July 29th

Just barely had a chance to get in some market time today as day-job continues to be busy.

One paper-trade, a short on FAS off the big volume spike at 3:45 pm. This was a high probability signal but a trade which I should have stopped out of on any other stock because it went 16 cents above my short price... on this stock, a 3x multiplier, I extended my normal 7-10 cent stop to 20 cents because of its volatility. With only 500 shares, that's a stop-loss of $100 with the potential to make much more. I exited the drop in the stock when it stalled, but then it dropped again to a low of $52.77 in the next candle, offering me up to 36 cents of gain. I took half at 18 cents. Before last Thursday, what I might have done was double down (add to the losing position) in anticipation of the reversal I thought would come.
And that is why it was so powerful a drug to me. I would win big when it worked. And, it worked much, much more often than it lost. That entry signal has a high correlation of success but when it doesn't work during a big trend day, it is a BIG loss because of all the shares you have in and the fact that the revesal didn't come. I write this mostly as a reminder to myself.

Now, as further evidence of it being a good (but not perfect) sign of reversal, take a look at the drop in FAS from 12:50 pm to 2:10 pm on a 5-min chart. A really nice down trend of $1.33. At 1:00 pm, there is a big downdraft candle accompanied by a large volume spike. That would be a sign to me that a change of direction would take place. If you were already in the stock, it might be where you would take off half, or more conservatively, exit altogether. While the next candle (1:05) is red, you can see the run-up to $53.11 in the price before it resumed its downtrend. You'll also note that after that 1:05 candle, the next three candles are range bound as the stock consolidated after the drop which began at 12:50pm. The stock then broke down out of this brief consolidation to $52.32 with another volume spike at the end, albeit a shorter one than 25 minutes before. What did the stock do after this smaller but notable spike? It reversed direction over the next 3 candles, a 40 cent pop. - Momentum, retrace, consolidation; momentum, retrace, consolidation.

I should note that the volume spike as a probable indicator of pullback or reversal seems to apply only at the end of trends. Volume spikes at the beginning of runs may indicate a big trend move is coming in the same direction. Sometimes, it doesn't seem to mean anything. That's probability for you... and the reason I now am faithful about using stops. Lesson learned.

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1 for 1, a 100% win rate. Gain of $85 in .25 hours of paper-trading.