Scenario recognition helps a trader identify trading opportunities before and or while they are unfolding. It takes lots of time behind the screens to acquire a repertoire of different scenarios and their subsequent outcomes. If you can spot a stock acting a certain way before the pattern completes you are giving yourself a bit of edge and most of all confidence. The confidence will allow you to let the trade work while the scenario you recognized plays out.
Inspiration for this post came from TIVO’s price action this morning. I glanced over at my stockMONSTER window and saw a trader say TIVO moving. By the time i got the chart up she had already moved nicely up to the 9.18 level. Since i do not have much luck, or anyone for that matter, buying at the top of an extended move i waited to see how she acted on the pullback.
On the pullback she came in hard (expected) but caught a solid bid when a clear bidder showed size at the 8.97 taking in everything. Next candle off the 9.87 showed price improvement, from that point i knew i had seen this before. This price action told me there is a real buyer and he is accumulating quietly and slowly without any rush. What do you know, the price continues to improve on trend for about an hour, now we are sitting back at the previous push’s highs, boom she pops through earlier day’s high making a new day high. Buying at the 9 level was the entry point for this scenario, the exit was selling your winner into the break out traders/volume/momo chaser bids. This trade gave you a solid 40c where the trade was never against you and your edge was you have have seen this pattern BEFORE!.