Reading the Tape: Trading into a Position

Gilbert "Gman" Mendez

Gilbert "Gman" Mendez

I am the kind of trader who can sit down at 7:30 AM or in the After-Hours and pay the offer or whack the bids in a stock if it is actively trading.  If you turned off all of my charts, my news feed, and just provided me the Level 2 quotes, I could sit down and make money 90 percent of every trading day in any trading month.   My charts and news feed are like a mouth-watering desert, delicious for some meals (or trades) but not essential.   I do have a sweet tooth for the wild volatility right on the Open that many do not have the trading skills to master.  Almost all of my profitable positions work right from the moment I get in during these volatile trading periods. This is not necessarily true of my positions during other time frames, which requires more patience to trade into a big position.  And this is the topic I want to talk about today.

Often traders confuse trading into a position with scaling into one.  To me scaling into a long position means buying X amount at a given price, buying 2X ten cents lower, and 4X a quarter lower with a stop 40 cents from the initial entry. In essence the trader averages down the position and ends up in a position with an average price near the second buy – potentially placing the trader in a position of weakness.  But these traders are loaded adhering to that timeless trading mantra….Go big or go home.  Well these traders are in danger of being sent home by the market.

To me trading into a position offers the better risk/reward.  This means using tape reading skills to determine whether it is likely that you ought to load up at a price different than that of your dream price (sometimes higher and sometimes lower). Trading into a position requires you to make a bunch of small trades.  You are getting a taste of the stock. Some of these trades end up being small winners and most of them are just scratches. Often this gets misunderstood by being undisciplined or impatient as it requires making small trades to get a taste for how weak or strong a stock is near your levels.   How do I say this nicely?  Wrong, wrong, wrong.

On our trading desk, SMB Capital, we call this paying for information.  And doing so allows us to increase our size, improve our win rate, enter trades others are not in, and limit our risk with our bigger position.  Overall you may make just a little bit of money and it may seem like too much of a grind.  But remember these smaller trades, this stock tasting, provide me with valuable information about my stock. By being in them I can get a feel for how easy it is to get a sale on the offer; how easy it is to get hit on the bid; how quickly I get chiseled on the offer when I try to sell; what the reaction is to me hitting the bids or paying the offer for more stock; what the selling/buying pattern happens to be, etc.

Further, the real risk to me is not losing a minimal amount on a few small trades. The biggest risk is missing out on the opportunity all together if the stock does not get to my dream price. The real risk is not loading up at levels higher than my dream price if the tape indicates it.

I often hear from traders that they rather miss a move all together if they do not get the price they want. This is specially true of swing traders. And I get their concern. They want to be disciplined so that if the stock does get to their dream price they are not in a position of weakness.

This is not what I am proposing here. I can’t think of the last time I traded into a position and felt that way. In fact, making those small trades often solidifies my conviction and makes it less likely I will get shaken out. The big difference is that when I scale into a position I often end up with my biggest position near (within cents) from my dream price.  But I also find myself being in many plays with my full size and with same risk profiles even though they never reached my dream price. I do not call that being undisciplined, I call that trading.

This is an important skill all traders should develop. I do not believe in the all in or flat mentality for getting into positions. It works for some, and it doesn’t for me.  Obviously if you have a system that works for you already then stick to it.  But this technique may help those of you struggling with missing moves or who find themselves averaging down constantly.  And that would just be delicious!

I will look through my video archive over the weekend for a video that illustrates this technique so I can present it on my next article.  Happy trading!

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