QUESTION: If a trade still may be worth placing on Day 3 and your rule states that it should be closed out at the end of that day (or the open of day 4), is there a certain time of the day on Day 3 after which you wouldn’t make the trade because there’s not enough time for the stock to move much before you’ll be ending the trade. In other words, if a breakout finally occurs late in the afternoon on Day 3, isn’t it useless to make the trade at that point?
ANSWER: As long as the stock has not broken out yet it’s never too late.
QUESTION: If you have detected more inside days (that meet all of the criteria) than you have money to invest, how do you rank them and decide which ones to trade? Do you just go with the lower priced stocks because you would have to put out less money in order to have the same profit potential?
ANSWER: I would go with those stocks that have been in the narrowest range for the prior time period (1 week, 1 month etc.) which means that they arealso likely to have lower volatility. At some point they will experience higher volatility and the inside day could be the trigger to a big trade setup.
QUESTION: Do you recommend sticking with only certain exchanges, or is it not necessary to limit yourself in that way?
ANSWER: I use only the NASDAQ and NYSE. Also I only use stocks that trade 1 million shares or more, on average, per day.
QUESTION: If Stock A is trading at $20 per share and Stock B is trading at $60 per share, ignoring the possibility of a major event with either of the stocks (like an earnings report being released), is the likelihood of a $1 move in Stock A equivalent to the likelihood of a $3 move in Stock B (since both would be 5% increases), or would there be no difference in the likelihood of a $1 move between the two. In other words, is the amount that a stock moves dependent on where the stock is currently trading?
ANSWER: The amount the stock moves has more to do with its Beta and volatility than it’s price.
QUESTION: New question: I don’t understand what kind of judgment might be needed at the time of the trade. Isn’t the entry as mechanical, just in the reverse direction, as it was when you would’ve entered the market on the original breakout?
ANSWER: It’s mechanical in it’s execution, you’re right, but in a reversal situation you may want to increase your bet size now that the odds favor you -which requires you to make a new decision.