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Trader Notes: Tips for Trading Stocks

Stock trading, through technical analysis, is an art. There are full of ideas, strategies, and tips for doing it. You need to be alert to all of them and choose the adequate before you trade. Here are some simple, but useful ideas, that can help in your daily work.

1. Fibonacci "Golden Zone"

Traders love Fibonacci retracements. They are easy to learn and draw, and certainly accurate as alert zones.  Obviously, it doesn't work all the time (there's no infallible indicator or strategy), but as many retail/professional traders and big banks use them, its lines become important levels of support/resistance to place or close trades as price reversals can happen there.

But not all Fibonacci levels have the same importance or attention from traders and investors: the area between the 38.2% and 61.8% is called the Golden Zone, since its the most powerful of all.  They are many (payable) strategies on the web, about this zone, all of them based on the same principle: is an area of a relatively big length and if the price trend not change its direction there, use the 61.8% level as a reversal alert zone.  Simply check different timeframe charts with its Fibonacci lines draw to verify that. So, when you detect a tradeable Golden Zone, use all your arsenal: price action, adequate technicals indicators, and fundamental analysis. Your possibilities for a successful trade will increase.

The Fibonacci retracement never works alone: you need to use other indicators. Notice in this weekly chart of XBI (the ETF that follows biotech companies) how the shares pullback from mid-2018 highs.  In November-December crossed the golden zone not changing direction until finding an important reversal alert in early 2019 when touched the 61.8% level and at the same time the MACD did a bullish crossover and also the key 3-year uptrend line support was touched. A real powerful technical signal: shares began to rebound.

2. Volatility VIX spiking

These days, when the SP500 is moving in all-time highs, all investors' eyes are in developments of the Trade War: the US planned on initiating new tariffs with China, with December 15th as the deadline decides by Trump. We have news from both sides: reports that China and US were unlikely to reach a trade deal this week, however today news of another delay in tariff give some hopes to Wall Street. The fact is that markets could see more volatility ahead of the weekend, especially on Monday when markets open. The stock rally will continue or a huge pullback could begin, probably no more flat sessions. So, VIX is a good instrument for a simple strategy next weeks only if markets fall and volatility spikes.

More than a strategy, its a tip when trading the VIX. In its daily chart notice the clear difference between its relative tops and bottoms: tops are spikes (rapid rise due to market fear), like an inverted V, while bottoms (more complacence due to market greed) are more rounded and full.

The diligent trader has already grasped the idea of this strategy: trade in the spikes of the VIX daily chart, operating shorts or puts. To find an acceptable entry point, the Bohlinger Bands are useful: waiting for the moment when the bullish candle leaves the upper band with some slack. Then expect a next bearish candle that wraps it completely (or almost) the previous bullish. This candlestick is known as engulfing. The open of the next candle is my entry point. However, there are a couple of undefined points in this strategy. One of them is not being clear about the exit. Perhaps the best idea is to set in advance a risk-reward, like the popular 1: 3 used by many traders, to determine the exit.

The other complicated point of this strategy is the location of the stop loss. The usual is that the VIX continues its fall the following days and is difficult it returns above the engulfing candle, however, it can happen. A double top would be formed, the most reliable figure in the technical analysis according to Alexander Elder, where we could confidently sell VIX. The best plan is to trial daily the stop loss to a safe level.

The "VIX spike strategy" works best in its daily chart. Every year happens, few but powerful. In this chart, taken from 2015, we noticed two big spikes overcoming the upper band of the Bohlinger Bands (mid-October and mid-December, in the yellow circle), both followed by an engulfing candle that generates the quick and important reverse. Two more spikes happen in January and February 2016 (also in a yellow circle) but in both cases, its price didn't overcome the BB, so its reverse isn't as powerful as the 2015 spikes. Finally, in the pink circles, we had two spikes that haven't an engulfing candle enveloping them, so the reverse seems very unclear.

3. The feared Opening Gaps: Buy the Close, Sell the Open

A simple rule: is better, statistically, buy stocks at the close of the session and then sell in the morning of the next session. It's far profitable than "buy the open, sell the close"Bespoke Investment analysts compared both cases with the SP500 since 1993 when it was incepted. The charts and numbers are shocking, check it:

A $100 investment in 1993 using the "buy close, sell open" rise more than 480% to $587, while "buy open, sell close" lost near 20% ($79) in the same period. Of course, this is just statistics, didn't happen every session, but gives an interesting idea: if you are a swing trader who wants to follow the trend but you are afraid of the frequently opening gaps, don't close your position, hold the gap: you can get a decent trade. Finally, remember, in the long-term, the best odds are in your favor.