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Trouble finding trades? Try these 2 patterns

It’s the start of the fourth quarter…and time to turn it up.

How am I attacking Q4?

By shifting my focus more on small-cap momentum stocks.

As I was reviewing my trading performance from Q4 2018, I thought about the strategies I traded… and what I could do better to improve performance for the final stretch.

The easiest step is to cut out everything that isn’t yielding. If you are developing a strategy, paper trade it, show proof of concept before you start throwing your hard-earned money at it.

The second step is to double up on your strengths.

For me, I’m going to focus more on my fish hooks and rocketsbecause those are the patterns I traded that put money into my trading account…

If the trading terms fish hooks and rockets appear foreign to you—no need to fret.

I’m going to thoroughly go over them with you.

I suggest you grab a pen and a notepad.

Why?

Because these two patterns alone are responsible for nearly $400,000 of my trading profits this year.

And the best part, they are easy to learn.

Fish Hooks and Rockets May Be All You Need

My fish hook pattern, as well as my rocket pattern, are what I think could work in this environment… and they’ll be useful when volatility picks up in small caps.

Take a look at the chart in the iShares Russell 2000 ETF (IWM).

Small caps have been relatively quiet and just bouncing between a range… and I think either way it goes, my fish hooks and rockets could uncover some opportunities.

Let’s start with the rocket pattern.

The Rocket (Breakout)

The reason why I use two patterns is due to the fact that one may be more prominent than the other… depending on the environment.

However, that’s not to say you still can’t find fish hooks or rockets when the stars don’t align.

You see, when the overall small-cap market is strong… you’ll see rocket patterns all over the place. On the other hand, when they’re selling off… we tend to see more fish hooks.

When it’s choppy price action like we’ve seen over the last few weeks… it’s been a mix between the two.

So what’s the rocket pattern?

Basically, it’s a breakout pattern where there’s an uptrend and the stock approaches a resistance level.

A lot of the times, as the stock approaches that key level… it attracts buyers and the price rockets higher.

Let me show you what I mean by that with a trade example. Here’s a look at what I sent out to my clients about a recent rocket pattern.

 

Fannie Mae (FNMA) is one stock that I’ve traded countless times… and I knew exactly how it acts.

If you look at the chart below, you will see a blue horizontal line.

 

That’s the resistance line. This is an area where the stock has had a hard time breaking above… and the sellers were running wild, pushing FNMA back down every time it got near that level.

However, this time (when I actually bought the stock) was the third time it was trying to break above that level…

… and you know what they say… the third time’s a charm…

… and FNMA actually rocketed above that level!

At some point, the sellers get tired… and they run out of supply. What happens after is when there’s heavy demand for the stock, and no supply… the stock breaks above that ceiling…

That very same day, I locked in a $4,000 winner (or 12% in just a few hours).

The whole idea is to spot a resistance level and the stock trending upwards on volume. There are two ways to play it… you could either buy in anticipation of the break above… or wait for the break out before buying shares.

On the flip side, there’s the fish hook pattern.

Fish Hooks Reel in Massive Winners

The fish hook is one pattern that I like to use to spot oversold stocks. Basically, if the overall small-cap market is weak… we’ll see more fish hooks, as stocks are under the water.

However, you can still spot these patterns in choppy or bullish conditions.

Here’s how the fish hook pattern works.

Basically, we look for 3 things:

  • A big drop in the stock
  • Stock finds a key support level and holds
  • Look for stock to rebound.

If you look at the chart in Glu Mobile Inc. (GLUU) above… the fish hook pattern was there… and it has support at $4… and started to bounce.

Once I got to my profit target… I took GLUU off for a base hit to lock in a safe winner.

However, for those who stuck around in the trade… they would’ve locked in a massive winner… because here’s what happened with it after.

 

The reason why I use the fish hook and the rocket is due to the fact I can attack the market in any way I choose… if the market breaks out, I know to use the rocket pattern… if it sells off, I’ll look for fish hooks.

If it’s choppy price action, all the better because I could use both of those patterns…

I want to leave you with some quick tips and lessons to get you ready for the fourth quarter, especially if you’re trading small-cap momentum stocks.

  • Well defined position size make sure to limit bet sizes and have a max allocation rule. What I mean by that is I won’t use more than $XXXXX per position.Scale into trades, and don’t just get into your maximum position size all at once.
  • Have an edge and plan — some traders like to go with their gut, rather than have a clear edge. Sure it works some times, but I don’t think it’s something you can bank on making your career from.For me to consider entering a trade, my patterns need to be there, otherwise, I’m looking for a new play.In other to maintain composure and hunting for my patterns… I have detailed plans and watchlists, which I send to all my clients.
  • Focus on proven chart patterns — I’ve been trading small-cap momentum stocks for years, and I know which patterns work… and which ones don’t.

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