EarthLink, 30-minute Chart

Questions:

1) Why would you be paying attention to this stock on Tuesday, October 21?

2) Is the trend up or down? Would you be looking to get long or short this stock?

3) Where would you get long/short this stock on Tuesday, October 21?

4) Where would you put the initial protective stop?

5) When would you stop trading for the day?

6) Where would you exit the position?

Answers:

1) Because it was unusually active, and very volatile.

2) Up. You’d be looking long.

3) Long at 8.18 on a buy stop above the 11:30 inside bar.

4) Initial Protective Stop: 8.07. (max. 1.34%)

5) Right after you enter the position or lunchtime, whichever comes first.

6) End of day. Could sell half, carry half, or just close it all at once.

The risk in the ELNK trade was very modest at only 1.34% — skittish traders could have chosen to move their protective stop to breakeven almost immediately. The stock closed at $8.54 representing a gain of 4.4% from entry, with a better than 3:1 reward to risk ratio.

Folks who blindly bought on the release of ELNK’s Q3 numbers had a great day, but the question is where did they place their initial protective stop? What if the stock reversed moments after they put the trade on? I like to quantify risk and set chart-based stops… I can’t just “wing it,” and I suspect that if I tried to wing it, the first thing that would take flight would be my trading capital, straight into a nose dive.

Screen capture of my intraday Watch List: