The Power Of Floor Pivots: Fading FB For A Quick Profit
Coming out of the weekend and into Monday, November 21st, stocks were gapping up as strength continued in the overall markets and one thing I like to look for as a contrarian trader is for stocks to get overextended into key pivot areas. This may mean going against the overall trend which is something you’re told not to do as a new trader, but when stocks get overextended there can be excellent opportunities in going against the grain. I like to look for these setups when I miss the initial big move but has gotten so far extended that it will need to pullback. When the stars align, it can prove to be a powerful and consistent strategy that can provide excellent returns.
For example, this Facebook (FB) trade came when stocks and the overall markets were ripping up out of the open but the higher it went the more I wanted to short it as I knew there would eventually be profit taking from longs and other contra traders like myself looking to capitalize on the pullback. Before taking a contra trade, there are few things that need to take place and that includes: shares are running into a key floor pivot (preferably at another important level on the chart like a round number), stochastics are overbought/sold on the 2, 5, and 15 minute charts and there is an increase in volume at the pivot price level.
As you can see in the two-minute chart below, FB was very strong out of the gates and ran up more than $1.80 in the first thirty minutes of the market being open, which is a big move even for a high beta tech stock like FB. You’ll notice that there are blue lines marked on the chart and those are for the floor pivots that I use every day to trade off, as do many other traders. If your charting software doesn’t have this feature, there are plenty of calculators online that will do it for you and then you can just mark it yourself. As share prices ran into the $119.95-floor pivot you’ll notice by the square box below that volume picked up but prices didn’t go anywhere. This generally means that there is a fight at this level, confirming its importance, as buyers and sellers are duking it out until one sides wins. In instances like this buyers are extended and will be hard for them to keep pushing prices higher so we know probabilities are in our favor and it’s time to smack the bid. We have prices at a key pivot, volume picked up at the pivot and the stochastics are way overbought on the 2, 5 and 15-minute chart.
(Click on image to enlarge)
Now that the stars are aligned, we can take our short position which I did and got filled at $119.90 when prices broke below the doji candle marked by the red arrow. A great thing with these types of trade setups is it’s easy to define your risk. Obviously, if the stock breaks new highs then you got in at the wrong spot and it’s time to get out. My stop was $120.05, just above highs, meaning I was risking 15 cents on this trade. I like to take a piece of position off at a 2:1 risk/reward so I had bids starting out at 119.60 with the 20-EMA and the VWAP as my ultimate profit target. I trimmed some more at $119.45 with my last bid to close my position out at the VWAP at $119.12. This trade worked out perfectly but it’s important to remember that trading is a game of probabilities and not every setup is going to work out as great as this one did.
Disclosure: This is not a recommendation to buy or sell any stock but is merely an informative article on different trading setups.
Thanks for sharing