ERJ March 19th 2010

ERJ (Embraer) gapped up with volume on Friday Morning.  
Following Tom C's entry rules from the Trader X blog  on opening gap plays - produced a profitable trade. Check it out.

Here are my business rules to help capture potential profitable targets:
- 9:35AM East. Scan for opening gaps using the following parameters. I use FinViz in real time (you must subscribe to the Elite option):


Scan Parameters

• Minimum daily volume average >500k shares/day
• Current volumes 3x as normal average daily range.
• Price above $5
• Gap up +1% 

- 9:35-9:50 Once this list is produced (I typically flip through 15-20 contenders) i will look for a first Solid white Candle and 2 consolidation candles (hammers and/or no wick above) above the top half of the first Marubozu.  
- 9:55-10:00  By that time i usually have 3-4 candidates to trade.
-10:00-   I will look for a clean break of the candle that will close a point above the opening range.
- Other considerations:  I use 10 minutes periods for scanning ; rely on the 8 Period EMA as guide to a clean trend.  Plot Fibonacci pullback/expansion between first pivot of day and previous day low. Check out this link for reference.  
- Exit rules: i will usually use two rules:  

1.  I will use the 5 period RSI to guide an exit by getting selling once the indicator crosses below 70 or if i notice a big divergence between highs.
2. The low of a candle violates the last low from the previous candle that marked a high from the day.

Trading the Opening Range

After going back to reading classic posts from TraderX -Wall Street Warrior and Maoxian (cant wait for his site to get back up a running) - i am  focusing my trading on the opening range (the first 30 minutes from the opening bell).

Couple of things that i am looking for (15 minutes Charts):

1- High Gap from previous day close (+2%)
2- Blue sky above
3- 2x usual volume
4- No trading before 10:00
5- Looking for consolidation bars

2010 Trading Resolutions

In the new year i would like to accomplish the following:

1. Reduce total number of trades.  In December - i had 116 registered trades (yikes). Looking back i realize that i spent way too much time in initiating entries and not enough managing actual trades.
   
2. Allocate more time on managing open positions -meaning allowing more time for movement to unfold when positive and cut loose of  losing trades at the right time.
   
3. Re-visit trading timeframes - right now most of my decisions are made based on the 10 minutes / 3-4 timeframe.  I am using the daily / 6 months view to see the bigger picture and the 30 minutes / 5 days for support and resistance areas.  Reasoning behind looking at a different timeframe is to minimize risk and increase win %. Right now i would say that my win % is approx 50% but cant say that i am making profits at the end of the month
4. Concentrate on a few good set ups and become a master at trading them on a consistent (profitable basis)
   

Trades

Here are illustrations of a couple of typical opportunities that i would like to capitalize on:

Opening Gaps

Screen: 

1. Min Price $2 Max Price $20
2. Avg Daily Volume >300k
3. Pre Open Volume >30K
4. Pre Market Price Must Clear previous session High

Entry:

1. Use 10 minute Bars
2. Enter when high of first 15 minutes or Opening Range is broken to the upside or break of first 10 minute Bar
3. Stop is low of the 2nd bar
4. RSI 8 must be through the roof
5. EMA 8 must not be violated - could also try 10 MA 

Exit

1. RSI 8 divergence
2. RSI 8 is crossing the 70 oversold line

Example #1 - VICL

Example #2 - STEC

Very good article on Stops and adapting to new trading environment

http://www.sfomag.com/article.aspx?ID=1448&issueID=c

2010 Trading Rules

2010 Trading guiding principles

 Stock Scans (using finviz:  http://finviz.com/screener.ashx)

1. Scan for Ascending Triangles, New Highs and Multiple Tops
2. Closing price above 20, 50 & 100 MA
3. Average Volume >300k
4. Current Volume 1.5 or better

 Entry Rules

1. Look for clear breach of prior resistance
2. Buy on the first pullback. The rationale is to get rid of Trading BOTS that aim to sell new highs
3. Breakouts must be met with volume
4. New highs must hae higher relative strenght that the previous high by comparing RSI 7 readings
5. If new high doesnt show Momentum - prepare for a Short setup

 Exit Rules

1. Break of current trend
2. Break of momentum