The Big Trade by Peter Pham

Author:Peter Pham
Language: eng
Format: epub, mobi
Publisher: Wiley
Published: 2012-11-25T16:00:00+00:00

What is the probability of price rising 0.5 percent after it rises 0.1 percent and breaks the opening range?

Table 3.4 answers 63.2 percent. So you can enter a trade in gold with a 63.2 percent certainty of making 0.4 percent on a trade if the price exceeds the opening price by 0.1 percent. Table 3.4 also tells you that if gold breaks above the open at all, 91.8 percent of the time it will move more than 0.1 percent.

When a range breaks, in my experience, the only winning strategy is to do as I described above with respect to the momentum, and that is to go with the flow until it ends, taking your profit and being satisfied with it. As a general rule, you can expect the trending move following a breakout to last as long as it took for the stock to break out of the previous range. For example, if XYZ Corp. traded between $6.50 and $7.25 per share for a week, you can expect that once the stock convincingly bests $7.25 on strong volume that the trending move will last days and not minutes. Regardless of that observation, which may or not be helpful, reviewing the statistics for greater and greater deviations from the open will tell you when the odds are no longer in your favor.

In the end, it is important when starting out to begin slowly. Find one or two situations, or setups, and master them. Don’t mix and match. I don’t trade every setup that comes my way. I have a few that I am comfortable with and execute on with a high degree of success. It was in studying a number of different setups that I identified the ones where I was most comfortable, and I still trade only those.

What you are looking for is similar to something that happened in the AAPL trade I outlined in the last section, where the odds were excellent that there would be an opening range breakout to the upside on a very small movement in price. That made a perfect entry point for a high-probability trade. Then as the trade developed and the first price objective was reached my odds of capturing more price appreciation (the move from +$1.00 to +$2.00) went down, but they improved after that (the move from +$2.00 to +$3.00).

Moreover, since the opening-range breakout for the month occurred over a very small total range—$0.60, as compared to an average monthly range of $4.11 (data not shown)—there were even odds that I would see nearly $4.00 of price appreciation that month alone, which is exactly what happened. For a position that cost me $24.20 per share to put on, I had even odds to make $3.51 per share ($4.11 average range minus the difference between my buy point, $24.20, and the low of the month, $23.60) or 14.5 percent gain.

This kind of favorable setup is nearly the closest thing to the perfect storm that you could ask for. It would have been

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