I wanted to write today and cover a recent bonus trade idea I gave in my active day and swing Trading Pit.
The stock was Builders FirstSource (BLDR), and it sparked quite a bit of curiosity among members. It’s not the stock that we should focus on here but rather the lesson, because the lesson applies to all stocks.
I received a few emails asking what to do once the stock seemed to be moving against them — it was a short position, so the stock was rising. This situation presents a perfect learning opportunity about interpreting stock movements with a keen eye on market context.
Key Observations from the BLDR Trade
BLDR's Average True Range (ATR) is $6.52, which is a vital metric indicating its typical volatility. The stock rose by about $4.75 that day, hurting the traders’ position — but well within its ATR.
It's important to note that the broad market was hitting all-time highs at the time of this trade, which affects individual stock performances, including BLDR in this instance.
Now, here’s the critical part…
If the market were down significantly one day and BLDR was up $8 against a declining market, I would be concerned. However, this scenario is quite the opposite.
The market continues to reach new highs and BLDR, moving less than its daily ATR and still showing a decline of about $20 over seven previous trading sessions, still holds big potential as a short.
So if you take that context into consideration, then there’s nothing wrong with this position, and it still looks like a great short. Don’t let getting down early on a trade freak you out.
This is why you have a trading plan, and you stick to it.
This movement within its typical range during a robust market phase shouldn't alarm investors. This is why we buy options a few weeks out, which is one of my rules for day and swing trading (at least 10 days to 20 days out with a delta of 0.70).
Now, if the stock started breaking higher for multiple days, or if it started showing amazing relative strength on big volume, then I would be concerned. But that wasn’t the case here.
Context Is King
The takeaway here is simple yet profound in the way it can impact your trading: Always consider the context.
Trading is not just about the numbers in isolation... It's about understanding how a stock moves within the broader market dynamics.
Start focusing more on the context. Because in trading, context isn't just a detail… It's the framework that dictates successful decision-making.
Always align your trading strategy with the overall market conditions — after the first 30 minutes of trading has passed and things settle down — and you'll navigate the waters much more effectively.
I hope that helps!
