Today we will follow Mr. Tuna as he searches for and executes a TFC alert! Mr. Tuna has put the time into learning and attending class, he is ready to make some good trades!
THE SETUP
Mr. Tuna has spent his morning perusing the flow alerts section when something catches his eye, a whale alert for AFRM. Mr. Tuna is aware that whale alerts are extremely rare, they require both an order of large size as well as unusual expiration and strike. Whale alerts are generally swing plays, but Mr. Tuna knows that the key to success is trusting his TA, so he will rely on the chart to tell him how he should play this alert.
THE OBSERVATION
Mr. Tuna begins by pulling up an hourly chart of AFRM that looks back for the past three months. He quickly identifies it is a downtrend and approaching the lower trendline, this would be a good spot to go long for a reflexive bounce. He also notices bullish divergence on RSI as well as a possible 3 bar play. This is shaping up to be a great setup, but he needs to draw some quick zones as well as make a plan for entry and exit targets.
THE UTILIZATION OF CRITICAL THINKING
Mr. Tuna zooms in on his hourly chart to look for more confluence that this would be a good trade to follow. He throws on his handy dandy regression channel and notices we are about 1.5 st. dev under the mean, this has been a reliable zone to go long. He quickly identifies and plots some resistance zones (red boxes), a gap that needs to be filled (purple box), and a support zone (green box) that if lost would invalidate the long trade. He also marks down an important high-volume node with a red line.
THE CRAYONS
Mr. Tuna is excited about this setup now. He pulls up his 5min chart to find where he should enter, set his take profits and stop losses, and create a full plan for the trade. He quickly notices that AFRM has reclaimed its 15min opening range low but has yet to backtest it. His stochastic oscillator says bull momentum is fading and that he could probably get a lower entry. AFRM also has rejected its halfway back of the morning sell-off.
THE PLAY
Now that Mr. Tuna has found his zones and created a plan, he must choose a contract and expiration. The alert came in for Feb 18th 85C, but he decides he wants a slightly lower strike as well as sooner expiration. His top target is $85 and would love for these contracts to go ITM. He realizes this will be a swing trade, but only plans on holding till the middle of the week so the extra premium included in the February calls doesn’t interest him. He ends up deciding to enter the January 21st 80C and wants to get filled around $2.90 per contract.
Mr. Tuna decides his risk profile is 20%, or $.58. When looking at the past option prices he observes the morning low price for these contracts was $2.40, this matches up perfectly with a loss of support as well as his risk profile. Mr. Tuna will risk 10% of his total portfolio on this play, which results in a maximum of 5 contracts. He devises a plan, he will buy 2 contracts on a retest of ORL, then add 3 contracts in his halfway back support zone or on a break above the opening range mean. His stop loss will be at 20%, which will result in the stock making a new low of the day, and his breakeven on expiration is at a spot price of 82.90.
Let’s review Mr. Tuna’s final plan for this long trade on AFRM:
1. Purchase the 80C expiring on Jan 21st
2. Initial entry on ORL backtest of 73.88
3. Add final three contracts at 73.20 or break above 75.7
4. Stop loss below 71.7
5. Target one gap fill 79.20
6. Target two HVN 81.6
7. Target three resistance zone 84
THE EXECUTION V.1.01
Mr. Tuna’s plan works out and AFRM backtests the opening range low. The stochastic oscillator confirms that bullish momentum is coming back into the stock, and sell volume has been decreasing the entire retrace. He makes his first entry at his wanted price of $2.90 per contract.
THE EXECUTION V.1.02
As the day progresses buy volume comes in strong and bulls take control. A successful breakout of the opening range mean is our signal to add our remaining three contracts and put on a full position. He gets filled at $3.30, having a net position of 5 contracts at a price of $3.15. At this point, Mr. Tuna also starts to observe the 9/20ema cloud as moving support throughout the trade.
THE HOLD
Mr. Tuna sits in his position for the entire day, he planned a swing trade with a target of 84. He realizes the average daily range of AFRM is $8, it is very unlikely his target will get hit in one day. As price pushes towards the ORH we see some slight profit-taking. The low volume on the profit-taking, bullish ema cloud, and holding of halfway backs gives Mr. Tuna the confidence and conviction to stay in the play. The contracts close the day at $4.25 which results in a gain of 35%.
THE SWING
As the next day approaches Mr. Tuna feels really good about his swing position, the market is up and he is long to participate in the rally. He moves his stop up to his entry point, the worst-case scenario is he breaks even on this trade. Right off the bell, he observes strong bullish momentum and almost an instant gap-fill to his first target. He is confident he can start to scale out at his second target of the HVN. As price pushes into the HVN he notices a strong presence of sellers and decides to trim three of his contracts at $5.50 or 75%.
THE HOLD V.2.0
Mr. Tuna is pretty hyped that the swing worked out perfectly and his price targets were spot on. He observes a strong presence of sellers on a retest of the HVN. Quickly, Mr. Tuna draws a nice halfway back of the last impulse moves and notices confluence with the current days ORH as well as the gap fill. He decides to put a trailing stop of 20% on his remaining position because he is confident that if the price can hold this newly found support zone his top target of 84 can hit!
THE EXIT
THE SUPPORT ZONE WAS HELD! With the added protection of the trailing stop, Mr. Tuna knew that in the worst-case scenario he walked away with some cash, but by trusting his TA he was able to stay in this play. Price explodes upward into his next target zone. Mr. Tuna exits his remaining two contracts at $6.50, resulting in a 97% gain on the last two contracts. In total, he put in $1575 with a max risk of $290 and walked away with $1380 of profit.
Mr. Tuna is hyped that he successfully completed his swing trade thesis. Using simple support and resistance, volume analysis, and halfway backs he was able to almost double his money overnight. Like a good student of the market, Mr. Tuna proceeds to log every aspect of his trade, as well as make notes on his chart about what he did properly and why it worked.
Mr. Tuna decided to go against the conventional wisdom of purchasing a Lamborghini and instead bought a top-of-the-line underwater boat. Fish are kinda weird, but when they follow simple rules they can really extract wealth from the market!
-Written by Mario Eiden
