Data-Informed Wins the Day


Welcome to volume 3! Have a seat. Let’s get rolling. In the spirit of making scalping simpler, the next few columns will focus on practical and simple scalping concepts you can focus on when you are new to scalping. Remember: this series is for traders who are new to scalping and perhaps even new to trading. So, you will see acronyms defined and helpful links throughout. This volume and the next three will focus on four good ideas for people new to scalping: 1) the importance of informing your trade plan with data…like, perhaps, the 34 EMA. 2) how nice range bound trading can be, 3) the importance of strong chart patterns, and 4) the importance of following the trend. And for these four columns, I’ll examine these things using Visa, trading under the much-scalped ticker, $V. This Visa mini-series will be framed in context with fall 2021 action in $V. If you’ve been trading $V in the last few months, and if you’re interested in learning more about scalping concepts…you are in the right place. Come on in.

I don’t trade too many different tickers I like to stay with a few and learn how they move. I love trading Visa it is one of my go-to scalping tickers. Long considered a great stock to buy and hold, it has volume and liquidity on a regular basis. Not to mention that a huge percentage of people have a Visa card on their person at any given moment. The image below is the $V 1-minute chart from a day in early December 2021.


I will constantly remind traders that we must inform your trading decisions with data. Whether it is in the “intro to the market” class I teach at BlackBoxStocks, or here in Green & Gold Scalp University, or down at grungy pubs, I likely sound like a broken record…you must seek data-informed trade plans. When you buy a stock, someone on the other side is happy to sell it to you at the exact same moment in time. Whomever has the strongest trading thesis…the most supporting data…will likely come out better. So, the way to identify patterns and probabilities it to seek data-driven trading plans. That can help you buy fewer bags.

As you learn scalping, you will need to learn and try different indicators, different tools, and various approaches. You will find the ones that help you identify patterns and probabilities with more regularity. There are hundreds of indicators and strategies one can use when scalping…it can easily get to be too much. The spirit of my approach is to keep it simple and effective. One such source of data, are EMAs, or exponential moving averages.

I like to keep charts simple. Scalping moves quickly, so simple charts are a must for me. Other people can deal with more data on the chart, but I find it can over complicate the situation. First, look at the image above. The blue line is the 34 EMA, and you will be hearing a lot about “the 34” throughout this series. The 34 EMA is a tool so widely used as dynamic support or resistance (s/r) among traders I know that it has developed a veritable story of its own…maybe even a cult. There is a lot to the story of the 34 it has clout me and thee will never have. The 34 is a great point of data that can help inform a trade thesis it works well as dynamic support, it seems, with regularity. Here is a video discussing the topic from Trade Talk Media. The 34 is often useful in providing s/r, and that is clearly the case here.

Our friend $V entered a violent downturn following earnings in late October. To many who trade it, there was no strong logic for the downward move. Sure, things drop after earnings often, but this just grinded down through resistance after resistance. There were things in the news here and there, but I was surprised that it fell through the psychological 200-dollar mark and continued falling. Alas, it was a mystery. That’s okay. Our job is not to anticipate it is to observe and play what we are given. Such is the way. In fact, over a month of downward pressure ensued and then traders found themselves in the chart in the image above.

You note that I’m using the Opening Range Breakout strategy here configured to ignore the first 15 minutes of the session along with the 34 EMA. This strategy is often called the “ORB,” and people will tag on the timeframe they are moving. So, you will hear this referred to as the “ORB15.” That means it keeps the first 15 minutes of volatility out of the calculations hopefully some direction has emerged by then. The ORB15 is a very useful tool for scalpers. It is worth learning, and it isn’t difficult to do so. If you are curious, here is a Trade Talk Media video explaining the ORB15 and how to set it up.

So, on the chart, you see a great ORB entry confirmed by a 34 EMA support. Now, of course this is a discussion of a completed (after-the-fact) chart, so it is important to keep in mind that back testing any approach will never help with the psychological forces at play in trading. In fact, I plan on focusing a lot on trade psychology in this column. So, to prepare yourself for our future discussions, start learning about…or brushing up on..what trade psychology is and why it is important to every single trader in the world entire.

Back to our chart. So, imagine how the traders felt who might have entered as $V broke above 200 (for the first time in a bit after a heavy trend of bleeding). Knowing $V had been in a downtrend might play tricks with your mind as it reverses. And of course you should know the tickers you regularly attempt to scalp. But after a downtrend, there can be a gut feeling that it will reverse any given time…a premonition that you will be caught in a false breakout. It could be tempting to take small green after the underlying stock price (UL) of $201.28, or so. If you imagine the incomplete chart at 10:40am, or so, it could easily look like a head and shoulders (H&S) setting up. Sometimes, fancying themselves contrarians, people try to front-run the H&S pattern without waiting for the neckline-break confirmation…don’t do that…definitely don’t do that.

But, the stock had been in a violent post-ER, seemingly illogical, downward spiral and traders might get jumpy at that point. This is normal fear, creeping into the picture. To help control that, you need…here it comes…data-driven trading decisions. Don’t exit on fear…exit on data.

Enter the almighty 34!

To review, my exit plan is simple, and it works a good amount of the time. To exit, I like to see two or three opposing candles open-and-close below the 34 to exit. By opposing, I simply mean the opposite color of where I would like it to go! There are reasons why I might wait for the third candle to close, but if the position is big enough, or if volume is intense enough, or if my mindset is not currently a calm Zen Lake of Placidity…two will do it. You can see this completed daily chart and follow the way that, had that been your exit plan…and you stuck to it with discipline, the 34 would have kept you in the trade way past the UL of $201.30. And if you were scalping a short-term option position, a gain of a few more dollars in the UL equates with much more gain per contract.

Yes, I see you all putting your books in your bookbags and zipping them loudly it is time for class to end.

But hear this before you go out into the world…If you had entered at the ORB15 break re-test when price action rose above the 34EMA (the first red arrow in the image), and if you could control the psychological torrent unfolding inside your psyche, this could have been a very profitable scalp(s) and/or day trade. You might notice that, according to my exit rules, a couple of the red arrows feature some iffy business that would have brought forth the Fear Monster. However, you see that the 34 lived up to its mythos and would have likely kept you in the trade for quite a while if you could have remained calm. Now, all we must do is see if we can better control the demon storm of our twisted and fanged psychology.

That’s a lot of ifs…but it can be done.

Follow River on Twitter @GreatRvR

He also hosts the trading podcast Riverside Chats: Deep Dives into All Things BlackBoxStocks.