a partial profit, giving it some room to find traction and continue back higher.
As the day goes on, if the stock continues to move lower, creating a reversal bar on the daily chart, I’ll likely close out the rest of the position as my longer-term thesis has failed – or at least is not yet ready to play out.
But if the stock moves well intraday, closing strong, then I’d be more likely to hold it overnight.
In this current choppy environment, I’ve been doing just that, entering a full position intraday, booking a partial profit when available, and then only swinging a partial position if the stock finishes the day strong.
This reduces my overnight risk and gives me more flexibility to manage a position going forward if the stock moves sloppily.
What is your trading style? Do you day trade, swing trade, or position trade?
All the above.
When people think of active traders, they usually think they are one-dimensional.
But we’re people just like everyone else, with savings accounts, long-term investments, IRAs, 401k’s, and so on.
In a perfect world, in my active account, I would only swing trade. When the market conditions are right, I think that swing trades offer by far the best reward vs. effort ratio.
But it’s not a perfect world so I day trade when it’s appropriate to generate cash flow. I’ll even scalp at times, using the Nasdaq E-mini’s exclusively for that purpose.
And despite being technically biased, I do have some long, long-term opinions on certain stocks and sectors and will hold core positions that I trade around over time.
What book or person would you say you’ve based your trading style upon?
There are a lot of people I wish I traded like, but don’t.
For example, when you look at the way Greg Harmon trades, it seems so logical, so objective, and so emotionless – in the best sense.
I picture Greg running his scans, doing his analysis, then placing his trades and sitting back with a glass of bourbon and a nice cigar, calmly managing his positions with a pre-determined strategy.
In reality, I’m sure it’s not that easy, but I suspect his methodology is a lot less stress-inducing than mine.
But good or bad, I can only trade like me.
By the way, Greg has a fantastic book on trading that outlines in detail his strategies and methodologies.
I highly recommend it.
It’s a part of my “20 Timeless Books Every Trader Should Read” list.
Do you prefer to trade a stock after an earnings surprise or disappointment?
It doesn’t matter to me either way because all I care about is price action.
A company can report an upside earnings surprise and see their stock tank.
Conversely, they can report an earnings disappointment and see their stock skyrocket.
That being said, post-earnings there is sometimes a “Hound of the Baskervilles” play to be made.
“The Hound of the Baskervilles” is one of Sir Arthur Conan Doyle’s most famous books in the Sherlock Holmes series.
I’m sure I was assigned to read it at some point in high school, but I never got around to it. Nevertheless, I know enough of the plot to make use of it here.
In the novel, Sherlock Holmes deduces who killed Sir Charles Baskerville based upon what didn’t happen - namely, that the hound of Baskerville Hall didn’t bark when the murderer entered the estate to commit his heinous crime, indicating that it was someone the canine knew.
Clues like this also exist in the stock market.
Take for example a stock that reports an earnings disappointment and gaps down at the open.
Most people would expect it to keep moving lower on the bad news.
But, if instead, it does the unexpected, quickly rebounding, first filling the gap, then breaking above the previous day’s high, that’s a clue that sellers might be exhausted - and possibly an opportunity to get long for a day or swing trade.
What are your thoughts on being consistently profitable?
I used to worry about being profitable every day, even going as far as to have a daily profit goal that I strived for.
As I’ve gotten older, I’ve realized that it’s more important to focus on how well you are trading instead of how much money you are making each day.
It’s something I’ve learned from watching professional poker players.
Poker players and traders struggle with the same dilemma – when to stop.
When to stop for the day, week, month, or even year.
The best poker players, the ones who are successful year after year, will keep playing not based on how much they are up or down but based upon how they are playing.
Are they making good reads, managing their bankroll correctly, staying focused, using proper risk/reward strategies, and so on.
They know that the game has swings and is subject to bad luck and tough breaks, but that if they continue to play well, over time, the money will come.
So I try to focus on being consistent and trading well, instead of making a certain amount of money each day.
It’s much more important for me to be profitable on a weekly or even monthly basis than on a daily one.
This AMA is from the July 30th, 2021 Lund Loop subscriber call. For context, the market at the time had been choppy for months, where breakouts failed and you had to buy weakness and sell strength.
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P.S. It should go without saying - but I’ll say it anyway - all opinions expressed in The Lund Loop are my own personal opinions and don’t reflect the views of my employer, any associated entities, or other organizations I’m associated with.
Nothing written, expressed, or implied here should be looked at as investment advice or an admonition to buy, sell, or trade any security or financial instrument. As always, do your own diligence.