CNBC wants you to think that great trades only come from trading blue-chip stocks.
The truth is the majority of my BEST trades come from some of the most worthless pieces of garbage out there.
Take Intelligent Living Application Group Inc. (NASDAQ: ILAG).
This stock landed on my watchlist after its IPO in July. In early August, shares went parabolic without any major headlines, doubling within 24 hours and then nearly doubling again a week later.
And you know what this company does?
It makes digital locksets, the kind used to open hotel room doors…
Actually, it doesn’t make them yet. The company still needs to develop its product.
Who can honestly get behind a company like that as a long-term investment?
Thankfully, neither I nor my students care about who or what these businesses do.
All we’re interested in is the price action.
Now, any stock that’s been a recent runner immediately gets placed on my daily watchlist just in case something like Monday happens.
While shares barely budged in premarket, the stock quickly caught a bid, sending the price higher.
I managed to trade this for some quick gains, though not as much as I could have.
That’s why I want to review this trade and show you where you might have found potential entry and exit points.
The techniques I’m about to cover can be used on any chart to help you construct your own trade setups.
What’s Your Framework?
Despite my outgoing personality, I’m not a huge risk taker.
Every trade I select aims to keep my potential losses as small as possible while maximizing potential profits.
I start by identifying the pattern I’m working with. It might be a Supernova or a former runner.
The pattern provides the framework for the setup. Each pattern contains different spots that work better for different setups.
ILAG fell into the IPO category. If you study IPOs and SPACs long enough, you’ll start to see different patterns emerge.
Keep in mind that certain patterns occur more often in risk on vs. risk off environments.
Right now, we’re at the upper end of a bullish push inside of a larger bearish downturn. That’s given small-cap stocks, mainly non-OTCs, more momentum lately, sending some of them on multi-day runs.
FaZe Holdings Inc. (NASDAQ: FAZE) is a good example of a multi-day runner driven higher by promoters and pumpers.
A few months ago, most of these stocks would die after a first or second-day run.
This tells me the broader market is ripe for runners.
So, instead of looking for panic dip buys in the early morning, I’m focused on dip buys into an uptrend.
Dip buys do a better job of managing risk than buying into pops or consolidations.
I know when I buy into a dip the stock should stop in and around my support level. If it doesn’t, then I can either average down or exit the trade.
For newer traders, it’s better to wait for the bottom to form before stepping in. While you may not get as good of an entry, it reduces the odds you buy a stock that keeps falling.
ILAG Potential Entries
Let’s apply that to ILAG and see what kind of possible entries we can identify.
After the initial boost from the open, shares traded sideways in their first consolidation (1).
This offered a short pullback that could either be used for the entry or traded against at the low, which is where I drew the first white trendline.
Then, shares made a similar move (2), albeit smaller, with another pullback to trade against.
I grabbed this one at $3.17. However, a newer trader might wait for that tail candle to form the low and then buy against that at around $3.25.
From there, shares spiked up past $3.50 before pulling back one more time.
I used this spike as my exit.
A trader could buy the pullback (3). However, if they bought in the second move, they’d be at their stop and be forced out of the trade.
That’s why it’s important to stick to the rules and lock in profits when you can.
The 3rd move could have easily snapped back to the lows. I never want to let a good trade go against me.
Now, there’s another possibility for entry when shares break over the morning high of $3.60.
To me, that leaves a lot of room for downside if you don’t have a tight stop.
The Bottom Line
Once you identify a pattern, it’s much easier to locate setups within that pattern.
Play around with these (with simulated funds or very little at stake) and find out which entries make the most sense and work best for you.
—Tim
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