230FIGURE EX26Open-low–break setup. (RealTick graphics are used with permission of Townsend

230 PART THREE Practical Examples 231 ing shares into that round of selling was perfectly valid, too. I felt that I had the overall trend with me, that I had BRCM action with me, and that it was worth holding on another quarter of my shares for movement under $42. I then had a quarter of my shares left. It was now time to make a con-fidence level. This is different from a trailing stop, which means that if you hit the stop-loss level that the trade is exited at, take the stop. A con-fidence level means that if you hit the confidence level, you’re less confi-dent in seeing better prices in the prevailing trend. I judged the confidence level based on retracements. You can see how BRCM held at above $42 and went to $42.60 before backing off again. If we were to go over $42.60, we would show a higher high, and I’d be less convinced that we would see a lower low. So instead of taking a stop here, I used the next round of selling under $42.60, and my stop was at breakeven. Then I tried to get a better fill somewhere under $42.40 for the remaining shares. The risk is that you get a breakeven stop. The reward is that you get a better price under the confidence level for more profit. This is your decision. You can see how this level held well enough to give us a move at under $42, which is what I wanted for the remaining quarter of my position. The tape-reading principle of faster selling is shown on the chart at the circle—the one with the vertical price bar that is labeled 3. On the vol-ume chart, you can see the volume spike to the sell side. These two things combine to say to “cover it all.” My target profits were met. I had confirmation according to tape-reading principles, so I took my profits and moved on. And, by doing so, I missed out on nearly 1 point more in potential. Do I care? I don’t. I played the trade as well as I could within my system. So I’m happy with my assessment, my aggressiveness, my scal-ing out to lock in profits, and my final exit on my remaining shares. Everything was in sync for this trade, so I have no reason to regret missed profits. 232 PART THREE Practical Examples E X A M P L E 2 7 Fading Breakout This example on Adobe Sytems (ADBE) describes how to fade the break-out setup. Again, to fade a setup is to initiate a position contrary to what the setup should bring in profitability. You will see how volume indica-tions on this setup offer a higher probability for a short setup than a long setup on the break of resistance from the open. Thus fading the long setup means initiating a short position after the failed breakout of the resistance. (See Figure EX27.) In the chart, the resistance is clearly marked from the open high at the $37.50 level, which leads to a move into support near $36.70. From this support, a reversal forms and moves the stock back up to the $37.50 level. Quite often, 30-minute highs will form a significant level that traders key in on for watching for some kind of reaction from the market. F I G U R E E X 2 7 Fading breakout. (RealTick graphics are used with permission of Townsend Analytics, Ltd.) PART THREE Practical Examples 233 In this case, the stock trapped the buy-side players and rewarded the short-side players. As the stock moved higher into the $37.50 level, you can see volume indications that showed a steady buy-side slant. Near the 10:30 a.m. period, however, volume began to increase, and eventually the volume spike corresponded with a price spike. Tape-reading principles suggest that minority action is slow and stable and that majority action is erratic and unstable. Given the increase on the buy side in relation to the volume as well as the price increase being more vertical into resistance, there is higher probability for the breakout to fail on that retest. Traders want slow and steady buy-side volume into resistance because it shows good sup-port. A volume increase and a price spike into resistance show that the probability is higher for the buying to have been exhausted and that there won’t be enough buying on the break of resistance to keep the stock mov-ing higher for profitability. This leads traders to fade the breakout in the hope of seeing the break of resistance trap more buyers with unsustainable upside movement resulting from exhaustion buying. Traders initiate a short position on the break of the resistance and look for the trade to move back below the resistance point for better confidence. Traders then look for a break of the most recent support to confirm that the downtrend is intact from that faded break. This support level in the ADBE example would be around $37.30. This is regarded as support from the level that paused briefly before reaching back over the 30-minute highs. Scalpers who wish to initiate a 1:1 reward/risk ratio for this trade would look for a cover into this support with a stop at the high of the level from which the trade would be faded or shorted into. Those traders who wish to scale out of the position would then exit a portion of their position into this support level and trail the stop to breakeven levels. If the position were to break this $37.30 level, traders could then begin to pick out their next support target based on the previ-ous price action and to look for an exit on the remaining position. In this case, we would see support at the $37 level. Unfortunately, the stock never got that low and moved back into resistance, where the remaining portion of the trade would be exited at breakeven levels. 234 PART THREE Practical Examples E X A M P L E 2 8 Short of the Range Resistance This example of Brocade Communications (BRCD) illustrates trading within a range. Tape-reading principles within the range show why taking a short position into the resistance level at the early range was a higher-probability setup rather than initiating a long position looking for a breakout. On the day of the trade (See Figure EX28) the stock was in an after-noon downtrend on good volume consistency, showing that the near-term price action was suggesting more downside ahead. Given that the stock gapped up the next morning into the previous day’s resistance level com-bined with the previous day’s afternoon price action, we would be look-ing for a short setup from the open. Having missed the early entry on the open-break play at $26, we were forced to wait for a range to form in F I G U R E E X 2 8 Short of the range resistance. (RealTick graphics are used with permission of Townsend Analytics, Ltd.) ... - tailieumienphi.vn