Trading $TSLA Price Action Using the Scientific Method Part I

For my “Stock Market Madness” Students

This analysis is for entertainment purposes, what to do with this information is found in the disclaimer below. 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 has 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. What follows are some thoughts for a potential $TSLA trade.

The physical sciences use the scientific method as a tool in explaining causality. The scientific method being a repetitive process involving the use of:

The process can be reevaluated at any stage, with the hypothesis and experiment being adjusted to address the new observations, questions, research, and experimental results. While not a physical science, applying the systematic, methodic process of the scientific method to financial data and its’ social/political influences lend to greater understanding and rationale for taking a trade. This understanding does not directly suggest predictability, but only suggests probability within the framework of observed price movement.

As you read about this hypothesized trade consider that the price movement of stock can do three things:

  1. go up
  2. go down
  3. remain relatively unchanged within the boundaries of the previous candle.

The Thought Process

Now let’s have some fun. Can you afford a Tesla? I can’t afford a Tesla. … but I can, at least, dream about trading Tesla stock. What follows is a suggested paper trade. What could be funnier than to make yourself richer in Monopoly Money for that imaginary Tesla. All I need is $79,900 … or a generous benefactor willing to donate their slightly used one, all in the name of science. 😉 Here is the hypothetical plan:

Tesla ($TSLA) is an exciting company to follow for multiple reasons. Its span of technologies, innovation and fanfare all contribute to the attention it receives. Naturally, Elon Musks’ public life adds an element of interest as well. With all the furry of regulation surrounding the Chinese Communist People’s Party impacting a huge segment of the electric vehicle (EV) market, $TSLA (as with huge segments of the US economy) is also affected from both supply chain and a sales perspectives. As such $TSLA makes for an interesting day/short-term trade as multiple technical indicators are poised for anticipated price movement.

The daily chart is shown with an exponential 9/21 moving average and price targets.

A caution on this trade is the current price candle, a daily red “inside bar” (on 2021/08/03). An “inside bar” is a bar described as being a lower high and a higher low relative to the bar previous to it, which will be called a reference bar. The nature of the inside bar (being one of price agreement) holds some probability to telegraph sideways movement, or other yet to be determined direction. Until the price is in motion, no determination can be made without further price action. It is literally all we know based on the bar itself.

Without complicating the trade, using simple price action and the increasing exponential 9/21 moving averages as guides, a break above the 8/3/2021 inside bar of $722.49 would make for a long trade with both of the price targets not only being previous daily highs but weekly highs as well – $726.57, followed by $749.18. The upward movement of price is solely considered here as timeframe continuity, (as defined by a trending trading method by Rob Smith called the STRAT), is “green” on the weekly, monthly, and quarterly time frames. Technicals not covered here supporting this theorized trade include an increasing Ergodis oscillator and super passband filter, positive MACD divergence, the “firing” of a TTM squeeze, and lastly, the breaking of a Darvis box to the upside … along with the dangers of an unpredictable wild swing due to earnings should have subsided (earnings on 2021/07/26 expected $0.52, actual $1.45 per TDA). A break above the $722.49 price level suggests a continuation to the upside.

Robinhood options chain.

To most small account traders $TSLA lies outside their reach due to the high price levels of the stock (currently trading at $706.66). A huge investment for anyone with less than a $100,000 account. One way to mitigate this is the use of options, more specifically an options spread. Knowing the price targets and using the weekly expiration of the August 6th options contract, a simple vertical spread trade at the time of this writing might look like this:

Entry Plan

When price breaks above $722.49 :

Buy the $720 call for $6.95 and sell the $725 call for $5.40 for a net contract purchase of $1.56 per contract share (contracts are in lots of 100). This would give a theoretical yield of $345.00 (for a risk of $156.00) if the price exceeds $725.

Exit Plan

If this were a live/real options trade allow some time for the trade to be executed. There are specific techniques for entering and exiting a trade with a higher rate of order fill.

If the current price pulls below the entry price of $722.49 then exit immediately.

Manually follow the trade with a mental “trailing stop” of the low of the previous price candle on an intraday chart (5min recommended). Exit on any pullback – permit no loss of return.

Once the current price reaches the target of $725 (or a few pennies thereof) exit immediately.

Note how the 8/13 vertical spread only has roughly a 1.5:1 reward to risk ratio. Conceding a higher return “may” warrant the extra time for the trade to reach its targets.
Note how the 8/20 vertical spread only has roughly a 1.5:1 reward to risk ratio. Conceding a higher return “may” warrant the extra time for the trade to reach its targets.

If contemplating this as a “swing” trade, a better strategy would be to consider this trade on a longer time horizon, giving an additional week to one month for it to unfold. In comparing vertical spread pricing one week out, “buying time” for the identical strikes expiring 8/13 would be $1.86 ($30 for the extra week). A person would have to evaluate the lower potential return, deciding if it is an acceptable risk. Comparisons of one-week vs. one-month risk/reward are depicted above. It is worth noting the “breakeven” prices for all three scenarios ($721.55/$721.88/$722.05).

$TSLA intraday 5-minute chart with multi-timeframe 9 EMAs and 9/21 EMA cloud.

Conservatively a person should consider taking any profits with a price above the target given how fast $TSLA price moves. As the price of $TSLA increases so will the price of the spread. Do not enter the trade if there is less than a 2:1 reward/risk ratio. 10% of the reward is a more than reasonable return for the trade, with 20-40% as a targeted reward. In no circumstances should a person stay in the trade if price retreats on a lower time frame (suggested 5-minute timeframe for entries and exits). Given the historical intraday price action, it is anticipated the price target should be hit within the first 1.5 hours of the trading day, if not exit and re-evaluate. Note: “if” you are keeping any single trade less than 5% of your total account, this would require your trading account to be a minimum of $3200.

Soooo … for my imaginary Tesla Model X I’ll need to purchase 464 8/6 $720/$725 Vertical Call spread contracts (at a 50% return) and I should have a little leftover for Starbucks. Ahhh … the power of imagination. Rock on Elon!

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

Disclaimer – because hot coffee is … well, hot.

No Investment Advice Provided

As with all financial decisions – all monies are at risk of loss. So simply DO NOT DO THIS TRADE or assume this is investment advice – IT IS NOT INVESTMENT ADVISE. 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

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Image attribution:
“Money” by 401(K) 2013 is licensed under CC BY-SA 2.0
“Tesla Sightings and Press Reactions to the Ultimate Car of the Year” by jurvetson is licensed under CC BY 2.0

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