$SPY in a tough trading area

Trading the $SPY for the last 7  days long has been relatively easy. Technically speaking it is text book. Large range days with good volume on rallies. Significantly lighter volume on days with small price ranges.

We rallied into the 200SMA on the daily chart last week @$111.78 and paused, with everyone looking at the same charts this created a lot of indecision. (again, perfect technical structure)

Keystone traders went home Friday with a game plan with two scenarios; what do I trade if the 200SMA holds as resistance and what do I trade if buyers some back strong and this significant level gets taken out?

Based on the light volume pause for the better part of 3 days (after the violent momentum rally) we expected a bullish day (this was not a guess it is technical analysis 101). However if we did get the bullish stampede there was an even bigger level to be aware of in the SPY at just over $113.

This $113 is the level that excites the sellers to come off the sidelines, it has been the trigger since just after the flash crash in May.

Now here is the situation you are faced with as a trader: long (being a buyer) is the correct trade, but there is limited upside potential to the trade taking into consideration this mornings gap to the upside.

What do you do? This is the zone where a lot of money is lost. The buying ideas are still valid but have less profit potential but there are not that many solid short sale scenarios.

I will ask again, what do you do?

Most inexperienced traders who feel the longs are not following through will put out short sale probes or actually in allocate capital to a full short sale position (because longs seem to have used up all their energy).

The correct play here is to be patient on the longs for new levels or better risk reward (from lower levels, which would be a flag on a daily chart) or do nothing. Doing nothing is the hardest thing to do.

Remember, not wanting to be long is not necessarily a reason to be a short seller.

MON: Monsanto showing healthy price action

MON: Monsanto demonstrated some terrific buying order flow for a few weeks and has had some time to consolidate the explosion. This pattern of “catching up” is one of our favorite price action scenarios to take advantage of.

I am looking for the stock to approach the $62 level again with the ultimate profit target of $65,  risking a close on the daily below $56.

how a professional stock trader earns money

Do you want the secret to consistently going to the bank? The all powerful golden rule that will unlock stock trading profits and financial freedom for you?

The first part of the secret is keeping a detailed journal during the trading day of what definitely does not work. I am not talking about a long bunch of paragraphs, I am talking about maybe ten 7 word bullet points of observations.

As you build up more screen time you MUST build your personal list of  low probability ideas. In other words “Don’t do this, and this and this.” The sooner you can minimize mistakes the more crystal clear your trading plan will become and you will have a list of do this and this more often.

This leads us to the second part of the secret. New traders lose money on every idea they have, they allocate capital to every idea without deep consideration for the probability of that idea making money.

Consistently profitable traders lose money on good ideas. They don’t execute a trade if after giving it some thought the expectation for follow through is low. In other words newbies execute a lot of trades that they can manage risk on, but has little potential to actually earn money. They feel safe but they also won’t earn a living.

Everyone will lose money trading, maybe even 50% of the time, it is a given. Make sure you make the list of what definitely does not work, then commit capital great ideas only.

You will still lose money on some good ideas but you will come out positive at the end of each month.

WY: Weyerhaeuser Co. Building a solid base

WY: Weyerhaeuser Co. reports earnings next Friday July 30. No matter how you decide to find trades or investments you can’t ignore a huge spike in volume combined with a 24% increase in price.

Whether you are day trading or value investor this stock is building a classic base; one that is consolidating its recent gains as well as giving you a terrific risk point to plan for a solid risk/reward.

Initiating the first part of my trade here with a stop below $39, there is some short term resistance to get through at $44. A close above this level I plan to add to the trade which should take me to my profit target of just over $48.

If I start to see similar price action in IP: International Paper and LPX: Louisiana Pacific this will confirm money is flowing in to the sector for earnings season and I will increase my capital allocation on the idea.

Stcok will adjust for dividend today and conversion to a real estate trust, let the charts clean themselves up and scenario will still be good.

Keystone Trading

Great entries are a small part of great trades

Trading stocks for a living can be one of the most rewarding experiences of your life if done properly. If you are trading all day every day for years and not making progress you are “practicing wrong.”

Of course by progress I am referring to earning consistent money.

Many of us here at Keystone have played competitive sports at one time or another, for me it was baseball and I often use baseball analogies to make a stock trading point. Today I am going to use football. Before I get to my point I was actually asked by someone at a BBQ this weekend what makes a successful trader?

While there is no “one” answer I feel one of two backgrounds give an individual a HUGE advantage; having previously owned a business or having been an athlete (especially if you went on to play at the high school, or college level and beyond).

Having owned a business you learn the importance of understanding how you will compete, how you will stand out in the market place to generate revenues; in other words you really need to dig deep to define an edge. As an entrepreneur you also learn what it means to put in an 80 hour week and sometimes not get paid, you learn very quickly the skill of paying attention to what is working and what is not.

As an athlete I feel focus, discipline and most importantly the ability to bounce back from adversity can be translated into a trading asset.

Getting back to the football analogy and your entries. far too much emphasis is placed on the entry signal. A football game usually lasts just over two hours when you remove all of the commercial breaks, each actual play is basically 7-10 seconds.

What does this have to do with trading? Everything as far as “practicing and focus.” The hard work, or better worded the reason you will earn money on on most trades is because of the hard work you do BEFORE you begin to look for an entry signal.

All football plays are mapped out for the coach before the game starts, your trading should be the same way. You want to be executing your ideas during the day, not finding new ones. If you are looking for ideas you are in a horrible environment or you are not prepared.

If you want to become someone who gets paid each month spend most of your screen time learning to identify great scenarios, one that have a high probability for follow through instead of focusing so much on your P&L and where to enter. In other words focus on IF there is something to do as opposed to where to get in.