In this series of posts, we’ve been looking at WYNN as an example of how a sweet spot trade can unfold. The beauty of this sort of trade setup is that if prices can start in the right direction, you can work to ensure a winning outcome before the trend is really confirmed.
We described stage one as the setup, and stage two as reaching the first road block. We had a good example in WYNN of a stock that had an extended test of Daily resistance. Today we observe what happened when prices finally broke resistance (2:49)
As I do in the Q&A call (2:49), I will try to talk about observations from two perspectives: holding the position & observing/on the sidelines:
If you have the potential long position:
From this perspective, clearly things are going well when the buy signal finally rolls through, and this is precisely the time to remain vigilant about the position. As before, if we assume that we are wrong, we can discover means to reduce variance while things are still going well. Here’s what the weekly chart looks like as the trend appears to be continuing from the sweet spot at stage one:
Failure to continue up from here can mean a reversal or congestion
Our sweet spot trade is made around the premise that the weekly trend will continue off of support, and so far it seems to be doing that. But this can only really be confirmed by continued price action beyond the recent high at $105.69. Such marks another bull/bear battleground and another road block. So again, we can think of ways to take some profit off the table:
- We can come in a bit off of those highs to set a limit, we like did in stage 2 using the Daily resistance
- Setting the limit can be hard – Since prices are going up parabolically, we don’t have to use a price target
- The price closing outside the red upper band is the dynamic target to take some off.
We’ll see in this example that prices got up a little more than one point, before breaking sharply. This sort of move may be exciting, and we wish to hold it and keep watching it go up, but prices frequently need to pullback after such price action – call it a blow off or profit taking.
- Leave some exposure on for the positive surprise, but scale out like at stage 2
- If prices keep on going, you don’t need to feel bad for reducing exposure – it saves you on sharp reversals.
- As an additional takeaway: at the start of the trade, we may see the position in thirds – a third comes off at Daily resistance, a third comes off into the next road block, and a we get to leave on for the trade to run
That doesn’t mean to size positions up for that last 3rd. Keep the discipline of sizing your position around the initial risk.
Number of shares = how much you can risk (e.g. 1% account) / initial risk per share
We should get enough extra juice on the trade simply by having the small initial risk (the denominator in that equation). Next post will cover the perspective of an observer on the sideline & the ideas can be applied also toward trading around the position…
Also, with this series, we will be holding a 3-day sale for ‘back to school’, beginning August 17th. Summer is ending, which means the kids are headed back to school, and traders are also returning from vacation. That makes this the perfect time to get back into the swing of things before Q3 gets going. More details coming soon