KR asked the following question about my BIDU trade:
“BIDU was based on luck or trading secret? Other than oversold indication at Stochastic, I did not see any reason to jump in before seeing some more weakness. What was the reason to jump in Y’day for you?”
Since I started this blog and documenting trades, I can’t count the number of e-mails I’ve received calling me lucky. I always reply, “how can anybody be so consistently lucky?”
While I can’t say I expected BIDU to shoot up over 30 points just one day after I entered, there is a method to my madness, and it certainly doesn’t involve luck. If you understand the intricacies of money flow, volume patterns and market psychology, there is a good chance “luck” will be on your side.
A number of people have asked why I entered BIDU when there didn’t seem to be a great setup. While the stock had pulled back, it was extended far from it’s base and did not have perfect “pullback” technicals (such as an oversold stochastic reading). As many of you know, I am willing to deviate from “perfect” setups from time to time, especially in overzealous markets. The key when deviating is understanding market psychology and volume patterns.
I’ve talked volume patterns to death on this blog, so now I’ll focus on market psychology. Over the last quarter, BIDU has been one of the best performing momentum plays. It’s parabolic rise has made those who did not jump in feel left out. When dealing with a stock like this, traders who are afraid to enter on strength will use any sort of pullback to jump in.
Based on this psychology, when the stock reached $300 I marked the gap at $280 as a good entry point. With a normal stock, I wouldn’t even look at this level as there isn’t a ton of support there. However, this ain’t no normal stock. Who wants to miss out on trading the Google of China? Taking the psychological factor into account, I felt $280 would hold.