Classic Short Sell Setup

04/20/11 08:34:19 AM

by Jamie Theiss

Here's an example of a classic short setup for daytraders.

Security: BRCM
Position: Sell

Figure 1 is an example of a classic short setup for daytraders. This is a real bread & butter strategy used time and again.

To set up this Monday morning trade, the premarket news was bearish with rumors of the country's credit rating likely to be downgraded. All the market averages were down. So the bears were growling and sentiment was weak. BroadComm (BRCM) is one of 20 or so stocks I follow daily and at the open it frequently puts in a nice red bar, as do most of the other stocks I watch. So this time I stalked it for an entry to the short side.

FIGURE 1: BRCM, FIVE-MINUTE. Stalking BRCM on the five-minute chart for a short sell setup when a red bar takes out the low of a green bar below the declining moving average lines.

Graphic provided by: Blackwood Pro.

On the five-minute chart, BRCM put in a nice three-bar pullback to the declining moving averages. Green is the eight-period simple moving average (SMA), while the blue line is the 20-period SMA and the red is the 200-period SMA. I was waiting for a red bar to take out the low of a green bar. This happened at $37.54 and my protective stop was placed a cent above the entry bar at $37.70. This gave me a 16-cent risk on the trade. If we used, for example, $100 as our risk per trade, our position size would have been 630 shares, which I always round down to an even lot size of 600 shares to account for slippage and costs.

Depending on your trade management system and trailing stop method, a minimum of a 1:3 risk reward is easily obtained. As the market, expressed by the QQQQs, was falling at the same time, I was comfortable riding this particular trade to its intended target. In addition, there were several stocks putting in similar patterns. It was a challenge not to take too many similar sell setups. You don't want to be overexposed in case of a sudden reversal.

There was bearish sentiment at the open, so we looked for short entries below the moving averages. We had to make sure to position size correctly in accordance with a protective stop point and risk amount per trade and then let the trade edge play itself out. We had to be mindful not to let our excitement cause us to become overleveraged by taking too many similar setups. Take profits according to your written trading plan's rules.

Jamie Theiss

Jamie Theiss is a full-time trader who daytrades stocks, swing trades forex, and from time to time position trades commodities.


E-mail address:	jamie_theiss@yahoo.com

Click here for more information about our publications!

PRINT THIS ARTICLE

Request Information From Our Sponsors

DEPARTMENTS: Advertising | Editorial | Circulation | Contact Us | BY PHONE: (206) 938-0570

Comments or Questions?	Article Usefulness
	5 (most useful) 4 3 2 1 (least useful)

DAY TRADING

Classic Short Sell Setup

SUBSCRIBE TO OUR FREE EMAIL NEWSLETTER!

SUBSCRIBE TO OUR FREE
EMAIL NEWSLETTER!