The $TSLA Price Action Experiment

Trading $TSLA Price Action Using the Scientific Method Part II

This is the second in a multipart (thought experiment … possibly gone wrong) set of articles contemplating a trade on $TSLA based on price action using the scientific method. Refer to the previous article on the observations (potential setup), this article will build on that thought experiment. This is the write-up for the observations of the paper trade on August 4th.

Because there’s “hot coffee” and people don’t understand what hot is referring to:

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).

NEVER enter a trade without a plan for BOTH entry and exit. 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.

Now onto the good stuff …

Recapping, it was observed that:

  • the daily chart had the 9 EMA above the 21 EMA describing short term upward price movement
  • the weekly had both the 9EMA above the 21 EMA, and the 50 SMA above the 200 SMA
  • the MACD was positive
  • a period of TTM “squeeze” had just ended
  • the day of observation also included an “inside bar” representing consolidation of the previous day’s price action
  • the daily, weekly, monthly and quarterly candles were all “green” per the STRAT full time frame continutity (FTFC) method (an important point is made later in this write up on this)

So we have some moving averages in agreement, some technicals being “bullish” and some price action observations all suggesting a positive move. … but with the scientific method we can only work with what is “true”. All these factors, while contributing to the stock’s psychological outlook do not guarantee price moving in any one given direction; it isn’t until price moves in one direction or another that it can be concluded there is net buying or selling.

The Hypothesis

The hypothesis was simple, we will have a profitable trade adhering to the following criteria:

  • enter on a break above the high of the inside bar
  • should price drop below the entry exit immediately
  • if price increases, exit on the break of the previous bars’ low
  • if price never breaks the high of the inside bar, no trade

The Experiment

The rules and expected outcome of our trade being defined by our hypothesis, our experiment was set up with two criteria for comparison, one as an options trade so a smaller account can participate using a vertical spread, and the other as a standard stock purchase of a single share of $TSLA.

Scenario 1 options trade at the break of the inside bar:

Buy the $720 call for $6.95 and simultaneously sell the $725 call for $5.40 for a net contract purchase of $1.56 (at the time of the previous article) per contract share (contracts are in lots of 100). This would give a theoretical maximum yield of $344.00, for a reward to risk ratio of approximately 2:1.

Scenario 2 stock purchase at the break of the inside bar :

Buy a single share of $TSLA at $720.

Notes:

Both trades would be executed and monitored using the 5-minute chart.

An important note is that the options trade breakeven price for this would be when the price exceeds the cost ($1.56) of the trade above our lower strike ($720) when the price of the stock reaches $721.56.

The first candle to form after entering the trade is one of the most important ones to form and is second in importance only to the candle you exit on. In this case that was the same candle.

The Results

Scenario 1 options trade at the break of the inside bar:

On the break of the top of the inside bar (~$722.49) one options contract for $156 was purchased. The bar of purchase had a high of ~$723.56 and a close of ~$723 even. The next bar opened at $723.10 and went up immediately to $724.61, which subsequently fell below our purchase price. Falling below our exit price and sell order was entered at the current ask to close the contracts immediately.

Because a contract represents 100 shares of stock, each penny in price change represents one dollar. The selling price was 10 cents less than the purchase, so this represented a net loss of -$10 for this trade.

Scenario 2 stock purchase at the break of the inside bar :

A single share was purchased at the price of $722.65. As with the options contract, when the price broke below the purchase price a sell order was entered at the ask ($721.98) for an immediate fill with a loss of 0.67 cents.

Observations at the end of the trade

  • The trade had to be exited in less than 10 minutes as price moved below our entry and violated one of our criteria for a profitable trade (being above the entrance price).
  • More money was lost with the options trade ($10 vs. 0.67 cents).
  • The options trade proved a little more difficult to get out of resulting in a greater loss.
  • The bar for the day ended up being a higher (but red) continuation bar.

Conclusion

This experiment demonstrates how it is more important to know how to stop a trade (getting out) than starting a trade.

With this simulation, we followed our trade rules explicitly. It would have been tempting to stay in the trade, but trade rules are established to minimize your loss. Neither trade progressed as anticipated, and in retrospect served their purpose as the increase in buying and price did not increase, 3 candles (15 minutes) later after reaching a high of $724.90, only to fall, eventually well below open of the day, before a slight recover at the close of less than 0.2% above the open.

The importance of getting out of a trade can not be understated. This is especially true with options contracts. Options magnify the rate of return – good or bad. This particular loss was more than acceptable as it was only a small portion of our original amount (6% of the cost).

The loss of the stock purchase is more straightforward, $722.65 – $721.98 = 0.67 cents.

Course of action

With the success of the exit plan, and in observing the high of the session never broke the high of the candle prior to the inside bar of yesterday ($724.90) – a new trade can be postulated. This is considered as all the “technicals” for Friday, August 6th remains the same – with the exception that the color of the bar closing the day is red <- this could be an important factor in the success of the trade as it does not conform with the conditions for FTFC.

The day ended with a higher high and a higher low (continuation bar) as compared to the inside bar of the previous day. A new trade is now contemplated with a break of the current high of $720.90 and a new options call options spread, buying the $720 call and selling the $725 call. We’ll repeat the exercise with all the same criteria as the candle closing Thursday, August 5th is another inside bar.

The $TSLA experiment continues! An outline write-up for this new trade is forthcoming.

Follow this trade in a simulated paper account … as it has similarities to hot coffee.

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

If you like this article and want to pay it forward consider joining Robinhood

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Image attribution: Robinhood

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Pay it forward AND learn to trade

Step up to a professional trading platform. An excellent platform to learn about trading AND to trade on is TastyTrade/TastyWorks. Their focus is on options trading, they have plenty of tutorials and an awesome LIVE program every day of the week and are available for replay. Traveling, no problem – with their mobile app you can watch/listen to their live program as well as trade straight from your phone or mobile device. TastyTrade offers one of the best execution times of any broker and an actual LIVE help desk you can phone for advice in using their platform.

What do I get for your referral? … hopefully a hotdog.

Image attribution:
“Practice Makes Progress” by Mary_on_Flickr is licensed under CC BY 2.0
“try again” by Sean MacEntee is licensed under CC BY 2.0
“Start/Stop” by kevingessner is licensed under CC BY 2.0

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