First of all a little introductory word about my trading strategy. I'm basically a momentum-swing trader, meaning that I trade stocks which I expect to move quickly, in a matter of no more than five days, into a wanted direction. Some of my trades are day trades and some last for several weeks, but most of trades will be closed in less then a week. I mostly trade on the long side, but will do occasional shorts if conditions tend to be favourable to bears (as they are now). Stocks are my number one trading instruments, but will do occasional trades in commodities, especially gold and silver, and currencies, such as US dollar.
In general I trade six bullish patterns which I've analyzed and found them to be the most consistent ones for quick swing trades. They are not chart patterns in a sense that most traders understand patterns (i.e. cup with handle, triangle, double bottom, channel, etc.), but are more like contextual patterns. This means that they describe a context, or a cycle/stage/phase, the stock is currently in. A stock can be in solid uptrend, basing, bottoming, etc. I've even made up some stupid names for them. I call basic batterns Bounce, Squat, Resurrection, Launch, Breakthru and Runaway. Some of these patterns can also have continuation patterns, a second stage buy points, which have been named also. I won't bother explaining the mechanics of each pattern in this post, but will rather explain every pattern in a real-life example of a trade, when it occurs. OK, enough talking, let's do some trading!
The first trade I closed this week was NTSP. This was actually a pretty unfortunate one as I got stopped out with a loss, only to see the stock rally from that point on. But, frankly, I made several mistakes in this trade. NTSP was a Resurrection pattern in its basic form. A Resurrection is a bottoming pattern. As the name implies, the stock is somehow being resurrected after being beaten down. After a several mont long downtrend, stock starts to make a bottoming base. When these patterns break out, they can produce some very nice gains in a very short amount of time.
So, after being pushed down for several months, NTSP started to bottom in August 2011 and built a nice ascending triangle in the next four months, with a very, very clear buy point at $6.50. This is a picture perfect resurrection pattern. The basic definition is that stock must consolidate for at least two months, provide a clear buy point, should not rally too much from the lows and, ideally, shouldn't have any upside resistance anywhere near. Everything lined up for NTSP to go up to 8 and probably even higher.
Now, the main problem is that I found stock on December 1, only after it has already broken out od the pattern. It was too extended to buy back then. I also didn't buy pullback to the buy point the next day, since I don't trust stocks that pullback immediatelly after the break out. Stock than built a very tight flag pattern with a clear buy point at 7. It even produced a little shakout right before it broke out. I bought this breakout and got shaken out the very next day as stock gapped down a little bit and fell below muy stop loss at 6.97. What happens next is seen from the chart.
So, what were mistakes I made in trading NTSP. There were many. First of all, buy point from Resurrection pattern was 6.5 dollars. Period. I should've located the stock earlier and buy that breakout. Secondly, my stop was flawed. A safe stop should've been put below the day of the breakout at around 6.75. I bought too late at 7.20 and was forced to put a stop right beneath 7. Which is not bad for a breakout from Resurrection pattern. But what I bought was not this pattern. It was a second stage short term base and these tend to produce a little bit more wiggling as the breakout point is not that well determined. Third, in a hurry to buy I actually miscalculated my position size. According to my money management rules I shouldn't have bought no more than 500 shares, but it looks like I mistyped some number in my money management calculator and got 700 shares. And the fourth mistake. Market was pretty shaky lately. My position in NTSP was way too big for these kind of market environment when indices threatened to produce a sell signal. I don't regret buying the stock at all. I would make the same if I had the same opportunity. But simply, I should've bought less shares earlier with a less stringent stop. That's it. Learn from mistakes.
The second trade was UUP, which is a US dollar ETF. Now I don't generally trade currencies, but this time I decided to make an exception. I'll explain why. US dollar bottomed in May 2011 and started a real rally in September. Such long term bottoms don't top just like that. Dollar is still in a long term downtrend, but the action seen in past few months suggests some sort of relief rally is under way. The first rally produced a very deep pullback, scaring most weak holders to sell I guess, and then made an extremely right translated cycle. Right translated simply means the time between the start of the rally is much longer than the time from top to the next bottom. The ratio in this case is 20 to 4. Right translated cycles make higher highs in most cases, so I bought a confirmed swing low.
Dollar is a very slow mover, so my position was almost 3 times my normal position. I sold everything five days later on a gap into new highs. Why? Just because dollar is in a long term downtrend, because gaps to new highs are often signals of double tops, which is still a probability, and because I had a pretty nice profit with a strong three day rally, which I did not want to waste. So, this was a very well timed trade from buying and selling standpoint in my opinion. The only mistake I made is that I traded a currency, which is not my specialty. But, as I said, stock market was getting weak and I wanted to have some sort of a hedge in case I screw up long stock trades. Which paid off perfectly this time as I was still able to close the week positive in spite of a loss on NTSP.
So, that's it for this week. I hope I'll have more trades to report next week, hopefully all of them with a profit:)
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