This is PART TWO of our series on accessing THE BATTLEFIELD TERRAIN (the current market conditions) before entering a trade.
PREVIOUS POSTS IN THIS SERIES:
PART ONE: ACCESSIBLE BATTLEFIELD TERRAIN
PRECIPITOUS HEIGHTS:
According to SUN TZU, one of our 5 star generals, PRECIPITOUS HEIGHTS is defined as ground wherein you are rested and encamped waiting for the enemy to provide a reason for attack. THE CROSSHAIRS TRADER interprets this as a market with an upcoming event or catalyst that provides a reason to enter the battlefield. In order to trade this ground the following rules apply:
1. There must be an upcoming catalyst or event. This event provides the reason to enter a trade and knowing when the event take place is, obviously, important. Every stock has at least four known events a year-earnings-that can be traded. Other possibilities include: analyst meetings, sector events (such as new product launch conventions), stock specific annual events, split dates, dividend dates, etc. It is imperative that dates are verified as they can change slightly, especially an earnings date, as the expected date nears.
2. The trade should be closed before the actual event takes place. This goes back to THE CROSSHAIRS TRADER motto, “Buy the Expectation. Sell the Result.” The trader, knowing the date of the “result” sells beforehand since the expectation, not the result, provides the reason for the trade. Also, the result could easily wipe out all of the gain trading the expectation. Why put the gain at risk?
3. Look at the historical movement of the stock going into the known event. Looking at how the stock has traded in the past can provide clues into how it will trade in the future. This is where it is important to have an intimate knowledge of the stock(s) you trade. You will be able to spot the repeatable pattern before others and use that to your advantage. Remember: stock charts are historical, not predictive and should be treated as such.
4. Because of the volatility going into the event there is most likely the opportunity to trade long and short. In order to do this you will most likely need to use a smaller chart than a DAILY for entry and exits. Your options should be in the money and, at least two months out in time, taking quick profits along the way.
The best stocks to trade are the ones that move the most from day to day (i.e. volatile) and this movement can be even more exaggerated when there is an upcoming event. THE CROSSHAIRS TRADER takes advantage of these events by entering the battlefield with the weapons of historical evidence and current rules based patterns, ready to strike when given a signal.
TRADING IS WAR. PREPARE YOUR WEAPONS.