Trade With Success!

We're Moving to a Bigger and Better Site!

2011-05-04T14:33:00.000-04:00

My friends,

Thank you to all of my viewers for your continued support on the Diodato Investments blog.

I have recently been invited to move from the simple Google blog to an actual website by Mike Cichoki, an expert in other fields of technical analysis and web designing.

The website is,
TradersBase.com

This site is more user-friendly, has more features available for our viewers, and a forum to discuss trading topics. From this point forward, all of my posts will be on that site. Thank you again for your support, and I hope to see you on TradersBase!

Sincerely,
Christopher Diodato

A Unique Way to Interpret the Wilder RSI with NG

2011-04-29T22:39:00.001-04:00

The Wilder Relative Strength Index, usually abbreviated RSI, measures the relative strength of a stock against its own price movement. It is generally accepted that a reading under 30 indicates an oversold condition while a reading above 70 indicates an overbought condition.

Please, please note that oversold and overbought are conditions, not trade signals. In addition, after I back tested selling an overbought DJI and buying an oversold DJI for the past ten years, I wound up with a catastrophic loss.

Now what we could do is try to find traditional price patterns in the RSI of a stock. This method was pioneered by Martin Pring and consistently gives favorable results. The most common patterns found in an RSI are the head and shoulders and the symmetrical triangle.

Take a look at our NG, which we are currently short. Click on the picture to enlarge.

In the lower column, is the chart of the NG 14-period RSI. There is a clear head and shoulders top, which has bearish implications. At the time of that breakout, the price also broke out through the bottom of its triangle formation. Add this to our fulcrum pattern that I explained in my original NG post, and we have a hefty weight of evidence that this stock is facing a major reversal.

Sorry I have not been actively posting in the blog as of late. I have my market analyst exam tomorrow, and I have been studying like a fiend. Wish me luck!

Happy trading!
~Christopher Diodato

By User Request - Choosing Your Position Size

2011-04-27T21:29:00.002-04:00

Before I start, I would like to note. Risk management is by far the most effective tool in a trader's portfolio. As you will notice, I am an "okay" stock picker, but I never let my losing trades run away. That is what makes me successful.

In yesterday's post, one viewer asked,

"What percent of your portfolio are you weighting to each of these trades?"

Well, we're here to all make money, so I would gladly share my go-to method. Now, I'll warn you in advance, there is math, so don't let your eyes glaze over.

Here we go! This is the method pioneered by Edwards & Magee, who published Technical Analysis of Stock Trends over sixty years ago, still considered to be the "bible" of technical analysis.

A trader has a general "rule" that they are not willing to risk more than a certain amount of their total capital on a single trade. Depending on your personal risk appetite, this percentage of total cash may vary. Most traders set this percentage between 1-3% per trade. Of course, if your trading capital is so low that you need to take large relative position sizes to offset commission costs, you may risk up to 5% per trade.

I tend to risk about $45 per trade (keeping my trading capital private). Of course after slippage, this may be slightly greater, but usually not enough to make a significant difference in your final loss.

So here's what I did for my Novagold Resources (NG) trade yesterday

I will enter at 12.88
I will keep my stop at 13.25 in case the trade goes wrong
That gives me a $0.37 risk per share bought
I am willing to risk about $40
I have a personal preference to buy 100 share lots rather than an "odd" number of shares
I'll buy 100 shares
100* 0.37= $37 Risk

Easy enough, right?

Flaws
Inherently, with a fixed absolute risk, percentage risk increases as you buy cheaper stocks. I only lost, for instance, about 15 cents on XING, but that was over a 5% loss. For this reason, you may want to make a subjective judgement on position sizes when trading low priced stocks. Or, you could be like me, and avoid low priced stocks all together.

Also, on high probability trades, one should be willing to risk more for a higher return. Therefore, a fixed amount of risk may not be suitable.

Slippage
As we learned on BVN, our mental stop level can sometimes be blasted through and our actual "emergency" stop be triggered. While, at the beginning of the trade, we may have thought we were only risking $40, we may end up losing over $100

And even in normal situations, you must accept that you will rarely enter at the price you want to.

Finally, there are many other methods of position sizing that are probably better (whatever that means), but this is simple and effective enough for my needs. I hope this helps everyone! Of course, if you have a question, post it in the comment box.

Happy trading
~Christopher Diodato

An Update on NG - Initiate Short at your Convenience

2011-04-26T20:57:00.001-04:00

Just a short comment here. I want to let everyone know that NG made a downward breakout today, and that with the bearish fundamentals and point and figure sell signal, it should be safe to initiate a short tomorrow. I would prefer to place the order around 12.80, in case there is a throwback. I entered today at 12.88.

My stop level is at 13.25 on close, or an emergency stop at 13.37.

~Christopher Diodato

Prepare to Short NG - Symmetrical Triangle Breakdown

2011-04-25T21:50:00.000-04:00

I have a lot of trades for this week. You'll get your third one by week's end. I just want to make sure to tell you as close to the actual breakout day as I can.

Novagold Resources (NG) has been coming across the ticker tape very often in the recent months. It is currently forming a symmetrical triangle, which gives us a clue that something is going to happen, but we have no clue what.

Now I hate indecisiveness, so I go to my other two analysis tools to get an idea of what direction the price is going to break out in.

First, understand the earnings. NG has had a constant negative earnings growth for the past several quarters. This is one of the main criteria in determining the fundamental strength of a company. This, therefore, favors a breakout to the downside.

Now, look at the point and figure chart. There is a very, very reliable pattern called a "catapult" that already broke out to the downside. If we had been looking at this chart, we would have opened up a short position long ago.

The evidence says that a downside breakout is very probable, so be prepared to open a short sale. The strategy and all of my analysis for trading this is outlined in this video below. I will be entering my position as soon as a breakout is confirmed. I believe the breakout will occur tomorrow morning.

Any questions are welcome as usual, and congratulations to those who entered GRMN with me this morning at the low of the day!

Happy trading,
~Christopher Diodato

Buy GRMN - Descending Triangle Breakout - 84% Chance of Success

2011-04-24T20:07:00.000-04:00

Back when Thomas Bulkowski did his massive studies on price patterns in the equity markets, he found that a descending triangle, a traditionally bearish pattern, was extremely dependable and profitable if it broke out to the upside. 84% of the breakouts hit their price target, so these types of breakouts are certainly worth taking advantage of when they occur.

We're looking at Garmin Ltd, (GRMN). Of course, click on the picture to view the full size image.

The breakout occurred two days ago, but the risk/reward ratios are still favorable toward taking a trade. The standard risk/reward is 3.5 (borderline), but after adjusting for probability, it becomes 18.38 (very good!). The method of executing the trade is outlined in this video below. Click on the link to view.

GRMN Video - Click Here

Here's another thing that will work in our favor in this trade, and may give us a clue to the long term performance of this stock. Take a look at the point and figure chart, a chart made to filter out noise and time distortions.

The patterns outlined in this chart give us two targets. The first, 40, was my intermediate term target, but there is also a target at 49, which is dedicated to the long term. Needless to say, the bull is in control. There was also a recent buy signal.

If you want to know more about point and figure analysis, I highly recommend looking into the brilliant work of Jeremy Du Plessis.

Remember, the trading strategy is outlined in the video.

Happy trading
~Christopher Diodato

An Overview on the Broad Markets - What Happens Next?

2011-04-20T21:09:00.000-04:00

Today was a big day for the markets. We had a broad rally lead by the tech sector, with Intel's strong earnings, and the Nasdaq finished up 2.10%. The other two indices finished the day up slightly more than 1.35%. My trader colleagues were all screaming, "I'm covering my shorts tomorrow!" Let's not get wrapped up in emotions. Take a step back.

Pictured below are four major indices that symbolize the broad American market, $DJI, $COMPQ, $SPX, and $RUT. Each one, minus the Russell 2000, is tracing out an ascending triangle, a common bullish-biased pattern. The patterns are somewhat sloppy, aside from the S & P 500, so if possible, I would prefer to place a breakout trade on that.

Click on the image to enlarge and sharpen.

With the ascending triangle patterns in place, we can have a bullish bias, but do not take action until there are definitive breakouts. Today, all three of those indices finished the day right under their resistance line. In addition, they each gave a stochastic buy signal. A breakout may be pending, but hold on the trigger until we are sure. We don't want another BVN tragedy.

I have a stop order on UPRO (a triple leveraged S & P fund) placed at 85.10, about 1 percent above the resistance level. Whether that is filled or not, we'll have to wait and see.

Bottom line: Don't get excited yet. The bear is anguished and retreating, but it may be a trap.

Happy trading,
~Christopher Diodato

FIG Head and Shoulders - Reversal Pending

2011-04-17T21:51:00.001-04:00

I'm posting this perhaps a week before we may be able to actually make a trade, so keep FIG on your watch list.

FIG is an investment group that took a major nosedive since its initial IPO. The downtrend has been in full force for years, and this is a little "blip" in the downtrend. Perhaps they leveraged themselves too much right before the stock market tanked. Anyway, the six month uptrend is showing signs of reversing with a very reliable pattern called the "head and shoulders."

Click on the image to enlarge.

I posted the strategy in my video, but here are the cliffs.

Enter short @ 5.12 stop
Exit with a loss @ 5.51 on close (Also, reverse the position)
Target @ 3.50
Probability of success: 55%
Probability of failure: 45%
Probability adjusted risk/reward ratio: 5.08 (Over 5, take the trade)
Earnings is announced on May 2, so be prepared to take action if there is a major swing.

Here's the video, which includes the strategy and all of my analysis.

FIG Head and Shoulders

Happy trading!
~Christopher Diodato

Our Best Friend - The OCO Order...Also, IAG Breakout Pending!

2011-04-13T22:22:00.000-04:00

An OCO (one cancels other) order is the best friend of a breakout trader that does not want to miss a move in either direction. The logic is very simple, and the benefits are numerous.

Placing an OCO stop order when trading breakouts:

Enormously limits risk
Reduces margin requirements while having the added open exposure of two orders
Allows you to only enter one order, but trade in two directions
Allows you to place a "good till cancel" order and never think about the trade again until it's filled

The main benefit is the risk limiting effect. Imagine this. In some sort of doomsday scenario, you trade a breakout with two separate orders. Since you are not at your computer, the order is filled as the prices hit your stop levels. The price breaks to the upside, your buy order fills. Then it breaks to the downside in a quick whipsaw, and your short order fills. You are now both short and long the stock...not good.

Anyway, to get you started with OCO stop orders, here's a trade for tomorrow.

IAG is making a double top right now, which may turn into a double bottom, which could turn into a long rectangle. Nobody knows, but we'll prepare for anything!

Our support and resistance levels are 21.50 and 23.40, respectfully. To take advantage of a breakout, we will place a "good till cancel" OCO order with a "21.38 stop sell" order (21.41 if you're feeling risky) and a "23.56 stop buy" order.

Now we forget about it until the order is filled one way or another. Perhaps have a glass of wine, go to the beach, whatever! Our stop level once an order is filled will be the support or resistance level it broke through when it initially broke out. We have a nice, simple trade opportunity here. My orders will be placed tomorrow morning.

Happy trading
~Chris Diodato

XING - Complex Trade Opportunity

2011-04-12T20:43:00.000-04:00

I really hate penny stocks. I hate how these "penny stock newsletter" groups can make thousands of the backs of idiots that see ads in the sidebars of web pages (looks to sidebar of the blog). Never listen to these people

But just tonight, I saw a technically strong situation in a semi-penny stock XING (over $2, a personal label). Both a symmetrical triangle and ascending triangle were forming. To top it off, there was a stochastic buy in the daily chart today!

Click to enlarge image.

So here's the strategy, and I am working very carefully to manage risk. We will exploit both pattern breakouts with multiple positions. The first trade may only result in a break-even. FOLLOW ALL DIRECTIONS and enter all orders at once

Enter with a stop buy @ 2.26
Set a trigger to enter a trailing stop sell of 25 cents once the price touches 2.40
Enter the second trade with a stop buy @ 2.42
Your sell stop will be 2.28 in case this trade fails.
Enter a limit sell order @ 3.00

Risk= $0.11+$0.14=$0.25
Maximum Gain= $0.74+$0.58=$1.32
Probability adjusted Risk/Reward=
(66%*.74)+(75%*.58)/
(34%*.11)+(25%*.14)=.9234/.0724=
12.75 (favorable)

Our risk is limited and defined very well here, so take the opportunity. Do not be tempted to over-leverage yourself just because the stock is cheap.

Happy Trading
~Christopher Diodato

Taking Our First Loss - BVN

2011-04-12T17:14:00.000-04:00

So today, the formation crashed, and BVN stock plummeted nearly five percent. Generally, I like to wait an see if the stock closes beneath the stop level. In this case, the level was 41.67. However, my emergency stop, placed under the next support level at $40, was activated, causing a large loss.

The trade was risky from the start, with only a 36% chance of an upside breakout from the descending triangle, so it would have been wise only to enter the trade partially, and then finish the entry on a definitive breakout.

I'll make a note for trades from this point foward.

Entry: 42.62
Exit: 39.85

6.5% Loss

I will look for a new trade later tonight as this market turns sour.

~Christopher Diodato

Stock Gaps and Stock Climaxing -They get Excited, Climax, and Crash

2011-04-11T18:35:00.000-04:00

I suggested that EXK was an attractive buy to my friends over at bodybuilding.com a few days ago. It was tracing out a beautiful flag formation and was ready to break upwards about 25%

Subsequently, it broke to the upside 27% and made several gaps. The different types of gaps are useful to know about when choosing what course of action to take.

The first gap is a breakout gap, as prices penetrate the upper level of the pattern and break to the upside with incomparable vigor. This is usually an excellent place to enter a trade.

The second and third are runaway gaps, which signal a move that is not planning on stopping any time soon. Note: These gaps do not get filled completely.

Finally, the climax, or exhaustion gap. This happened today. Prices gap up one last time, but quickly reverse on high volume. As the gap is completely filled, I move to exit the trade with my tail between my legs. A climax after several very volatile price swings often signifies an impending large reversal.

It did. Much like after a human climax, it got tired, and crashed. EXK finished down 10% at $11.17

Here is the chart that shows each gap. See if you can tell the differences. Note that the final gap was filled within five minutes, so it is difficult to see.

Gaps generally work in our favor if they are breakaway or runaway gaps, but when a climax is spotted, be prepared to take action fast.

I will be looking for trades tomorrow night and will post my findings.

~Christopher Diodato

An Update on BVN

2011-04-11T14:32:00.001-04:00

Just a notice to everyone. BVN broke through its stop level today, and if we followed the strategy outlined in the video, we would exit the trade with a loss if it closed below 42.00.

Today's low was 41.69, which probably raised concerns among the viewers here.

Do we prepare to exit? Not unless the close is beneath 41.67. Wait, what?

BVN's ex-dividend date was today. The book value of the stock decreased by exactly $0.33 per share. We must correct for that by adding our dividend amount to the current stock price.

Here is BVN's chart since NOV. Click on the image to enlarge and sharpen.

Add $0.33 cents to the current stock price, or lower all previous stop levels by the same amount, and we adjusted our trade for the ex-dividend gap.

This is often overlooked, but essential to being a successful trader.

Happy trading,
Christopher Diodato

Projecting Tomorrow's High and Low Using DeMark's Method

2011-04-07T20:14:00.000-04:00

Nope, no trades today. Preserve capital and wait until the perfect moment, and then exploit it!

Anyway, a couple things that you may find useful.

There are two useful day trading tools called the "Pivot Technique", and "DeMark's Projected Ranges." They can give us clues to what tomorrow's potential support and resistance levels are, and what the high and low of the day may be.

Both of these methods are based on the trading range of the day before, but they are often right. Sometimes, they seem like self-fulfilling prophesies, since many floor traders are aware of these techniques. Regardless, it would not hurt for us to know.

Tonight, I am just going to do the projected high and low from the DeMark method for the S & P 500 ($SPX). Tomorrow night, we'll explore the pivot technique. Please note that this specific equation is only for when the yesterday's close was lower than yesterday's open.

Equations taken from New Trading Systems & Methods by Perry J. Kaufman
Yesterday's high=H= 1338.80
Yesterday's low=L= 1326.56
Yesterday's close=C= 1334.82

Tomorrow's Projected High= (H+C+(2*L))/2-L= 1336.81
Tomorrow's Projected Low= (H+C+(2*L))/2-H= 1324.57

Potential Buy- BVN- Compania De Minas Buenaventura S.A.

2011-04-06T22:02:00.000-04:00

I was going through my daily pattern sleuthing, and I found something that made my heart race. An Elliot Wave channel!

We're taking a look at BVN, which I have confirmed, is a Peruvian precious metals mining company. My analysis and trading strategy is detailed in the video below.

I'll start off with a picture, as always, click to enlarge

Elliot Wave theory dictates that every broad market move can be divided in to five waves up, and three waves back. Often, the waves form a channel, which is very useful in forecasting long term movements. This sometimes works for individual stocks, and I have conviction that BVN is "one of those stocks."

BVN is at the bottom of the channel, and the upward Wave V is about to start, which means that a major upswing is on its way.

As icing on the cake, a small triangle formation is forming with short-term price targets at $40 and $50 and is about to break out.

And finally, to make things even better, silver and gold are spewing out buy signals with reckless abandon.

So what is the strategy. Depending on your appetite for risk, you can do one of two things.
1. Buy tomorrow
2. Wait until a definitive buy signal, and place a buy stop order around 45.30
3. Our price targets are at least $55 within the next year, and I expect a move to $65. This is a long term strategy.
4. My only place that I promise to sell as now is when the price hits the top of its Elliot Wave channel.
5. Our stop loss is a break beneath $42, which breaks the channel.

I will be buying BVN stock tomorrow morning, and a leveraged option upon breakout above $45

Happy trading, post any questions in the comment box.
~Christopher Diodato

BUY DGP- Ascending Triangle Breakout

2011-04-06T09:20:00.002-04:00

First trade! Buy a gold ETF tomorrow. I chose this one because I liked the leverage, so less capital gives you the same profit as if you invested more money.

We have several things that will work in our favor with this trade

Breakout above very stubborn resistance
Breakout on high volume from ascending triangle
Two stochastic buy signals
Favorable risk/reward ratio
High probability of success with this type of breakout (~75%)

Click on the picture to enlarge.

Strategy: Buy stop @ 44.55 and a Buy limit order @ 44.05. Filling one order must cancel the other, as we do not want to overleverage ourselves.

The probability of a bullish ascending triangle breakout hitting its price target, according to the Thomas Bulkowski studies, is 75%, which means that there is a 25% chance of failure.

Our stop is a close below 43.75, and our target price is 47.50, resulting in a probability adjusted risk-reward ratio of 11.

This is a very favorable trade, and I had a video, but it is still opening. Hope you can jump in!

~Christopher Diodato

EDIT: 1:26 PM

Renowned technical analyst, Sam Collins, has just recommended a strong buy for all gold ETFs. Beat you too it! =)

First Post

2011-04-05T22:09:00.000-04:00

Yes, yes. Upon request, I have created a blog; a blog dedicated to sharing my trades and my money making tips.

Before I start, here is an introduction of myself, since I suppose I should establish some credibility.

My name is Christopher Diodato. I am nineteen years old (almost twenty), and have been studying technical analysis and markets since my eighteenth birthday. I taught myself how to trade, with the help of about twenty books and several very intelligent people working in the field.

My main areas of study are in the field of technical analysis, including:
Price Patterns
Point & Figure
Oscillators
Elliot Wave
Cyclical & Regression Analysis
Capital Conservation

It is the last point, capital conservation, that I believe makes any trader successful. As most technical analysts, my win rate is not impressive. In all honestly, about 40% of my trades result in losses. However, the losses are usually only about 1-2%, while my winning trades average about a 12% gain each.

I am currently a sophomore at Penn State University, majoring in finance, economics and employee relations. My goal is to create a business immediately out of college with funds amassed by trading.

I am also currently studying to become a Chartered Market Technician, and should have completed all three exams by Spring of 2012.

My goal of this blog is to post my trades and my logic of each trade BEFORE I actually make the trade. This will ensure that readers of this blog have ample opportunity to take my recommendation. I generally post my trades in video format so everyone can see each step of my analysis. Even though these are my recommendations, I take no responsibility for losses, as I know that I am sometimes wrong.

For those interested, here are my statistics for my trading in the year 2011:
Total Percentage Return: 62.6%
Win Rate: 45.4%
S & P Return: 9.29%

Time to time, I will also post my current thoughts on the market. These include pivot points, technical phenomenon, and support and resistance levels.

So what are we waiting for? No amount of happiness can buy you money, so let's make some!

~Christopher Diodato