FSLR: Another failed follow through to really drill it in!

A few days ago I had the pleasure of writing about one of my favorite trades the failed follow through. I love them because they are very predictable and tend to work right away. My patience is not my strong suit so these plays work great for me. Let's take a look at the daily chart for FSLR after todays action.

As you can see FSLR has two very big bullish days leading into today's action. I knew I was not going to take a long here no matter what. I also drew the line of daily resistance that price was at. My goal for this in other words was failed follow through, And this is exactly what happened today

At the open we saw a strong candle, which is why having a written out plan and a strong bias is of extreme importance. It also helps in maintaining calm and simply waiting for your bias to confirm. What was I looking for? a failed follow through. What am I looking for to confirm this on the intraday ? I want to see a quick push followed by an even quicker fail. As I always say the daily chart comes first. This one could be taken short as soon as you saw some sign of red, but ONLY because the daily was so extended and it was hitting an area of resistance. If this was a bullish chart with room to go taking a short at the first sign of red would be a pretty impulsive thing to do. Since you had your bias for this action taking a short that quickly was simply you following your fantastic plan. Remember the analogy of the little engine that could and then all of a sudden it couldnt and falls right back down. When all charts align for a failed follow through it tends to be a nice homerun play to the short side. Hope you enjoyed this!

ROVI : Anatomy of a Failed follow through play

ROVI : Anatomy of a Failed follow through play

First of all I need to give credit where it is due. I learned this play from Nathan Michaud over at INvestors Underground. The first time I saw this set up being talked about was in his DVD textbook trading. Now that I got that out of the way let me give you my take on it.

What exactly is a failed follow through? It is a chart that is a bit over extended to the long side ( on the daily timeframe ) Preferably you want the day prior to have been a strong day but you also want to see some trouble heading into the close. So it tried to close on its highs and maybe it did but it suffered to get there. Let's look at the daily chart on ROVI after today's action

You can see here that it had a huge red day today. It opened green but closed deep red. So what on earth happened? Here is a look at the intraday with 2min candles shown

This is a pretty solid example of a failed follow through. The stock in question HAS to be slightly overextended or it wouldnt set off the radar for you to take it short in the case of a quick failed up move. What is the psychology behind this move? Well whoever saw ROVI yesterday would say ok this is a solid long play , if it gaps down I can take it r/g , this is the mind of a professional trader. What happens when amateur traders see the gap up? Many want to chase. They saw the action yesterday and they dont want to miss out. But the pro knows that this has ran quite a bit and another gap up is NOT sustainable. So what happens? It pops green and then instantly it is faded. Once you have that bias in place you know what to do the second you see this move. You short it! and short it hard! I like to visualize a train trying to move up the hill and it just slides back because it can't push any further. That visual has helped me to understand what a failed follow through play is all about. It tried to pop its ugly head and gets wacked. Remember though, as I always say, it is the BIG picture that counts. Hope you guys enjoyed this post!

RAX: Why having discipline and having a plan is so important in trading

RAX: Why having discipline and having a plan is so important in trading

Here is a look at the RAX daily chart after its action from yesterday.

On Thursday I noticed that RAX had two strong days after a gap down that held. I also noticed that it was approaching an area of resistance, and area that I did not think price could go above. Of course in trading anything can happen but from a probabilistic perspective that was my line in the sand. You can see it drawn on that chart. Since we do not know how the stock is going to open on a particular day we come up with a plan as traders. For a gap up scenario, a gap down, a flat open etc. My bias here was short ONLY. I love to have a strong set bias because i do not become confused if my bias isnt as strong. Having a bias is one thing, timing an entry is a completely different ball game. This is what separates a stock picker from a trader. I can say " this will be short" but completely mess up my entry and end up losing money even though my direction was right.

Here is a look at what happened intraday.

This is a look of the 1min chart for RAX. As you can see RAX gapped down. If you do not have your plan written out and a system for trading a gap down stock into an area of resistance you may do what I did to start the day and short into the weakness of the early morning action/ This is a purely psychological mistake. I know that in this kind of situation you wait for the stock to bounce a little perhaps to r/g area and then short from that area or close to it. For each situation you need to have a plan , a system you can't just look at intraday action and say oh I think this is going to happen. You need to know what usually happens in a particular scenario and WAIT FOR IT. What if I saw the r/g play setting up and forgot that the daily was at resistance. I would have taken this play long and got screwed again.

Sometimes a stock that gaps down after touching an area of resistance will just collapse, it could happen of course and if you want to be in it you can with a small position or on a pullback. You do need to know that the "setup or plan" for this scenario is usually going to involve a move higher to make people feel this is a r/g and then the short comes into play. o So develop your play list and your checklists and plan for each scenario and trading will start to become much easier.

The hard work should be done BEFORE the trading day NOT in it. This is what leads to failure , confusion and random trading which kills all accounts