I have had some great conversations this week with other traders on the subject of Patience and how it can be used as a tool to put on successful trades. I know what you’re thinking though, something like “how on earth can I quantify patience”?
Of course this would be near impossible to do since patience can be viewed as a state of mind, an attitude, etc. So how can you use it as a tool? Let’s start by taking a look at a trade I am in, and I will walk you through how I use patience as a tool to enter when I WANT to.
For an example, I will discuss a U-turn long trade that I am in at the moment in $COH (Coach). Here are some messages from my stream this morning:
Let’s first start with the pre-market action after the earnings announcement. The stock makes a nice move up and I elected to put it on my “to fade” list. Do what? You did what? Sometimes I do this because the move is out-sized in my view, or if I expect profit taking at some point soon. I posted a chart to my stream showing how price was hanging out near a prior important level near the hod (high of day) from last Thursday.
Once it appeared to have stalled here in my opinion, I initiated a short position at $57.65 and continued to monitor the action. The Gap Fill below was the obvious first target, but based on the indicator that I trade from it appeared that the $56 level would hold so I covered some.
I typically trade with a 1% trail stop in situations like this, or I use the 20 SMA as my entry/exit point – simple rules that I follow. This trail stop did hit so the position was now closed. However, I often continue to monitor a post-earnings stock because I expect some rebound/recovery to occur – and I was not disappointed.
My entry long on what I call the U-turn trade was at the test of the 20 SMA from below, and a break through it at the $57.10 level. Once it broke through $58 and probed the hod (high of day) I elected to sell 1/2 and start the process of putting on a Collar for the balance.
Here is another area where patience can really pay off. I often try to get a Collar put on for free (or better) as a goal. I began monitoring the November option chain and found the 57.5/60 Collar to be real close to free ($.20 debit when I first began to look). The stock seemed to be rather strong still so I elected to be tactical in how I put the Collar on.
I sold the 60 Call first, and now I am waiting to buy an appropriate Put for November with the proceeds collected – being patient to get MY price. One way I can benefit here is this: if price continues to drift up, any Put that I below will become cheaper to a point where the Collar can actually pay a credit.
Now that is one way that Patience can in fact be quantified.