Whether it is a student that just completed our VCM Trade for Life™ seminar, or an astute market player who is normally on top of his game, sometimes low quality trades are taken that appear to be excellent trades, even in review. It is difficult for traders to identify a problem with the trade, if they don't know what the problem is. There are many set ups that occur that many traders may take and never really ‘see’ the problem. Sometimes small differences can make a big difference to the P&L. These quality issues are taught in our seminar, but often times traders lose focus on the details. Let’s look at two of the big ones. Below are two VCM buy setups (VBS). How would you rate them for quality? Would you play either one?

The first VBS at “1” has four red bars, a green bar reversal (GBR), and is happening right at minor support (mS) at the rising 20 period moving average. Sounds like an unbeatable combination and it truly does look like a nice VBS. And, to answer the question, yes, it is a VCM buy set up. The problem is that it is not a "buyable" VCM buy set up. In other words, this is not a high odds play even though it may meet the technical requirements.

Everything about this play looks excellent including the set up except for one thing. It is happening right at 12 o'clock, the beginning of a reversal time that takes us into the lunch time doldrums. The lunch time doldrums are notorious for having set ups fail because of no follow through. The nice rally this stock had into 12 o'clock does not mean that the pattern will continue through the doldrums. As a matter of fact if you look at this pattern, it is typical of exactly how stocks act during lunch. While the stock did stay strong and eventually did break out, there is no way any intraday trader could stay with the play because of the sloppiness that occurred. Multiple times a stock went lower and set a pattern of lower lows and lower highs until the 1:30 reversal time brought the stock back to a picture of strength. So rule number one: do not expect strategies to act the same during lunch as they do in the morning or afternoon.

How about the VBS at “2”? This stock is obviously strong and on a powerful uptrend. It has three red bars and three lower highs on the pullback and a nice pair of bottoming tails as well. Once again this does meet the requirements for a VCM buy set up. However, once again, the quality is so low it is not a buyable setup. The problem here many of you may have already recognized. It is being hinted at by the fact that the stock price is still so extended above the rising 20 period moving average, even after the pullback. This is because the rally from which this pullback occurred was a climactic top. Note the multiple wide bars, the far extension from the rising 20 period moving average, and note the high volume at the top. Here is another rule that many of you have been taught, but may not remember. The first pullback after a climactic sell setup is not buyable. Period.

The bottom line is that your trading skills have to be excellent and followed with great discipline to make money on a regular basis. The failure to recognize either one of these rules can take profitable traders and make them unprofitable in a hurry. Next week, we will take a look at another example.

Quality Buy Set Ups, Part 2 of 2