Tuesday, May 26, 2009

The 30 Minute RULE

This is a "different" name, to a rule that I trade by. It's waxie's 10AM rule, but not everyone lives on the east coast, so I will change the name to not make it "obvious" here. Just trying to share information, which has been very beneficial to myself. (his book is on my library to the lower right, fyi)

- When looking to enter a stock LONG, only do so on either
b) a HOD that occurs after 30 mins of trading

- When looking to enter a stock SHORT, only do so on either
a) a GAP UP
b) a LOD that occurs after 30 mins of trading

This is a rule, that I trade by, and NEVER violate. (I used to violate it back when I was brand new to trading, and before I had ever heard of it, thank goodness that was only for a very brief time)

Not referring to just today only. (yes yes news driven, I got that)

To either a very minor or very major level, THIS HAPPENS EVERY SINGLE TRADING DAY.

The first 30 minutes of the market are, hmmm let me try to think of a decent analogy, of WHY following the 30min RULE helps so very much. Ok here goes:

First 30 mins of trading = Ice Patch
Stock Market = 600 H.P. Muscle Car

A Muscle Car, with summer/slick tires, running at 6000 rpm, just spinning out on-top of a patch of ice. You know in a very short period of time, that the tires will move from the ice to the pavement.

But ya know how when tires spin really really fast, some times they look like they are going backwards? So we don't even know if this Mustang Cobra is in 1st, or it's in reverse?!!! All we know is that when it moves from the ice, its going to MOVE and move convincingly either forwards OR backwards, and then we will be able to tell crystal clear, but only when it get's OFF of the ice.

When you finally get off the ice patch, it's means you can much more TRUST the direction after that point, as in if its Forward or Reverse. Remember, those tires were spinning on the ice, so again it's very hard to tell if they were spinning forward or backward! When you finally get off the ice patch, It does NOT mean that you go 0-100mph and get whiplash from the push (huge rally or huge crash). Maybe your only stuck in 1st gear all day and just put put put along. But at least you have a much better idea what DIRECTION the "put put putting" is in. You can trust the pavement (post 30 mins). You can not trust the ice (first 30 mins)

So again since you have NO clue looking at the tires if it's in forward or reverse, you know that it is a 50/50 coin flip, which you also know is NOT a trading plan! So you do what what's best, you LOOK to gain higher probability.

Here is how: If you slip to the BACK of the ice patch, you place your chips for it to go FORWARD. If you slip to the FRONT of the ice patch, you place your chips to go in REVERSE. (why???? b/c the odds are still only 50/50 on direction, but now there is much more room to travel from that selected point, and much more whiplash to catch in your favor (ie profit)

And if your wrong, and it does happens to continue to move back onto the pavement, you are already headed in that direction, so the whiplash (loss) is much less.

That is my terrible attempt at an analogy for the ONLY short gap ups, and ONLY buy gap downs.

On to the BUY if HOD after 30 mins, and the SHORT if LOD after 30 mins: That is along the same "analogy". You don't trust the ice patch (first 30 minutes). You only trust the pavement.
Once 30 minutes of trading has passed, you are no longer on the "ice patch" you are now on the pavement, so you trade WITH the market.

Trade WITH the pavement. (after 30 mins)
Enter AGAINST the ice patch. (initial gap)

I hope this is understandable, and/or helpful to at least someone.
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