Momentum-Burst Swing Trade: RLYP

Well they can’t all be good trades. And it would be disingenuous of me to only show the good results! Here’s one that went bad, and quickly.


I frequently read the Stockbee blog, written by Pradeep Bonde, as well as keep an eye on the “Coiled Spring” screener found on the Alan Farley’s Hard Right Edge website. Both sites spend a fair amount of time discussing momentum-burst trades. In a nutshell, this is when a stock had a big run up, then pauses to catch its breath, and then bursts out again. I also have my own screener which brings up a bunch of potential trades each day. One method is to catch the move after the initial burst, which is more conservative because it waits for confirmation, but loses out on possibly the biggest portion of the move. Or you can lie in wait for the burst by using buy-stop orders. That’s what I did with Relypsa, Inc (RYLP).

As you can see above, I set my stop-market buy order for $37.76, with a ‘soft’ stop-loss of $36.07. I say “soft” because most of my stops and profit targets are not executed intraday, nor placed with the broker. Instead, I look at the close of each day, and compare it to the stop or target. If the threshold is met, I sell the next day at open. This makes my life less stressful, as I theoretically don’t have to constantly watch my trades. Except I *do* constantly watch my trades. I’m working through that mental problem, but I digress.

One thing I don’t understand is where I came up with my buy stop price. The stop-loss I understand: I picked a number just a little below the lowest low of the recent low-movement days. But for other momentum-burst swing trades, I’ve been calculating the difference between the two most recent highs, and then adding that to the highest of the two highs for a buy order. Which in this case would have been $38.68. So why did I pick a trigger that was less than the previous day’s high? Did I just look at the chart and say “nah, $38.68 looks too high.”? I can’t remember, which is sad since this was only a few days ago. My notes on this trade are mum on this decision. Well I should have stuck to my (somewhat arbitrary) entry price calculation method, because I wouldn’t have gotten into this trade in the first place.

So the price was hit, and my order was then executed as a market order, with a buy price of $38.04. Let’s see what happened.

RLYP---closeThe stock promptly dropped over 5% the next day, closing below my stop price! So I sold it on January 30th, for a loss of -7.26% before commissions.

So shall we pick through the ashes and see why this one went bad?

Well the markets have been pretty turbulent recently, for starters. However the 29th was an up day, and many of my other stocks were up that day as well. So that doesn’t seem like an excuse.

A couple of problems come to mind:

• First off, that buy-stop placement was just stupid. The whole point of placing the stop order above the recent highs is that you want confirmation that a big move is really happening. By placing it AT the high of the previous day, I hadn’t set it above the ‘noise’ of a normal trading day. So the buy got triggered without real confirmation of an upward move.

• I don’t know if this stock really had enough time to ‘rest’ and gather momentum. I realize that sort of thinking is anthropomorphic and a little fuzzy-minded if it’s not backed up with hard numbers. But none the less, RLYP had a sizable run-up only a few days before I got into it. Just as those who’d already made profits decided to get out, no doubt.

But one larger issue that bothers the crap out of me: I’m making this up as I go along. And I don’t like that.

Unlike other systems I trade, this one is too ‘discretionary’. I haven’t come up with a good way to backtest this system with hard data. Exactly where do I place my buy orders? How and when do I exit a trade? Pradeep at Stockbee is a little vague about these details (no doubt because he’s selling a membership…nothing wrong with that). I read a book by Ivaylo Ivanov and it too is a little vague. It’s possible that systems like these must rely on fundamentals or factors external to simple price and volume data. Which would make backtesting impossible, and thus cause me a lot of anxiety!

I can *see* that this type of system should get results. I just haven’t yet worked out the details. Perhaps more paper-trading is called for here, before committing money to this.

2 thoughts on “Momentum-Burst Swing Trade: RLYP”

  1. Matt – I just found your blog and enjoy reading how you go about figuring things out! Great explanations.

    I’m having the same issue as in this post. I developed a “burst” system then back tested by hand in 4 different months in 3 different years — all in choppy market periods. I hit roughly a 50% win rate but the winners well out-paced the losers.

    I’m now paper trading the markets and in the last month have 2 winners to 20 losers! I can’t figure out how I could be seeing so different results. Same exact implementation of the system. Is the market right now THAT different from other periods of history?

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