|6 types of relative strength/weakness very specific to MY intraday trading.|
Everybody has heard of relative strength and relative weakness, but what exactly is the strength/weakness relative to?
What is being compared? And how is this useful in intraday trading?
This article explores/answers these questions and offers some examples as food for thought.
As readers, please understand the following types of relative strength/weakness are highly specific to my personal INTRA-DAY trading.
Some readers might disagree with some of my inclusions, exclusions, conclusions and points, which is fine with me.
My monthly intraday trading volume ranges between 10-20 million shares and have been trading full time for the past 16 years. (Only trade Nasdaq and NYSE, no OTC)
Point being, the concepts described in this article have been learned/defined/refined through enormous amount of experience and used every single day by me.
Concepts described are generalized and there are always exceptions to everything.
75-80% of my intraday trading volume is on the short side, so concepts described focus on the short view. For long view of trading try to flip the switch.
Also, keep in mind, this article is not a book full of detail, but rather a one page very brief introduction to a book. (NO, I have zero interest in writing a book)
Type 1 Relative strength or weakness of a stock (price action) compared to a benchmark index most related to the stock.
SP500 stock compared to SP500
Dow stock compared to the Dow and SP500
Tech stock compared to Nasdaq and SP500
Before even considering trading any stock, its important to get a general trading game plan for the upcoming day.
This type of relative strength/weakness needs to be clearly seen by all market participants to be useful any specific day, generally becomes more useful later in the morning after stocks settle down.
If you are planning on trading short and futures are gapping sizably lower, the relative strength/weakness of a specific stock is going to be much tougher to judge and maybe impossible.
Point > is stock down because of relative weakness or simply because of market? Tough to judge. Likely useless tool on such a day. Use tons of extra caution on short trades, put hand brake on.
If you are planning on trading short and futures are gapping sizably higher, as the morning progresses the relative strength/weakness (especially weakness) of a specific stock is going to be quite easy to spot.
Nasdaq opens +25 points and by late morning is HOD +35, while AAPL opens +8 points and late morning is trading only +2 near the LOD.
AAPL very clearly showing sizable relative weakness as market continued moving up while stock is moving down. Further intraday downside and red roll is likely in the afternoon.
All traders in AAPL can crystal clearly see such relative weakness and make the tool a very valuable one in such a circumstance.
Intraday long trades are much more likely to move on and stop out with losses adding further weakness in the afternoon.
If short a stock with sizable overall market correlation, and market all of a sudden drops a decent amount, while stock refuses to fall >>> This is sizable relative strength.
Meaning >>> run, don’t walk, for the hills. Aggressively immediately close short trade.
Type 2 Relative strength or weakness of a stock (price action) compared to its group, its industry, its sector or group/industry/sector leader.
Take social media sector and currently FB is the leader of the sector.
Sector opens higher and moves higher, FB opens up 50 cents and rips higher and is now up 1.50-2.00 late morning
TWTR at the same time opens 1.50 point higher, pops another point and then slowly fades and is barely green on the day late morning.
TWTR late morning is now clearly showing sizable relative weakness to sector and sector leader, which likely leads to lower price and red roll in the afternoon.
Type 3 Relative strength or weakness of a stock (price action) compared to its intraday VWAP.
VWAP = volume weighted average price. Measure of average price throughout the day that is specific to volume.
Biotech stock has premarket news. Prior day closed 6 and opens 7.50 and immediately rips higher to 8.25 on big volume.
Stock slowly fades to 7.60 and consolidating there mid to late morning with VWAP at 7.85
In this case VWAP is a measure of bagholders that chased the stock up and are slowly losing hope, praying to get out unchanged.
VWAP is the volume based breakeven point for the bagholders and as stock moves even lower below VWAP to LOD, such bagholders realize the futile trade they are in.
Hope turns to prayer, which goes answered leading to more losses and bagholders start to unwind long trades, which leads to further selling in the afternoon.
As a short in this situation, using VWAP crossover as a stop point might be sound risk management on trade.
This type of relative strength/weakness is not very meaningful with mid to large cap stocks, but highly important with tiny to small cap stocks.
Type 4 Relative strength or weakness of a stock (price action) compared to its news of the day.
$30 stock reports poor earnings, guides lower and trading 27s premarket.
Seems ugly, is ugly and likely goes even lower, at least that is the expectation based on the news.
Stock opens and starts pushing back up and now trading mid 29s.
Shorts in stock hate this, maybe bad news was already priced in? Time to cover?
Stock is barely red after ugly news and showing nice relative strength to the news, what will make it go down now?
Red to green cross is long trigger for a trade as both longs and short covers push stock higher rest of the morning.
Biotech stock has had nice run up from 4 to 9 into FDA decision, now gets approval news.
Closed 9 prior day and immediately pops to 10 on the news, 10 doesn’t last long and stock starts fading and now is 9.25
Longs are amazed, “this is the news we been waiting for. WTF? Why isn’t the stock higher”
As a short trader my thought >>> “seems like a sell the news scenario” with stock showing big relative weakness to the news.
Story is over, catalyst is over, where is the beef?
Short low 9s and look for decent red reversal to cover.
Type 5 Relative strength or weakness of a stock (price action) compared to time as it progresses through the day (intraday time frames and what generally occurs during each one).
This type of relative strength/weakness might be the most difficult to explain and understand, only tons of experience can truly make you see the light here.
Basically means where is the price action compared to the time frames of the day and general expectation of such time frames.
The following is only a very minor outline of this type of relative strength/weakness, there is tons more and I only scratched the surface.
9.30-10.00am = wild wild west, or as frequently referred to as amateur hour. Largest discrepancy in price and reality occurs here.
Love this time frame, as 1/3 of my trading volume occurs here. I do my homework early pre-market and prepare for possible trades and desired entry points.
Generally a time frame for opening trades for me and often adds to trades. I rarely use stops during this time frame.
During this time frame an early trading range is established, which I use as a key reference point later in the morning.
10.00-11am = early trading ranges are tested and various relative strengths/weaknesses become apparent for trade triggers, adds to trades and plan on stops is finalized.
If short, decisions made whether to add, reduce or do either one aggressively or scale.
Watching closely for lower high failures and higher lows possible trouble points if short.
11.00-11.15am = Very key time of the day for me in management of open trades. Its go for the gold or its punt time on trades
If short and the stock is not doing what I expect it to do, trading near HOD means >>> I am on HIGH alert to close trade immediately and move on. Can always revisit if something changes.
I do NOT fight relative strength on shorts or relative weakness on longs after this time frame.
11.15am-12.30pm = often quiet time frame for me of watching closely and managing open trades.
In theory, stocks open with imbalances/excesses up or down, but as morning progresses, during this time frame equilibrium is established leading to consolidations.
12.30-1.30pm = breakdowns/breakouts from consolidation generally offer continuation rest of the afternoon.
1.30-2.30pm = to me this is often afternoon head fake hour. Don’t trade much here, except to close open trades.
Might try to short occasional intraday super extension for small gains using tight stops.
2.30-4.00pm = Time frame to close trades, not open them. Day is basically done.
Prepare for AH earnings if anything of interest on the horizon for possible trades in AH.
Occasionally will outline some very specific HUGE strength into the close and play overnight gap trade for continuation and close early next morning.
Type 6 Relative strength or weakness of a stock (price action) compared to its intraday trading range (especially early morning established trading range)
I personally prefer to view this concept in percentage terms with key levels listed below.
It’s something that I have developed for my personal trading over the years and to this day have never seen mentioned anywhere else.
0% = stock trading at low of the day.
25% = stock trading near low of day, halfway between LOD and midpoint of intraday trading range.
50% = midpoint of intraday trading range or equilibrium.
75% = stock trading near high of day, halfway between midpoint of intraday trading range and HOD.
100% = stock trading at high of the day.
This is probably the most critical type of relative strength/weakness to me and one I use the most in intraday trading.
It is highly complex in its use and application.
One day perhaps I will write a very long blog post on this alone, but to do it justice, 30-50 pages with illustrations are needed.
In the meantime to get a tiny flavor for this concept, see my Feb 13 twitter feed @epicacapital.
Anatomy of a Great Trade
My very top/best short setups, ideas and trades where I tend to trade in size have very specific commonalities.
Here is a brief outline of the process from start to finish, specifically on a short trade with possible size.
I am always up at 6.30am eastern time.
I get up this early in order to give me plenty of time to prepare for the coming day.
I read all the highlighted news on briefing.com and hopefully find 1-3 items that stand out to me.
I also subscribe to News Trade Pro, which is real time feed of analyst comments and news on specific stocks that I previously chose to follow very closely.
I also keep close watch of top pre-market % gainers.
If a stock starts moving up substantially and catches my attention, I will first look (split second) at its 6 months daily chart.
This is a very quick way for me to gauge if there is enough meat on the bone to even consider such a chart on the short side.
Let’s assume I found a stock that qualifies.
Now the game begins and always starts with making sure I fully understand the fundamental story of the story, making sure it qualifies as trash.
I reread the news item of the day several time to fully understand it and assess it and decided on what might be an expected trader reaction.
I try to find something about the news item that is not quite apparent to most traders, but is a very key detail that could provide me with a decent edge.
Now that this is done, I go back to the daily chart and start looking at it in detail.
Seeing how the stock traded the prior day, or prior few days based on volume, trading range, where it closed compared to trading range.
See which price point past bagholders might offer overhead selling resistance, if applicable to this stock.
I carefully try to figure recent measured moves and possible measured moves for today or next few days.
This helps me identify a level where I feel long trading momentum has a strong chance of reversing.
Such a level would be my initial short entry point, which in my view/experience is very solid entry point.
Higher price beyond this level is highly welcomed as the setup tilts even further in my favor considering reward/risk.
I identify exact levels I will add to the short if moves higher.
I also think about possible stop points, just in case I am wrong but I very rarely use stops before 10am.
I also think about downside targets, what is reasonable, likely, what is easy money target and what is much harder earned target.
Am I looking to fight quick battle or sizable war.
This type of setup is one I generally will add shares on the way up until 10am regardless how high the stock goes, then reassess.
If I start shorting premarket, I actually want to get squeezed initially until 10am so I can add at very advantageous price points.
Keep in mind, I have qualified this company as trash and news as misunderstood. This stock can only go so high without gravity coming into play.
Also, very key specific to me:
I check past volume rates, recent volume rates, expected volume today.
Also outstanding share count, total trading float and short interest.
Assuming this is a top trading idea on my plate, together these things help me identify the maximum size I can trade easily in this stock to get in, but more importantly to get out if wrong.
Size is relative from stock to stock for me.
Huge liquidity and tight spreads like in ZNGA and size might be 200-300-400-500k shares
Low liquidity, low float, wider spreads like in LIVE and top size might only be 50-60k shares or less depending on stock.
The game plan is now complete and I haven’t even traded a share yet.
Assuming everything meets my criteria, I am ready to rock.
If I get my desired entry, entries I am good to go.
If NOT, I put the stock on close watch list for next day and following days for possible trades.
It’s my way or the highway. It has to fit like a glove or I pass for now. There is always more opportunities tomorrow.
Let’s say I shorted some shares premarket and added some shares to the short at various points until 10am.
Generally I won’t add higher after 10am (only lower), unless I am truly in LOVE with extremely strong feelings about the trade.
During this time frame I watch the stock very close.
I watch time and sales, which offers clues where most of the trades are taking place (bid, ask, in between)
I watch level 2 to see which ECN/market maker is most active on bid and ask, or are there multiple heavy players.
I watch the bid and ask spreads, types of size on bids and asks, are size bids/asks fake or real, do they get traded through and how does stock react immediately after trade through.
All this stuff helps me paint a portrait.
10.00-11.00am I watch today’s trading range closely and where stock is trading compared to it.
I start paying very close attention to the various type of relative strengths/weaknesses outlined in this article.
If at least 3-4 of them fall in my favor it’s a sign to add to the trade, maybe significantly as the morning progresses.
I finalize my stop points and tighten them appropriately
11.00-11.15 is generally decision time for me on the trade.
If all looks good, relative strength/weakness in my favor I kick back and patiently wait for my various targets to cover in scale form.
If stock is near HOD or HOD bells are going off in my head.
Usually will close trade aggressively and move on, can always revisit if things start to change.
This is very key for me:
I created a strong detailed game plan pre-market and added more vision to the portrait since the 9.30am open.
I have very clear expectations through experience and game plan of how the stock should trade and when it should start to roll over.
If stock trades much differently than my expectations, in price and even more importantly in time, I will start to reduce and maybe reduce very significantly long before 11.00-11.15am.
I can always revisit if things change.
11.30am-12.30pm I do lots of watching and consider final adds to the trade, assuming everything is lining up perfectly.
Adds to trade during this time frame only occur on weakness near LOD or break of LOD.
Rest of the afternoon I patiently wait and scale out at various lower targets if everything goes according to plan.
I hope this outline is helpful and eye opening to the reader.