Micro Stock Trader

Sunday, January 19, 2025

Micro Stock Trader’s Adopted Retracement Trading Strategy

At Micro Stock Trader, we continuously refine our trading strategies to align with sound, proven methodologies. One approach we are incorporating into our toolkit is Oliver Velez’s Retracement Trading Strategy, as outlined in his YouTube presentation, "How To Trade Key Retracement Without Indicators" (Watch here).

Stock chart of Universal Robina Corporation (URC) displaying retracement levels, trend continuation zones, and trend reversal zones based on the Retracement Trading Strategy. Key price levels at 68, 77, 80, 84, 92, and 104.4 are marked.

Week 4 analysis of Universal Robina Corporation (URC) using the Retracement Trading Strategy, highlighting key trend reversal and trend continuation zones. The stock is currently testing the 0% retracement level at 68, a critical point for potential rebound or further downside continuation.

Understanding Retracement in Trading

A market move that shows a strong burst of momentum often undergoes a natural retracement before resuming its trend. The key to retracement trading is understanding when a pullback presents a viable trading opportunity versus when it signals potential trouble.

According to Oliver Velez, there are two types of strength moves in the market:

Single-bar strength move: A single large power bar showing aggressive movement in price.
Multiple-bar period of strength: A sustained upward or downward trend over several bars.

Both types of moves create key levels that define retracement zones, which traders can use to make informed decisions.

The Key Levels of Retracement Trading

When a stock experiences a significant strength move, it establishes two critical levels:

Top of Strength Move: This is the peak of the power move, marking the 0% retracement level.
Origin of Strength Move: This is where the power move began, marking the 100% retracement level.

The retracement occurs when the price pulls back from the peak of the move. The probability of a rebound to the original strength level depends on how deep the retracement goes. The breakdown of probabilities is as follows:

Retracement to 33% (1/3 of the move):
- 80% probability of rebounding back to the top of the strength move.
- Considered a high-probability trade setup.
Retracement to 50%-66% (midpoint to 2/3 of the move):
- 50% probability of rebounding back to the top.
- The risk increases as price moves deeper into the retracement zone.
Full retracement (back to origin or 100% retracement):
- 10% probability of rebounding back to the top.
- A full retracement indicates potential trend failure.

Equivalent Discussion for a Downtrend Power Move

In the case of a downtrend or downward power move, the retracement process works in reverse. The price experiences a strong decline, and a counter-trend rally or pullback occurs before potentially resuming the downward trend. The probability of resuming the downtrend depends on the retracement depth:

Retracement to 33% (1/3 of the move):
- 80% probability of price resuming its downward move to the prior low.
- Considered a high-probability continuation trade setup.
Retracement to 50%-66% (midpoint to 2/3 of the move):
- 50% probability of price resuming its downward move.
- Increased risk as price moves deeper into the retracement zone, signaling potential trend hesitation.
Full retracement (back to origin or 100% retracement):
- 10% probability of price resuming the downward move.
- A full retracement suggests potential trend reversal or trend failure.

The Sweet Spot for Trading Retracements

The most favorable area for high-probability trades lies in the 25%-45% retracement range. This zone offers 60% to 90% win probabilities, making it the optimal entry area for a retracement trade.

By waiting for a pullback into this sweet spot zone, traders increase their chances of capturing a continuation move back to the highs (in an uptrend) or back to the lows (in a downtrend), while avoiding trades that may result in trend reversals.

Practical Application

Identify a Strong Move: Look for either a single-bar power move or a multi-bar strength move.
Mark Key Levels: Identify the top of the move (0%) and the origin (100%).
Monitor Retracement Levels: Wait for a pullback into the 25%-45% retracement range.
Execute Trades with Confirmation: Use price action signals or volume confirmation before entering a trade.
Set Targets and Stop Losses: Aim for a return to the top (in an uptrend) or to the prior low (in a downtrend) while managing risk accordingly.

Tactical Entry Assessment for URC at 68 Level (Week 4)

Scenario Analysis

Micro Stock Trader is considering a tactical entry at 68 level for 90 URC shares in Week 4. Given the recent downward power move from an origin of 104.40 (October 1, 2024) to a low of 67.80 (January 17, 2024), the retracement strategy suggests that URC is at a critical level where a potential trend reversal may occur.

Rationale for Entering at 68 Using a Stop Limit Order

The rationale for entering at 68 for 90 URC shares is to live test the Stop Limit Order by DragonFi. A Stop Limit Order is a type of order designed to help traders buy breakouts, limit losses, or take profits.

To place a Stop Limit Order, two prices must be specified:

Stop Price: The price at which the order becomes executable. We are setting our Stop Price at 67.80.
Limit Price: The highest price we are willing to pay (if buying) or the lowest price we are willing to accept (if selling). We are setting our Buy Limit Price at 68.

This means our order will only be executed at a price that is at or below the Limit Price of 68, ensuring that we won’t pay more than 68 for the stock. This strategy allows for controlled entry into the trade while minimizing slippage.

Strengths of Entering at 68 Level

Deep retracement suggests discounted entry: A price near the lowest level of the move provides an opportunity for maximum upside potential if a reversal occurs.
Potential breakout from oversold levels: If buying momentum builds up, it could trigger a move towards the trend reversal sweet spot (88.00 - 95.00 range).
Clear stop-loss placement: Entry at 68 allows traders to define a tight stop-loss just below 67.80, minimizing downside risk.

Weaknesses and Risks

Potential continuation of downtrend: The stock may still be in a bearish phase, and a break below 67.80 could signal further downside.
Limited confirmation of trend reversal: The stock has not yet reached the 55%-75% retracement levels where reversals typically gain momentum.
Low probability of immediate rally: At 68, the probability of an immediate move back to 104.40 is low, given that it has yet to break key resistance levels.

Probabilities Based on Strategy

If URC rebounds into the sweet spot (88.00 - 95.00): 60%-90% probability of trend reversal.
If URC fails to reclaim above 75% retracement level (95.30): Potential fake breakout leading to another downtrend leg.
If URC breaks below 67.80: High risk of continued sell-off and new lower low formation.

Overall Assessment

A tactical entry at 68 for 100 URC shares presents a high-risk, high-reward scenario. Given that this level represents an extreme retracement, a trend reversal strategy should be confirmed by price action signals (e.g., bullish engulfing, high buying volume). The safest approach would be:

Partial entry at 68, monitoring price reaction.
Adding more positions near 75% retracement (95.30) if the trend reversal gains traction.
Strict stop-loss below 67.80 to prevent deep losses.

Conclusion

While the retracement trading strategy provides valuable insights, it is crucial to wait for confirmation before committing fully to a reversal trade. A tactical entry at 68 could yield significant rewards if the stock rallies into the trend reversal zone, but risk management is key to prevent substantial losses in case of further declines.

Retracement trading is a powerful tool when used correctly. By focusing on the 25%-45% retracement zone, traders can maximize their win rates while minimizing risks. At Micro Stock Trader, we believe this method provides an effective framework for identifying high-probability trading opportunities without relying on additional indicators.

Disclaimer: This post is for informational purposes only and should not be considered financial advice. Always do your own research before making any trading decisions.

As we move into Week 4 of live testing under the Budget Ethical Trading Account (BETA), our primary focus will be enhancing downside scenario modeling and incorporating volume confirmation for support and resistance levels. Week 3 highlighted critical areas where our trading strategy needed refinement, particularly in identifying weaker support levels and anticipating breakdowns more effectively. This post outlines key adjustments for Week 4 to improve execution and risk management.

A technical analysis chart for URC in Week 4, highlighting key resistance at 71.50, support at 67.00, stop-loss at 65.50, and a bargain price entry at 60.00, with volume analysis to confirm trade decisions.

Week 4 BETA Trading Scenario for URC: Key Support, Resistance, and Risk Management Strategy

1. Strengthening Downside Scenario Modeling

Lessons from Week 3:

Our expectation of 77.07 as a strong support level did not hold, leading to a significant price breakdown.
We lacked a structured downside contingency plan, resulting in an overly optimistic market expectation.
Stop-loss placement worked as intended but could be further optimized to allow tactical re-entries.

Week 4 Adjustments:

✔ Model Multiple Downside Scenarios – Instead of relying on a single support level, we will create a tiered downside risk model based on past price action, volume shifts, and market sentiment.

✔ Define Alternative Support Zones – A structured approach will identify probable support levels at 67.00 (weak support), 65.50 (hard stop), and 60.00 (bargain entry).

✔ Tactical Stop-Loss Adjustments – Stops will be refined to protect capital while allowing flexibility for tactical re-entries if strong reversal signals appear.

Simulated Downside Scenarios & Tiered Support Modeling

We will now analyze three potential bearish scenarios to test our model’s response under different market conditions.

🔻 Scenario 1: Gradual Sell-Off & Controlled Decline

URC price slowly declines toward 67.00 with low-to-moderate selling volume.
At 67.00, if volume remains weak, we assume that the support level will not hold.
Price continues drifting downward, hitting 65.50, triggering our hard stop-loss.
If selling pressure persists, URC approaches 60.00, where we reassess for a re-entry opportunity.

Trade Action:

❌ No entry at 67.00 without volume confirmation.

🚨 Exit at 65.50 if downtrend continues.

✅ Consider tactical re-entry at 60.00 only if reversal patterns emerge.

🔻 Scenario 2: High-Volume Breakdown Below 67.00

Price reaches 67.00 but with high selling volume, confirming further downside pressure.
URC sharply declines to 65.50, showing no signs of reversal.
Further institutional selling drives the price toward 60.00 within a short period.
Support at 60.00 is tested, and volume increases significantly, signaling potential stabilization.

Trade Action:

❌ No entry at 67.00 due to strong bearish momentum.

🚨 Wait for volume stability at 60.00 before considering an entry.

✅ Look for a reversal candle (Green Elephant Bar) before re-entering.

🔻 Scenario 3: False Breakdown & Rapid Reversal

URC breaches 67.00 momentarily, triggering stop-losses from weak hands.
Suddenly, institutional buyers enter, reversing the price back above 67.00 with a strong green candle.
Buying volume spikes, and price recovers toward 71.50, testing resistance.
The stock consolidates between 67.00-71.50, forming a bullish structure.

Trade Action:

✅ Enter at 67.00 if strong buying volume appears.

✅ Hold position if recovery momentum continues.

🚨 Exit at 71.50 unless a confirmed breakout is supported by volume.

2. Incorporating Volume Confirmation for Support & Resistance

Lessons from Week 3:

Key support levels failed because volume did not confirm buyer strength.
High selling volume on January 14-16 reinforced the need for caution in calling support levels.
Resistance levels lacked momentum confirmation, making breakouts less likely.

Week 4 Adjustments:

✔ Confirm Support & Resistance with Volume Trends – Any support level must be validated by higher-than-average buying volume. If price reaches support but volume remains low, we will delay entries to avoid premature positioning.

✔ Monitor Institutional Selling Pressure – Large-volume sell-offs indicate stronger bearish control. If institutions continue offloading shares at high volume, we will adjust our trading expectations accordingly.

✔ Use Volume to Confirm Breakouts – Instead of assuming resistance levels will break, we will wait for volume-backed moves above resistance before committing to breakout trades.

3. Tactical Adjustments to Trading Strategy

Key Level	Week 3 Expectation	Week 4 Assumptions and Revised Strategy
77.07	Expected strong support	Removed as a key level; now an invalidated support
71.50	Resistance level	Hard Resistance. Exit immediately on approach unless volume confirms strength.
67.00	Expected to hold	Weak Support. Entry only if confirmed by Green Elephant Bar + volume increase
65.50	Not previously considered	Hard Stop-Loss. New hard stop-loss to prevent deeper drawdowns. If price falls below this level, we exit entirely to limit losses.
60.00	Not previously considered	Bargain Re-Entry. Strategic re-entry zone for bargain hunting. If the market experiences a deeper sell-off, this level may offer an ideal entry.

Final Takeaways for Week 4

✅ Downside scenarios will be fully modeled, including tiered support levels.

✅ Volume confirmation will be required for any support/resistance validation.

✅ Stop-losses will be strategically adjusted for better tactical positioning.

✅ Breakout expectations will be managed conservatively with volume analysis.

By implementing these refinements, we aim to make more data-driven trading decisions while reducing exposure to unnecessary risks. Week 4 will serve as a key test of our ability to adapt to changing market conditions effectively.

📢 Stay tuned for next week's trading recap and insights as we put these refinements into practice!

Disclaimer: This post is for informational purposes only and should not be considered financial advice. Always do your own research before making any trading decisions.

Saturday, January 18, 2025

Week 3 Scenario Modeling Assessment for URC: Refining Our Predictive Skills

As we assess our scenario modeling performance for Week 3, it is important to evaluate how our projections aligned with actual market outcomes. By comparing our Week 3 Scenario Chart with the Week 3 Closing Chart, we can refine our predictive strategies and improve our execution in future weeks.

A technical analysis chart illustrating the Week 3 scenario model for URC, marking key support, resistance levels, and expected price movement.

Week 3 Scenario Model for URC: Projected Support, Resistance, and Market Movement Analysis

Universal Robina Corporation’s (URC) daily candlestick chart at the close of Week 3 on January 18, 2025, showing key price levels and trend analysis.

URC Daily Chart at Week 3 Close: Evaluating Market Movement as of January 18, 2025

1. Comparing Our Week 3 Model vs. Actual Price Action

🔹 Expected Scenario (Week 3 Model)

Probable Resistance: 80.70
Probable Support: 77.07
Target Breakout Zone: 85.00 (1/3 Zone)
Stop-Loss Adjustment: 73.80

Key Assumptions in Our Model:

✅ We expected URC to consolidate around the 77.07 support level before attempting a move toward 80.70.

✅ We projected that, if momentum built up, a potential breakout towards 85.00 could occur.

✅ Our updated stop-loss of 73.80 was positioned to protect against downside risks while allowing price action to develop.

🔹 Actual Market Movement (Week 3 Closing Chart)

Closing Price: 68.60

Support Failed: Price dropped significantly below 77.07 and even the stop-loss at 73.80.

Bearish Momentum: URC fell sharply, breaching multiple support levels with increased volume.

Moving Averages: The 20-day MA (76.37) failed to provide support, confirming further bearish sentiment.

Key Observations from the Actual Price Action:

🔻 The expected support level at 77.07 did not hold—instead, a strong breakdown occurred.

🔻 Stop-loss positioning (73.80) was breached, confirming the importance of having a rigid risk-management system.

🔻 Bearish volume surged, indicating strong selling pressure rather than a recovery attempt.

2. What We Did Well in Week 3 Scenario Modeling

✅ Incorporated Stop-Loss Adjustments: Our dynamic stop-loss strategy at 73.80 was a good move, as it prevented excessive drawdowns.

✅ Plotted Probable Resistance & Support Correctly: While price did not respect support, the levels were based on valid historical price action.

✅ Anticipated Key Market Zones: Our 1/3, 2/3, and 3/3 breakout zones correctly outlined potential bullish scenarios, even though the market ultimately moved in the opposite direction.

Mid-Day Trading Reflection: January 16, 2025 – Lessons from the Tactical Action

Transaction Costs and Tactical Adjustments – Refining Our Trading Plan

3. Where We Can Improve Moving Forward

🔸 1. More Focus on Downside Scenario Modeling

🔹 Our scenario focused heavily on a potential breakout but did not fully model a downside continuation scenario in the event of a breakdown.

🔹 Moving forward, we should build alternative scenarios that consider:

A breakdown below key support levels (like what happened this week).
Adjusting stop-losses dynamically based on trend weakness.
Identifying lower probability, high-impact events (like a major support breach).

🔸 2. Incorporate Stronger Volume & Trend Analysis

🔹 The Week 3 Closing Chart showed a strong increase in selling volume, signaling high conviction from sellers.

🔹 Our future models should incorporate volume analysis to confirm or invalidate price setups.

🔹 If volume is declining while price is testing support, it may be a better indicator that the level is weak, helping us adjust our trade plan.

🔸 3. Refine Tactical Entry & Exit Decisions

🔹 Given the level of volatility, we should explore smaller tactical entries first instead of assuming a full position at a key level.

🔹 Consider layering into positions based on confirmation signals (e.g., if support holds for multiple days rather than entering immediately).

🔹 Transaction costs must also be factored in when making rapid adjustments to positions. (Read More)

4. Key Takeaways for Future Scenario Modeling

✔ Develop Multiple Scenarios – Avoid focusing too much on one primary expectation. Instead, create a bullish, neutral, and bearish model to prepare for any market movement.

✔ Use Volume Confirmation – Support and resistance are only valid if volume confirms the level. Next time, check whether buying volume supports price action before committing to a trade.

✔ Improve Stop-Loss Strategy – The hard stop-loss was effective, but a more dynamic approach (like a trailing stop) may help capture upside while protecting against deeper losses.

✔ Adjust Trade Execution – Future models should factor in smaller position entries rather than assuming full exposure immediately.

Conclusion: Building a More Adaptive Trading Approach

Week 3 provided valuable lessons on scenario modeling, stop-loss placement, and volume analysis. While our upside expectations did not materialize, our risk management approach helped mitigate major losses. Moving forward, more robust alternative scenario modeling and volume-based confirmations will enhance our strategy.

🔔 Next Steps:

Improve downside risk scenario planning for better trade execution.

Adjust position sizing strategy to allow for tactical entries.

Use volume confirmation as a key factor in future market projections.

By refining these elements, our Week 4 model can become even more accurate and adaptable to market conditions! 🚀

Disclaimer: This post is for informational purposes only and should not be considered financial advice. Always do your own research before making any trading decisions.

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Sunday, January 19, 2025