Hello Trading Friends!

It's been a while since I did a self-post, so I thought I would share a DM conversation with another trader. I hope you find the information useful!

They asked me why I traded the stocks I did today given how extended they were and 3-6X the Average True Range (ATR). Below was my reply:

ATR isn't as important for professional gaps and fresh catalysts. If there's a big shock factor, price can keep going to the next relevant level on the daily/weekly chart.

Daily range is more relevant if you're trading $AAPL, $NVDA, $TSLA, etc. on a day-to-day basis like some traders prefer. The stock can only move so much without a catalyst.

The reason why I place so much importance on the daily/hourly chart is because that's the timeframe institutions are trading on. You want to be on the same side as them when they have to buy/unload a million shares throughout the day.

You see $RCM breakdown below the low of the year around $16.07? Nobody is interested in buying here. Big money has to stop out and unload. Professional traders know this and short. That's where intraday trends come from :)

November 3, 2022 - $RCM daily chart lost low of the year support

November 3, 2022 - $RCM short low of day re-test for +2R

See that $13.60 area where the trend terminated and reversed on the above 5-min chart? It's a pivot from the weekly chart. Big money watches these key levels and reacts to them.

November 3, 2022 - $RCM weekly chart bounced from a pivot low from 2 years ago

Professional gaps? What are those?

A professional gap is one where everybody got caught off-sides. It takes out pivots/stops/structure on the daily chart. And by 'everybody' I mean swing and positional traders on the higher timeframes.

The best way to think about it is pretending to be an institution yourself. Say you went long $FIS on Oct 13 and created that pivot at $72.36. Only big players are able to create those types of reversals.

Everything is going fine for the next 2 weeks. Looks like an uptrend up to $85 right? Yesterday was just a little pullback before earnings.

This morning you wake up and see the price has gapped well below your stop. That's a shock. That's a professional gap. Google it for a better definition :)

November 3, 2022 - $FIS daily chart lost low of the year support via Professional Gap

November 3, 2022 - $FIS short low of day re-test for +4R

Here's another professional gap that made most of the move after the Open. It went sideways for the rest of the day, but every attempt to rally was pushed down by sellers. The $35 whole number was defended aggressively when I attempted to short it again in Power Hour.

November 3, 2022 - $LNC daily chart lost low of the year support via Professional Gap

November 3, 2022 - $LNC short declining 20 MA for +3R. Second trade: LOD breakdown failure for -0.7R

Would it also be safe to say you look for stocks that are at their recent ATH/ATL as well and then shift to the lower time frames for confirmation?

Yes, I do look for stocks near the ATH and ATLs. Buy high, sell higher. Short low, cover lower. This is the fundamental concept behind following the trend.

And in case you think that I don't make losing trades, here are two from Power Hour. Both $AMZN and $SPOT were at the lows of the year but rallied (only to sell-off at the Close). In hindsight, the daily charts were on their 4th and 5th red bars and extended from the daily MA's. Everybody makes questionable decisions—including me :)

November 3, 2022 - $AMZN short declining 20 MA for -1R

November 3, 2022 - $SPOT short declining 20 MA for -0.5R

The More Eyes Seeing the Same Thing, The Better

I'll leave you with the following chat messages from Monday. My friend and I both unknowingly took the exact same trade! Apparently, many other traders did as well and that led to some clean follow-through.

October 31, 2022 - Trading buddy and I saw the same pattern independently

Disclaimer: Not financial advice. For educational purposes only.