If you can’t trust your trading levels, what can you trust? Spending hours every week studying charts and drawing out trading levels is done for a reason. Ignoring this information or worse, doubting it, is the same as not having a plan at all.
I like to use trading levels and at times trend lines because of the simplicity of the strategy. If the candle closes above a key trading level (or trend line) the sentiment is bullish and generally speaking, taking a long position is the plan. But why?
The levels drawn effectively indicate where resistance or support shows up. Another way to look at it is, these are areas of supply and demand. Yet another way to look at it is these are levels where the bulls and bears are fighting it out and one of them is going to win.
If you trust the levels drawn and have a plan for both when to enter a trade and when to exit it, you are setting yourself up for greater chances of success. Sometimes this means you miss out on part or all of a trade. There will always be another trade to make and often it is only minutes away. This week was no exception, so let’s get to those trades. But first, a quick poll if you’d be so kind.
TSLA Closes Above $286.67 and the Bulls Love It
This week the trades were in TSLA, DKNG, NIO, and LCID and the levels were solid once again providing the information needed to get in on the action . I actually was thinking TSLA would find lower lows but trust in the candles and levels drawn kept me on track. Lesson learned, trust thy levels!
I began the week pointing out TSLA continued to make lower highs and lower lows. Sticking with the trend, I was looking for a rejection at $286.67 which has been a key area of support and resistance (bulls vs bears!). We got the push up to start the week and then on Thursday the candles burst through this level, closing solidly above.
What did I say before about the simplicity of trading levels and sticking to a plan?
If the candle closes above a key trading level (or trend line) the sentiment is bullish and generally speaking, taking a long position is the plan.
As Thursday came to a close above the $286.67 level the play was entering calls with a $295 strike price with Friday’s expiration. To lower risk, considering the following week’s expiration would be an option to look at. I did not like that play in this instance because any close back below this key level would indicate more downside.
Here’s a sequence of charts highlighting the trade in TSLA this week, a short but highly successful one with the potential for over 400% profits for those that got in before Thursday’s close and held through most of Friday. First, the original post from last weekend…
And the chart we started with, as you can see I started off somewhat bearish…
Moving forward to the end of the week and zooming in we can see on Thursday the bulls got the big push with the close over $286.67 and on Friday got the follow through, not quite getting to the $300.98 target but getting very close ending up at $299.68.
And here’s a look at the chart for the $295 strike option, massive gains for a single day, high risk, high reward trade with potential of coming in at +464%. This is obviously the max but achieving between 300-400% gains on this trade was attainable and all of the information was on the right side of the trade.
To recap this trade in TSLA. There was a nice big green candle on Wednesday but strong resistance above at $286.67 keeping me out of any trades going long. Thursday followed with another strong, green candle AND showed it would close above this key resistance level. This was the indication to enter with calls. Friday gapped up and continued to climb all day with the candles moving almost without pause from the bottom left to the upper right of today’s chart allowing for big profits on an 85-cent call option.
DKNG Breaks Trend Then Breaks Resistance
The candles for DKNG gave a couple of reasons to enter a long position, considering calls either on Wednesday or Thursday with a strong gap up and higher close Friday to close the week at $17.63 after swinging as low as $15.15. The reasons…
First, on Wednesday the trendline was broken and the bears lost control. This piece of information was needed to consider entering calls. However, I did not like taking entry on this information alone because of how strong the $16.50 resistance level has been and I wanted to see a close above this level first as I noted to C&C members in last week’s Trading Levels post.
How did I recognize that 16.50 was a critical level for DKNG and a break above would be bullish? The candles repeatedly failed at this level over the past several trading sessions and then continued lower. Another rejection would have likely sent the candles spiraling lower, but the bulls took over instead.
Signal Miss, Opportunity Missed, Lesson Learned
I could have made a lot more money had I risked entry on Wednesday and given how strong the candle was and the close being above last Friday’s high, perhaps there was less risk here than I originally perceived.
You can see in this next chart the daily candle bounced off of the 50-day SMA (simple moving average, click here for more on this topic) with a long bottom wick. Often, when in a down trend if a candle with a long bottom wick shows up at a support level, which is what the 50-day SMA is providing, this indicates a reversal. The long lower wick is a sign that the bulls are pushing back at this support and the bears may be running out of steam.
Back to the Winning Trade in DKNG
Thursday’s close above the $16.50 resistance level was the additional information needed to give enough confidence to enter the trade. The bulls absolutely loved getting above this tough level that was defended fiercely by the bears for over a week. The strong push Wednesday coupled with the action Thursday allowed for entry a couple of hours prior to close with risk at a comfortable level.
Friday gapped up and paid off nicely. This week had multiple examples of the importance of combining multiple pieces of information before entering a trade with confidence. It also provided a chance to reflect on missed opportunity, like entering DKNG on Wednesday after the long lower wick off of the simple moving average support. There are always lessons to be learned and new trades to make.
At the end of the day, utilizing the break of the trendline followed by the move above key resistance put the odds in favor of the trade working out. Friday worked out beautifully for the traders that trusted the trading levels and got in. Profits!
I think it is important to review your trades every week and I will continue to do so, sharing my experiences in this newsletter so we can all benefit from the successes as well as the lessons learned.
Highlighting what worked reinforces the good. Reviewing what didn’t work helps understand what went wrong, how to avoid a mistake in the future, or capture a missed opportunity next time around.