Textbook Trading – Notes and Review of Chapter 6 – Shorts and Over Extensions by @investorslive

Table of contents:

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Summary:

1-Intro

For sure my favorite chapter so far. Not only because shorting is my best and most consistent trade setup, but also because I feel like Nate is really hitting his stride at creating the DVD at this point. Of course it may also be be related to the fact that at his heart he is a short seller, so I think I sensed a little more enthusiasm in this chapter.

2-Para

Nate starts out with probably the most consistently profitable though dangerous setup, the parabolic move. He does a good job explaining why this is so risky since there is no clear spot to set risk on. When a stock fits this pattern it is going bat shit crazy and it’s very hard to say “OK if it hits X I’m out”, because you can’t solve for X. This is where you have to use your rules to determine your “Oh shit level”. If you are willing to risk $100, $500 or $10,000 you need to be disciplined enough to enter and then exit at that point if it goes against you.

3-Powerclose

Next setup is the power glose and gap up parabolic. In my opinion these are the most common short squeezes and traps. Its very easy to short something mid day, then grit your teeth into the close only to be squeezed out 5 minutes after the open. Of course, if you are smart, and learn from this chapter you can capitalize on those early shorts. Avoid mid day grinding and short into the gap up the next day. This section I felt was particularly useful.

4-intradaypara

Next Nate covers intraday parabolics and kind of what I’d call HOD moves. These are a little more difficult to explain so its nice that he uses tons and tons of charts and setups to explain it. I particularly like the flipping back and forth between daily and intraday charts. One thing I can tend to get lazy on is matching up multiple time frames intraday. This section was a good reminder to always have an idea of what the daily looks like.

5-Review

In closing the most valuable lesson of this chapter was explaining to the new or growing short seller how to differentiate between a solid risk to reward short and a stock that is “up a lot”. I’ve seen it a million times and I’m sure Nate has seen it 10 million times, but the biggest roadblock to becoming a successful short seller is being able to make this differentiation. If you pay attention I think this chapter can teach and show you that.

Notes:

Parabolic Shorts
Over extended Charts
Over extended Consolidation
Power close gap up Parabolic
Intraday Parabolic
What is parabolic action?
Traps
All these setups can keep going, even if they are solid short setups, that does not mean they die long term
Parabolic Short
     -Drawback is there is no set risk, no place to set a top
     -HOD, former top etc
     -Overextended charts, going going going, no pullbacks
     -Just because it pops does not mean its a short
     -Lots of good charts to demonstrate
     –Notice grinding transition to parabolic
     -Parabolic – speed up relative to previous action – need to learn this important
     -Take advantage of emotion
Over extended Consolidation
     -Overextended, but second wave up
     -Can use lower highs and late day fade – HOD rejection type
     -Even if para if it holds higher lows, odds are you will get a squeeze – no capitulation
     -Need to recognize consolidation/higher lows
Power close gap up Parabolic
     -Closes on HOD with big daily range
     -Another huge move right at the open
     -Emotion out  of the gate, momo longs taking profits/getting spooked
     -No place to set stop, so you need  to have disciple to enforce your dollar loss rules
     -Good example on JASO, previous day took all day to move $1, para day it moved $1.50 in 15 minutes (THATS PARA)
     -Can set risk on pre market high
     -With patience you can also set risk on day high after para move for all day fade
     -Need to recognize para’s for exits or you will get squeezed
     -With no set risk you need to pick a dollar amount you are willing to lose, $100, $500, $1000 and stick to it.
     -Capitalize on chasers
Intraday Parabolic Price Action
     -Speed up relative to previous
     -whole and half dollar numbers
     -Emotion on air, quick nail and bail, not a swing short setup

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