How do you get a 71% in two days froth with trading mistakes? … and given the news of late, from $WFC no less. Some might think dumb luck, but with closer examination and in considering the price action of $WFC, probability can be on your side. Having a trading plan and knowing your risk – the failure on a clean trade entry/fill was overcome. Watching price action on higher time frames was key to decision making. The lesson which follows is one of capital preservation, knowing when to exit a trade with no regrets, and how to adapt to a bad price entry.
Help! Help! Thief! Have I got your attention?
… because the market is the biggest, bad-est bully in the world. It will steal your lunch money and then some too (not really, because you know the risk, so technically you willing gave your money away).
Are you betting on the lotto to solve your financial problems? Do you enjoy “scratch-offs”? Would you gamble your mortgage payment on the flip of a coin? If so – just leave now. Don’t read any further. Go away, because you will lose money. You may know the odds, but you draw into question your judgment, as such, because I doubt you have a reasonable plan when you lose. It is winner take all when you are gambling. … or in reverse, it’s loser loses all. Don’t be a loser. You and only you are responsible for your actions. This analysis is for entertainment purposes, what to do with this information is found in the disclaimer at the bottom. The disclaimer elaborates further on the statement – “this is not a trade recommendation.” This trade is suggested as a simulation – paper trade only. When you want to learn to trade, check out TastyTrade – they have a FREE trading program, and when you’re ready to – open a trading account TastyTrade, they have an awesome platform (TastyWorks). If TastyWorks is too much, consider Webull or Robinhood.
One more caution and warning to for those that tend to leap before they look:
NEVER enter a trade without a plan for BOTH entry and exit. NEVER make a trade on someone else’s recommendation, NO MATTER HOW CONVINCING THEY ARE – including material of entertainment value. 95% of traders fail because for a combination of reasons including not having a well-thought-out plan of action and rules for trading. Random good fortune is the only reason you hear of novice traders being successful today, tomorrow holds a high probability they will lose it all, and if leverage is involved the loss can even be greater. What follows happened in the past, it is not a trade recommendation and is meant for entertainment only.
The DOW Jones Industrial Average ($DIA) has been lackluster for the previous week or so. From a daily price standpoint, the price has bounced around with indecision within a range. At one stage, on the 4th of August, it would not have been surprising if the Dow was going to test (self-fulfilling prophecy) a previous trend level. Prices, however, seemed to have a rare Thursday-Friday on the 6th of June with both the Dow and S&P closing up over all the highs of the previous two weeks. Two weeks. For technical, fundamental, quaint and price action traders – “cash” was a safe place to be given the indecision. The decrease in volume seeming to confirm this assumption (conversely it should have been a good time to be a premium seller – for what few buyers there were). The financial sector ($XLF) was pretty much suffering the same fate since mid-July as well. Then comes a “strong” jobs report, AND Treasury yields with an extended bounce.
Questions: A thorn in the lions paw?
Without saying, Wells Fargo has taken a beating this year. Wells Fargo has been a bellwether as a company. Warren Buffet and Charlie Munger know their place in the larger scheme of this company, of when they’ve been right and when they’ve been wrong. They are also shrewd as investors. Remember the disclaimer – they will indirectly take your money if you bet against them … without remorse. While Buffet may have reduced his holdings of Wells Fargo, he is still vested. While other banks take losses, have undergone mergers and generally teeter at the direction of the Federal Reserve, Wells Fargo takes the lemons thrown at it and makes lemonade. Consider Wells Fargo this past year or so:
- Corona virus – the entire market drops
- Drop in revenues
- Charge offs
- Bond market in trouble
- Second pandemic wave
- Banking sector concerns
- Regulatory policy
- Poor media coverage
Add to these how the press over dramatically paints a constant doom and gloom (it’s a race to be the first to say “I told you the world was going to end … you heard it here first). You can read all about “Why Wells Fargo Stock Plunged 52% in the First Half of 2020 …“, “Wells Fargo Stock Is Likely To Trade Sideways – Forbes“, and many others with a simple Google search. All this should be enough to make you want to bet against Wells Fargo. On a positive note, Wells Fargo takes action when it comes to these challenges. The most recent with government regulatory policies. Wells Fargo response has been to end its personal lines of credit programs (which is probably very prudent given the pandemic), take its licks and move forward. It is the author’s opinion they will be a better company for it.
The Attention Get-ter
With some of these challenges framed, none of the aforementioned has a direct influence in the trading decisions of a pure price action trader. The $WFC daily chart has been trading upward, along the bottom of the STRAT traders’ weekly “broadening formation”. $WFC’s price action also broke above some previous price levels that had defined a price range, which was defined on a monthly chart. The quarterly time frame looked excellent with a “PMG” style continuation in price. Being cautious with continuation trades, an inside or outside bar would prove a good entry point. From a technical perspective, both the 50/200 EMAs and the 9/21 EMAs were aligned with the faster moving averages above the slower, and both sets were positively sloping.
Price action observations
In asking the question “which way ya gonna go George?”, price action on all higher time frames was in agreement. Candles representing the 4 hours, daily, weekly, monthly, quarterly and yearly were all green. Price action was further moving away from a lower broadening formation, upwards toward the upper broadening formation price level. The process is described as “coming through previous range”.
From a broader perspective, $XLF (the financial sector which has holdings of $WFC), the $SPY (which has the XLF as a sector) and $DIA (where $WFC is traded directly) were all trending higher as well. Trends of such a nature represent the psychology of the market, in this case, “bullish”. Being bullish, while a potential factor, should mean nothing when considering price action solely from a scientific view.
The hypothesis statement for this trade was, $WFC will continue higher with a break above the previous daily high of ~$49.68. The break at this price level would also be a move higher off of an inside 4-hour bar from the previous day (Tuesday, August 10th). The quarterly target is $54, based on $WFC’s first-quarter loss in 2020 (the pandemic everyone continues to suffer from). Entry would be made using the 3 minute or 5-minute time-frames if made prior to 11:30, 15minute or 30-minute time-frames thereafter – if at all (keeping in mind “cash” is a position). Profit would be taken discretionary using a higher time-frame and/or non-STRAT technical indicator.
The Experiment … and when things don’t go as planned.
Day of the trade involved watching intently for an inside/outside bar and entering “long” on continuation above the high of the inside/outside bar. Wells Fargo opened up forming an outside bar on the 15-minute chart. The hypothesis spelled out much of our trade plan, keeping in mind the following rules:
- enter on a break above the high of either an inside bar or outside bar
- should price drop below the entry exit immediately
- ensure price increases continues with follow through, if not:
- watch price action on a lower time frame (3 or 5 minute) to anticipate an exit
- exit on the break of the previous bars’ low
- be prepared to sell either market or with an “bid” price $1 below the “ask” to ensure an order fill
- if price never breaks the high of the inside bar, no trade
Seeing the outside bar on the 15 minutes was the trigger for entry long above $50 (psychological level). I was looking for the best possible price so the initial bid for entry was to the low side. This unfortunately was a mistake. The lack of conviction caused the order to not be filled as the price quickly continued to the upside. The next bar to form was an inside bar on the 15. A new options order was placed, using the same Strike ($50.50 expiring August 20th), at $0.01 cent below the median ask of the inside bar (high = $50.17) to get a good fill on the break of the candle. As the next candle formed the order was filled at $50.16 … then price consolidated – another inside bar.
But, Mousie, thou art no thy lane,
In proving foresight may be vain;
The best-laid schemes o’ mice an ‘men
Gang aft agley,
An’lea’e us nought but grief an’ pain,
For promis’d joy.”To a Mouse by Robert Burns
With the defined trade rules this may appear as an issue (and it is). This deviation in the overall experiment is noted with the acceptance of a potential loss of monies. The modification for this trade was to use the low of the candle of entry as the exit – this is a deviation from our rules that state:
- should price drop below the entry exit immediately
- if price increases, exit on the break of the previous bars’ low
The modification reads (which puts the trade-in jeopardy for a greater loss):
- should price drop below the bottom of the entry candle exit immediately
- if price increases, exit on the break of the previous bars’ low on subsequent candles beyond the entry candle in time
A Word On Experimental Bias
Experimental bias is bad. Very bad, and unfortunately all scientists are subject to it, to one varying degree or another. When the bias is obvious it calls into question the motivation of the experimenter. It is important to know if our influence affected the outcome of the experiment. Experimental bias sometimes manifests itself in ignoring experimental conditions and/or data that explains a phenomena’s cause and effect. Subconscious bias is subtle and hopefully ferreted out with the peer review process, and/or eliminated with the use of controls and/or double-blind conditions.
… any systematic errors in the research process or the interpretation of its results that are attributable to a researcher’s behavior, preconceived beliefs, expectancies, or desires about results. For example, a researcher may inadvertently cue participants to behave or respond in a particular way.APA Dictionary of Psychology
The goal here is to remain objective. Some traders take the constrained view so as to bias their thesis or hypothesis with a negative outcome so that they are more focused on capital preservation than the greed of never-ending profits. Always ask the question “how much can I lose if something goes against my hypothesis?”
The decision to remain in this trade was not purely of experimental bias, rather one justified by observation of the price chart and relative consistency of the trend (not STRAT characteristics). While maintaining the trade was purely a judgment call in technicals (EMA moving averages in confluence), one of accepting the risk, and in noting the experimental conditions. The risk being defined by the bottom of the 5-minute candle of entry as an exit, which represented approximately $0.10/share ($10/contract) loss. With this understanding and concession, the experiment would continue until the price fell below the 9EMA on the 15 and 30-minute charts (at 11:30 price was still above the bottom of the entry candle, so a higher time frame was switched to. The decrease in volume was met with smaller and slower changes in price.
Note on options
When trading you need to ensure a complete understanding of the risk, and how much risk tolerance you are willing to accept. The risk in an options trade is predefined – it can be limited or unlimited. In this case the maximum loss was the cost of the trade ($66/Call contract).
On the thirty-minute chart, price continued upward both days of the trade with a notable period of sideways movement between 11 AM and 2 PM (traders gotta eat ya know). there were 7 instances where the original trade rules would have ended the trade if the 30-minute chart alone was used (indicated by the white arrows). There are spots where the price went below the previous candles’ low. These were ignored as the price remained above the 9 EMA
The one-hour chart had 4 distinct periods where the trade should have been exited. One on the first day, this was ignored being an outside bar – had the subsequent bar been below this low the decision was made to exit as this would have potentially meant a reversal for the day. Given the overall conditions, and that the day of entry was a Wednesday, the trade was held overnight. Thursday presented itself with 3 additional potential exit points. The first of these was within pennies of the previous bar (as with the outside bar from the previous day) and so ignored. The next two exit points were basically inside bars from a larger time frame and were ignored. Because of the volatile nature of options expiring on Fridays the decision was made to end the trade at the close of the trading day (4 PM).
From the trade activity the percent return can be calculated: ((Final price – initial price)/inital price) x 100% = rate on investment, so (1.13 – .66)/.66 x 100% = 71%, for a profit of $47 dollars over the course of two days.
- Buying the ask would have probably gotten a better entry and prevented fumbling for a lesser than optimal purchase price (going to add this to the next hypothesis … and this will be an on going observation).
- For the trade to unfold it was necessary to adapt to market conditions as they unfolded.
- Using the low of the 15 minute entry candle proved successful in this trading attempt. Actual loss on a break below should have been approximately $10.
- Higher time frame candles were more revealing as to the nature of the trade, as lower time frame candles would have ended the trade prematurely per the “low of the previous candle” rule.
- Price above the 9EMA on higher time frames appears to be a reasonable indicator to remain in a trade.
- Price stayed at or above the 9 EMA on all time frames with the exception of the 3 minute chart.
- The break below the 20 EMA may prove a good exit strategy.
- Risk tolerance and patience were necessary throughout the trade.
The 3-minute chart for the second day of trade (12 August 2021) above shows how erratic price can be on a lower time frame. Compare to the right-hand half of the hourly above. The 3-minute 9/21 EMA (upper, narrower cloud) may not be immediately suitable for a swing trade, but price action did appear to recover quickly once it dipped into the 50/200 EMA cloud (lower cloud). While riddled with trading errors, this trade was very profitable as a trade goes.
Comparing the options strategy to that of common stock:
100 shares of $WFC would have cost $5117.00 dollars at the time of the trade. The profit on the roughly $1 dollar move would have been $100 (1.95% return) with $5117 at risk. The single long options contract at the $50 Strike, expiring one week out was $66 (71% return), with $66 dollars of risk, and returned $47 profit.
Some may ask, “… the annualized return was astronomical! Where did this trade go wrong?” This trade went wrong in many ways. The most glaring is in that the contingency plan to stay in the trade was made while in the trade. Ideally, contingencies would be made prior to the trade. The goal is to never lose money or be negative about a trade. The way this trade was structured, in the end, required it to allow for the potential of a negative return or to lose money along the way – which it did. Anytime a price pullback occurs or a decrease in profit you have potentially set the trade in a compromising position to lose even more. A loss is a loss. Early in this trade, there was a loss of $6 – just to stay in the trade. It was merely with the correction of the next candle that permitted the trade to continue in the positive. There were moments when the trade was up over $50. So as you can see, technically because the trade wasn’t exited at its high, the decrease in profit is a loss in a sort. Always try to exit a trade when it is trending in the direction of the trade. It is always better to leave money on the table along the way than to lose money in the end. “The trend is your friend, until the end when it bends.” Don’t be around for the bend, you’ll be hollering “… help, help! Thief!” and “where’s my friend the trend?”
$WFC has pulled back in price, down 0.01 cent shy of a full dollar. It now sits at the bottom of the 200 EMA on the 30-minute chart. The 50/200 EMA remains positive for the same time frame. It is currently red on the day and week, green on the monthly, quarterly and yearly. Per our price action trading, $WFC is currently only trade-able intraday. For entertainment value (read disclaimer below, this is not a trade recommendation), such a trade may be setting up given the market-wide pullback that has affected many stocks without basis of change in business fundamentals. There is a 4Hr inside bar with a long trade opportunity sitting on the bottom of a localized 4-hour broadening formation (dashed line). When the price breaks above $49.42, potential targets would be $50, $50.62 and then $51.41. Such a trade does not fit within the overall criteria (note the red 9/21 EMA cloud) of a successful setup but will be interesting to paper trade and measure the outcome of such setups over time.
Follow this trade in a simulated paper account … as it has similarities to hot coffee. Mistakes were made, and it would have been easy to get burnt.
Disclaimer – because hot coffee is hot.
No Investment Advice Provided
As with all financial decisions – all monies are at risk of loss. So simply DO NOT DO THIS TRADE – THIS IS NOT INVESTMENT ADVICE. This information is for entertainment purposes only, so don’t make yourself the one everyone else is laughing at.
Any opinions, chats, messages, news, research, analyses, prices, or other information contained on this Website are provided as general market information for educational and entertainment purposes only and do not constitute investment advice. The Website should not be relied upon as a substitute for an extensive independent market research before making your actual trading decisions. Opinions, market data, recommendations or any other content is subject to change at any time without notice. RalphPatterson.com, will not accept liability for any loss or damage, including without limitation any loss of profit, which may arise directly or indirectly from the use of or reliance on such information.
We do not recommend the use of technical analysis as a sole means of trading decisions. We do not recommend making hurried trading decisions. You should always understand that PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Paying things forward
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“HELP” by marc falardeau is licensed under CC BY 2.0
“Wells Fargo” by JeepersMedia is licensed under CC BY 2.0
“Money” by 401(K) 2013 is licensed under CC BY-SA 2.0