It's natural to boil trading down to perceptions of personal intelligence, or lack thereof.
Nail all of your trades and you're a genius. Watch them go horribly against you, and you're a dope, a fool, and an idiot all rolled into one. Such is the case, it's not uncommon to equate self-worth to trading performance and in fact, if you're not encouraged by your successful trades and bothered by your unsuccessful trades, then you probably don't care enough to invest yourself fully into trading to begin with.
While you shouldn't revel too deeply in your individual winners, you should allow yourself optimism and a sense of satisfaction when you've begun to prove to yourself that you understand the ways of consistently making money in the market. By the same token, you mustn't dwell on your losers and beat yourself up over them, at least to the point that you can't move on to the next trade without a clear head. But it's perfectly appropriate to be critical of yourself, to recognize when you've misjudged the market and traded poorly, and to seek to understand what went wrong. Trading is an immersive and reflective practice. Part of your preparation will include revisiting both your highs and your lows in order to have a clearer picture of what works, what doesn't, and why in any situation.
Above all, trading is an inexact science, which means that the market rarely behaves precisely as you'd expect it to (even if your read on it is correct), and one single approach will not suffice for each and every trade. In order to properly execute a trade, and feel good about oneself in the process, one must understand how to specifically approach the particular trade. Part of that is being able to recognize the specific movements and behaviors of each stock as it works itself into a tradeable area. Thursday, June 23rd offered some pronounced volatility on a back-and-forth day, with many stocks behaving skittishly as they made moves into areas not seen for quite some time. As is almost always the case, trading in areas with clearer stops set up winning trades, but absolute precision varied between stocks. Still, what we found if we were patient were trades that fit one profile or another.
"Closing" the Gap
One of the most reliable formations of any technical trading strategy is that a gap on the daily chart is an event that will propel a stock in whichever direction the gap occurs. Gaps are also powerful in that they'll usually signal a reversal when the gap is revisited. If a stock is rising or falling forcefully, you're advised to try and locate any gaps on the daily chart that the stock might be coming into as an area for a potential trade. Here we see Facebook parent company Meta Industries (
META) making a significant low (blue arrow at the right of the chart) as it came into a gap that it left back in April of 2020 (circled towards the left), when the symbol was FB, which resulted in an eventual run-up to an all-time high.
In most cases where a gap is involved a falling stock, for example, need only touch the low part of the gap- the high on the day before the gap was created -to sufficiently fill the gap. On its most recent move down, META actually initially filled the gap on June 21st when it got down to 155.97, two days before it made its low.
However, the low part of gap is actually 157.91 as indicated by the blue arrow on the chart to the left and META got nearly $2 lower than that on the day when it filled the gap. So what gives?
Here's a little secret about gaps: A stock will often overreact past the low or high point of the gap and not reverse until it comes into the close on the day before the gap. The close on the day before META left the gap back in April of 2020 was 154.18 (red arrow), a good distance below that day's high, and META's low on June 23rd was 154.25, almost precisely the close of the day before the gap.
Were you not aware of the close on the day before the gap, you would not have recognized 154.25 as providing a significant opportunity in META.
As shown on the chart to the right, META perfectly held the close on the day before the gap at 154.25 (blue arrow) and then embarked on a $5 intraday rally. We also had a partial retracement and form-up at around 155.30 (red arrow), where we could have made a trade with a clear stop and a defined risk against the day's low. This is important because if you were looking to get long META on this day you had a strong mid-day form-up at 155.30, backed up by a perfect adherence to a gap rule on which to confidently base your trade. Not to think too far ahead, but if you were also hoping to catch a position in META, you could have made a case that holding the gap from April 2020 after being down so much was the inflection point that would give way to a sustained rally and since then, META gapped open the very next day and closed nearly $16 above its most recent low.
The Classic Over-Reaction
A typical strategy for buying a stock is to watch a low develop, wait out a rally that proves the stock has gained some strength, and then look to buy a retracement somewhere near the low with a stop in right below the low. This strategy will work under certain conditions, for example, that the stock made its low into an area of support, and that there is some overall strength to the market in general. However, when conditions are less than ideal, you'll certainly need to adjust your approach.
Diamondback Energy (
FANG) has become one of the energy sector's biggest movers over the past couple of years. With energy stocks making significant lows on the heels of escalating oil prices and uncertainty regarding a pause in the federal gas tax, FANG was among the weakest in the sector. But with FANG down approximately 28% from a recent high above 162, and the market due for rally, FANG was primed for a buy.
Above is FANG's 5-Minute intraday chart. It shows an initial low of 118 (red arrow), followed by a brief rally up to 120.57 (circled), and then an eventual low late in the day at 117.37 (blue arrow) before rallying heartily into the close. If you'll notice, FANG sold off in the morning from 128.34 before making its first low, which is important because it couldn't break resistance from that area. This would be a sign of further weakness and that momentum would be to the downside. Each stock in the energy sector made new lows on this day given the sector's overall weakness, and FANG was among the worst performers of all. Still, with FANG being down so much one may have been inclined to buy against l18 on the retracement after its midday rally up to 120.57.
Often times, a stock will over-react through the earlier low before rallying, especially if the stock has been performing weakly throughout the day. FANG had the initial hard sell-off from resistance after the open and the head-fake rally up to 120.57 after the 118 low, all of which were signs of weakness. The trader who understands that weak stocks will often not hold lows, particularly when the market is weak, would have been looking to buy somewhere under the lows. In this case, 117.37, as shown on the daily chart above with the blue arrow, was enough of an over-reaction through the earlier low, and it happened to correspond with decent support between 117.70 and 116.80, indicated with the circles in the daily chart above. After making its ultimate low of 117.37, FANG rallied to close up to 120.65.
It's a tricky formation to anticipate. But if you believe that a stock is down too much to drop much further and simply needs to be bought as the market shows signs of reversing course, it makes sense to play the weaker stocks by allowing them to exhaust themselves to the downside one last time before striking. In the case of FANG on this particular day, buying the over-reaction below the previous low provided the opportunity to shop at a discount in a way that truly paid off.
Forming Up After a New Low
As FANG showed us in our prior example, we can get a bargain on a stock buying below an earlier low, often at a price where those who bought above the earlier low would be getting stopped out and enjoy an immediate reversal. Other times, a stock will make a new low through support but then form up a bit after the new low is in place. It's almost a kinder, gentler over-reaction because it gives you time to assess the new area and plan a trade against it with an easy stop. An example of this can be seen with investment bank JP Morgan Chase (JPM). On June 16th and 17th JPM formed up around 112 (circled) before rallying up to 116.95 the next session on June 21st. JPM fell to a new low of 111.63 on June 23rd, shown with the blue arrow, as many stocks were breaking down to fresh lows. The 111.63 low was an overreaction below the 112 area. But unlike with FANG, which you had to either catch on a new low, or anticipate the overreaction, JPM formed up by holding the 111.63 low twice before rallying with true resolve. This provided some time to trust that the low was in with a clear stop, as the greater market embarked on a rally.
It's commonly said that the definition of insanity is doing the same thing every time and expecting a different result. This definition can be expanded to mean expecting the same result in different situations. A vital component to successful trading is executing the proper strategy for each unique stock in a given situation. For example, broader sectors will act differently from each other in most cases, depending on market conditions; and individual stocks within a sector will at times act differently from other stocks in that sector. For lack of a better comparison, your stocks are like your children and in order to keep each one happy, and by extension the whole family happy, you need to know what each child's personal tastes, interests, and preferences are. Your children will each learn in different ways, prefer different things, and have personal interests separate from each other. They won't all be better at math than writing, they won't all prefer hot dogs over hamburgers, and they won't all be interested in taking ballet. Just as you need to meet each of your kids where they are as individuals, you need to meet each stock in likewise fashion.
For this reason, it's insane to think that the same one trick will work for every trade. Sustainably successful trading requires a refined approach. Even if you believe that you have a system in place that works most of the time, and therefore you will make money on aggregate, your system must take into account the fact that no two stocks will react in the exact same way in any given market condition, and your strategy will differ based on this. That way, you can trade intelligently even if you can't outsmart the market.
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