Hi folks,
I just wanted to cover another recent short setup that I posted on my @traderstewie twitter feed! Earlier last week I posted a short setup trade idea $PTEN. This blog post will teach you how to plan a trade!
$PTEN was a “Head & Shoulders” technical pattern and was actually setup very similar to a recent Art of Trading official alert I made on $CF. I talk about the process behind that trade here!
The Art of Trading didn’t officially alert the $PTEN setup but many Art of Trading members (and non-members) judging by the response I received on twitter actually took this trade for themselves. Which is excellent because this is exactly my goal with the Art of Trading. To build traders up and to create more confident traders through both application, skill building, pattern recognition and education!
Now let’s take the time to review what made $PTEN a top-notch short setup and how YOU could have potentially traded this idea!
So, what caught my eye on $PTEN? Well, many energy stocks made BIG runs up this trading year and now that the luster is starting to fade in the energy sector many of these high-flying stocks are starting to develop topping patterns. Instead of making new highs they’re beginning to make lower highs and lower lows on the daily time frame charts. Many of which are creating “Head & Shoulders” type technical patterns!
What does a Head and Shoulders pattern look like and how do I trade it!?
Basically, the stock makes a “left shoulder” usually out of a higher low in an uptrend then trades higher creating the “head” and finally bounces off the neckline creating the “right shoulder” and makes a lower high. The technical pattern triggers when the stock trades and closes below the neckline (which is technically a support area)
How do I measure a target?
In the above chart note the method of measurement. The technical move is measured from the neckline to the head peak “X”. Subtract “X” from the neckline value to get the downside target.
What type of market conditions make this an ideal technical trading pattern?
Bear Markets.
So, with this information on hand how could you have potentially traded $PTEN?
Your first job is to observe the chart (below), identify the technical setup then judge your risk vs reward on the setup. In this case the downside move on $PTEN measures $6 based on the head and shoulders technical pattern. Your ideal entry sits around $16.
Another very important attribute to note on the chart is the 20 EMA. I use the 20 EMA on my charts to judge the strength of a trend. You’ll notice late December 2021 into May of 2022 $PTEN held a strong uptrend above the 20 EMA, which then broke but then ended up making one big final push higher into June. But now the stock is starting to find resistance underneath the 20 EMA as it makes lower highs and just like $CF the 20 EMA can be used as an ideal point of entry for a short setup.
The last important attribute to note on the $PTEN chart is prior support, which I marked with a horizontal line at the $14 price point. This area could be a good spot to realize partial or full profits. Keep in mind short setups tend to work a little quicker than long setups so you need to be ready to book full or partial profits, quickly when they present themselves.
Now that we’ve broken down all of the technical attributes of the trade setup lets come up with a trading plan!
Planning Your Trade:
Ideal Entry: $16~
Ideal Stop: $17: Slightly above the previous 2 candles and above the 20 EMA
Target #1: $14: Marks an area of previous technical support (partial or full profit taking)
Target #2: $10: This marks the spot of the technical pattern completion in a PERFECT trading scenario.
Risk vs Reward: Short term = $1 risk vs. $2 reward. Longer Term scenario = $1 risk vs $6 reward.
Now that I’ve planned the technical trade out what’s next?
Patience!
Patience on the ideal entry!
Patience on the Stop!
Patience on the Target!
Patience on the setup! Let the trade and the market work for you!
So, how did the trade develop?
$PTEN gave an opportunity to get short on June 30th and again the very next day on July 1st right around the ideal entry area of $16. Waiting for the entry was crucial in this trade but it gave a small window to do so. Setting alerts and executing without hesitation once you have a trade planned out is important in this environment!
If you executed the entry perfect on June 30th or July 1st you could then consider using the June 30th high ($16.32) as a new point of reference for a stop loss. Lower your stop into the $16.50 area, especially after the nearly 10% down day on July 1st.
I updated the chart and posted it in the $PTEN thread which many of you follow. I do this same thing in the Art of Trading private feed but I add pointers, tidbits of education and make sure to answer any questions members might ask about how they could potentially trade the setup. Again, my goal is to build more confident traders!
After 2 trading days and a 12.5% move down from the ideal entry $16 into the $14 target this is where you make the decision as a trader to take a partial or full gain on the trade. In this example you need to consider that $14 has been a spot for the market to find support on this name since March. If it was me trading this name, I would have taken the full short-term gain at the first target $14. Usually in fast moving environments its better to take base hit after base hit instead of looking for a massive home run trade. Volatility will push you out before you see it.
I hope this step-by-step review helps in the planning of your next trade! You can use this guide for any sort of technical pattern trade, really. Just remember the key components to the plan:
Examine the chart and spot the technical setup
Identify the Ideal Entry
Identify the Ideal Stop
Plan your Targets
Plan your Profit Taking Areas
Be Patient!
Cheers and Happy Trading!
Art of Trading
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