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Warrior Trading Blog

An Early Morning Drive With Ross

What’s up, everyone? All right, so it’s about … What time is it? 6:12 in the morning, and just outside San Francisco getting ready to head back on a flight to New York. And I was just sort of thinking about trading the last few days.

I’ve been in a little bit of a slump, and any time this happens I get pretty sort of self-reflective of what’s going on, why is this happening, and I think that’s something that probably every trader goes through. So I thought for a few minutes we would talk a little bit of this slump, how to get out of it. Those of you guys who’ve ever been in one or in one right now, hopefully this’ll give you a couple of tips.

So over the last three days I finished my third red day. And three red days in a row, it’s not something you go for. You definitely aren’t going for a record of how many red days in a row you can have. That’s not a record that you want to try to set, but yeah. It’s my third consecutive red day, and what’s interesting is that I had a really good green day last Friday, and then Monday I had a small green day. I made about $1,800.00, and then on Tuesday I lost 2,500, and then on Wednesday I lost another thousand, and then Thursday I lost 1,300. So over the course of three days I gave back about, I don’t know, 4,800, five grand or so, and realistically speaking, it’s not going to kill me, but three red days in a row isn’t fun.

So as I was kind of looking last night at the stocks that I’d been trading and kind of what had been working and what hasn’t been working, what I noticed over the last couple of days were a lot of false breakouts where … I mean, my strategy of being a momentum trader, for the most part, is to buy stocks high and sell them higher. And a lot of people say, “You buy low, sell high.” That doesn’t really work for day trading unless you’re trading reversals, where you’re buying stocks that have been selling off all day and you’re doing a bounce. Reversals can work. It’s a strategy that I trade from time to time, but you’re buying something that’s very weak. You’re buying weakness. And so you have to be really careful about that, because sometimes you mistime it, and you’re trading against the trend. Trading against the trend is risky, so I like to trade with the momentum.

So when I see a stock going up, I buy it as it’s going up, buying it high with the goal of selling it higher. And of course, the lowest-risk place to buy strong stocks is generally on a brief pullback. So I was trading a lot of these brief pullbacks over the last three days, and what kind of kept happening was I was buying a stock that moved up, pulled back a little bit, got in it, and it came up and would sort of re-test the highs and then just sit there for a second and then drop.

And I’ll say that I can be fairly impatient as a trader. That’s something that I ultimately … Ultimately, it’s something that I want to get better at, being a little more patient, but I think a lot of traders are impatient. And I think when we get into stocks for breakouts and they don’t happen right away, there’s just sort of a tendency at a certain point to be like, “All right. I’m giving up on this thing. I don’t want to risk it. I better just get out and get my profit.” And then you multiply that trader mentality across 100,000 traders or whatever it is, and when you have stocks that start hesitating that’s enough for people to bail out. So that’s kind of that funny thing of …

We talk about candles of indecision, doji candles and things like that, and when you’re trading momentum, seeing indecision is, like … That’s a big red flag. You don’t want to see indecision. You want to see very strong bias, stocks moving up quickly. And so over the last couple days I just had a couple trades where it was like … I got in for the breakout on a good quality setup, a totally valid setup, and the stock would pop up five cents, eight cents, maybe 10 cents. That’s the short-term resolution, but it wouldn’t break over high a day, and then it would end up failing and dropping back down. And that was starting to get a little frustrating.

And so one of the things that I often will tell myself is when we have a period where the market is feeling a little bit choppy, things just aren’t really opening up the way I’d like them to, and feels like every time something pops up it gets resistance and sellers and it just drops right back down, I usually say, “All right, you know what? You got to step back a little bit.” Instead of being really aggressive and jumping on everything that hits my scanner, which is valid during a strong market, hold off for a second and let something prove its strength. And … All right. 9.5 miles. So we should be good on her chatter for a little bit.

So the strategy there is to just sort of slow down a little bit. Wait for something to prove itself. By waiting for a stock to prove itself, which is to go up 20, 30%, to really start to open up for the first pullback to go to new highs, and really to start to make some bigger moves. It might mean you miss the first stock that starts to take off, but on the other hand, if you’ve got … Let’s just, for instance, say we’ve got a pitcher up on the mound and he’s throwing wild pitches, and you’re ducking left and right, you’re going to be really, really defensive until they start coming in as solid strikes that you should be swinging at. And so you might miss the first one, but then you’re like, “Okay, this guy’s getting it dialed in. I can start to really get aggressive on the next couple setups.”

Being able to adapt your strategy to a changing market is super critical, and I don’t mean change completely the way you trade. For me, I’m not going to go start trading Apple and Facebook just because the last three days were tough. I don’t want to do that. I don’t want to change strategies. I want to just kind of fine-tune, just slightly adapt the existing strategy to accommodate the market that we’re seeing right now. And so for me that’s going to be being a little bit more cautious about how quickly I jump into stocks, wanting stocks to prove themselves to me a little bit more.

And one of the things that is definitely tough about trading … I’ve had people ask me, “Ross, if you’re averaging about 70% accuracy over the course of the last three years of trading, for instance, why don’t you just stop worrying about all this and just always trade with the same size always?” Well, the problem there is that during a cold streak you’re not minimizing your drawdown. During a cold streak when the market’s not hot, stocks are popping up and failing, popping up and failing. You’re just going to be losing money, so it makes sense to reduce your share size and be a little more conservative, be a little slower to jump in stocks. Wait for them to prove themselves.

And then likewise, during a hot streak you’re not maximizing on the opportunity because you’re not being as aggressive as you could. We’ve had days, and I think back on some of these days where we’ve had some stocks go parabolic. We’ve had days literally where a stock will hit the scanner, my high day momentum scanner, squeeze up 10%, get halted, open 10% higher, squeeze up another 10%, get halted a second time, gap up 20%, squeeze up another 10%, get halted, and within a period of 15 minutes the stock goes up 40%. It doesn’t make sense, but it’s emotion.

The emotions start running really, really high in the market, especially when you have a stock like BSPM or RKDA or LFIN, DRYS, any of these stocks that just go parabolic, which is to say that they go up in excess of 200% within a period of, I don’t know, like a couple hours. It starts to get traders really excited, ancy, and impatient waiting for that next move. It’s like the next thing it starts to take off … If I miss BSPM, there’s no way that I’m going to miss this other one. I’m going to jump in it that much faster. And, I mean, I do it myself, because it’s hard to fight that instinct.

And again, you got to remember the market. It’s where hundreds of thousands of millions of traders come together, and in a lot of way it’s driven certainly by speculation and by fear and by greed. And so when you have traders who are very, very fearful. You can have markets that are very hesitant and are weak. And when you have traders who are feeling more greedy and you’re seeing big moves and they want to try to get a piece of the next one, you’re going to see markets that are irrationally strong.

You know, that old saying of the markets can be strong … The markets could be irrational longer than you can remain solvent. Sometimes I’ll see beginner traders short a stock that’s up 100% thinking, “Look, it’s up 100%. This is crazy. Doesn’t even have news.” Next thing you know, the stocks up 200% and they’re like, “What is going on? This is crazy.” 300%. What? How’s this possible? 400%. 500%. 600%. Just like that, they’re account’s blown up. They’re gone. The stock goes up 650%, and then two weeks later it’s all the way back down to its original price. So you had this little pocket where emotions were running extremely high on the stock. Volume was really high, far above average. Goes totally crazy, and that short seller may have been right, ultimately, in the long run, but could not remain solvent long enough to hold that position.

And you look at a stock like LFIN that goes from $7.00 to $140.00. That’s crazy, crazy, crazy, crazy. That’s like 2000% move, and now the stock, I think, is de-listed. I mean, it’s like zero. So, I mean, ultimately someone who shorted at 50 bucks was right. But could they afford to hold it to 140? Probably not. And so this is where emotions start to run really high, and again, you have to, as much as you possibly can, not apply a strong mental bias to the stock of it should do this or it should do that, because stocks are perfectly happy to do the opposite of what you think they should do. And instead, simply focus on trading the chart pattern that’s in front of you while at the same time keeping mindfulness and awareness of the general market sentiment and sort of the momentum meter, which, you know, isn’t like a real thing. It’s just the general trader consciousness. Are traders currently right now really aggressive or really kind of fearful?

And I would say the way I would try to create a MOMO meter would be to run some type of scan of in the last three days, how many stock have moved up more than 100%? And any time that number is higher than, I don’t know, two or three, you’re in a pretty strong period of momentum. If in the last couple days you’ve only had stocks going up 50%, okay, meter’s a little lower. If you only had stocks going up 20%, that’s a very slow market for active day traders. 10%, 15%, that’s horrible. So kind of measure that way, because when you’re in a market where you’re seeing stocks every other day going up 50 to 100%, 200%, that’s when things are getting crazy.

So anyways, for the next couple days next week I’m just going to try to focus on sitting tight a little bit until momentum takes off, not trying to really be the first one to jump on a stock that hits the scanner. Let it prove itself to me and then go ahead and take a stab. All right. So that’s it for me. Getting close to the airport here, so I got to switch gears and get focused. I’ll see you guys back in the chatroom.

Oh, hey. I didn’t see you there. Well, I was just working on the dream board for my next home run trade. Hopefully it comes soon. Until then, make sure you subscribe to get email alerts any time I go live or upload new videos. Until then, happy surfing.

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