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The 1-3pm Bloodbath: A Killer Late-Day Shorting Strategy

Tag: shorting

The 1-3pm Bloodbath

Breakouts are perhaps the most recognizable trading pattern in the market. Everyone sees them. Nonetheless, not all breakouts work. That is a fact of trading. And in the world of low-float, highly volatile stocks, certain criteria can lead to severe destruction when chasing breakouts at a certain time of day. It can be so destructive that FinTwit sensation @team3dstocks of #vwapboulevard fame calls this short setup the “1-3pm Bloodbath.”

We’ve already written the Ultimate Guide to VWAP Boulevard, and another post explaining the dangers of Kill Candles. However, the trilogy wouldn’t be complete without a thorough examination of the 1-3pm Bloodbath. All three are contextually related in varying degrees to the world of momentum day trading. And for that reason, you should understand each one.

To that end, in this post we’ll do a deep dive into the strategy, offering some real-life examples that reveal what to look for, and some red flags in the setup. Before jumping in, check out this quick tutorial on how to find these setups inside TradingSim:

1-3pm Bloodbath Overview

While the 1-3pm Bloodbath is perhaps a bit more noticeable to the naked eye without tons of back-testing data, we still want to give credit to the man who put a name to the pattern. AllDayFaders (ADF), as he is known on Twitter, coined the term years ago.

ADF is very good about tagging his posts for those of us wanting to learn from his market wisdom. And a quick search on Twitter for “bloodbath @team3dstocks” will turn up a wealth of information on the subject.

To that end, here are the main criteria that ADF recommends for spotting the setup:

AllDayFaders 1-3pm Bloodbath Criteria

This all seems simple, right? And with a trained eye, it certainly becomes easier to spot these criteria. However, there are likely a few readers wondering what “low float trash” looks like?

In other words, how do we know what’s capable of running, versus what’s likely to fail? Let’s have a look at that.

What Is Low Float Trash?

When ADF makes reference to “low float trash,” he’s simply calling out the typical practices of unprofitable companies. These “companies” must employ dodgy market manipulation in order to raise cash to continue operating.

To understand this a bit better, you need to understand the concept of dilution. The folks over at DilutionTracker.com do a great job of explaining this. Here’s a good definition and example:

So let’s put some of this into layman’s terms.

Small-float company XYZ needs to raise cash. They aren’t profitable, and they have a history of “promoting” the stock through PR releases and such. They might even do a reverse stock split in order to reduce the size of the float before the PR is released. This gives them the ability to manipulate the float easier.

Offerings

XYX has previously filed for a shelf offering with the SEC prior to the PR release, and has a history of raising cash into price spikes.

Once XYZ releases some “positive” news, the stock picks up momentum that day. Perhaps it runs 50% or more in the premarket, 100% in the regular session on millions of shares. But lurking behind the scenes is this potential offering of shares they have registered to dump into the market.

With that in mind, ask yourself a question. If you were company XYZ, wouldn’t you want the biggest bang for the buck? Of course you would, so you drum up demand and then dump millions into the market as the demand is hot.

The result? Dilution. And, consequently, the context for why these big runners usually won’t sustain their upward momentum.

Repeat Offenders

Using DilutionTracker’s example of NBRV, we notice on the chart as well that prior price spikes have resulted similarly. Not only that, but the company has recently completed a reverse split in December of 2020 just to stay listed.

The second set of arrows represent the day mentioned in the tweet above, May 26th. Notice that NBRV gapped in the premarket almost 100%, then proceeded to fade the rest of the day and close red. It has never had any trajectory but downward.

NBRV dilution example
NBRV dilution example

And this is just one example of the effects of dilution. There are literally hundreds, if not thousands of companies like this one employing the same tactics to stay afloat.

To that point, if you’re going to play these tickers, it would benefit you to look left on a daily chart and see the typical results. Not to mention, having a grasp of how to understand filings with EDGAR, or by subscribing to a service like DilutionTracker, or BamSEC.

Avoiding Filings

One other thing worth considering is that institutions may not want to carry their positions over and register new “holdings” with the SEC if they are making a play on these tickers. AllDayFaders mentions this in one of his tweets, and it could very well be another point of consideration for why these stocks sell off dramatically near the close of the day.

1-3pm Bloodbath Criteria

The criteria is pretty straightforward for the 1-3pm Bloodbath setup. However, there are some caveats to watch out for, which we’ll cover in some of the examples later. And, ultimately, it takes practice, practice, practice to spot these in real time.

Let’s recap the basics from AllDayFaders:

1-3pm Bloodbath criteria

You could probably add to this criteria an open shelf offering, or lack of real news, etc., to really spice up the probabilities. Anything to portend the coming demise of whatever manufactured momentum is present.

Typically the prettiest patterns play out after #vwapboulevard or some overhead resistance has been reached or breached. If this area of long term resistance doesn’t provide the failed follow through in the morning, then ADF says to wait for the retest and fail in the afternoon.

On that token, ADF does warn to “AVOID stocks that run intraday without gapping big. Those tend to be headaches. Wait for the 1-3pm bloodbath setup on those.”[efn_note]https://twitter.com/team3dstocks/status/1418694024437850119?s=20[/efn_note]

And with that in mind, let’s look at some examples.

1-3pm Bloodbath Example #1: COCP

COCP is a great place to start, because it was such a violent move at the end of the day. But let’s look first at the criteria it met.

According to Finviz.com, the float was 66 million. Check. It had also run 93% in the premarket after announcing Coronavirus drug “progress” the day before. Check.

Here was the headline reference on MarketWatch:

COCP PR on May 3, 2021
COCP PR on May 3, 2021

So, we had a catalyst. And COCP ran straight into a #vwapboulevard area just above $2.17 before 6am, as can be seen on the chart below:

COCP premarket levels
COCP premarket levels

While #vwapboulevard provided a great shorting opportunity in the premarket, it retested this area shortly after open. The result was not as favorable for shorts this go-around. ADF often warns that if #vwapboulevard doesn’t break down soon after 10am, wait for the 1-3pm Bloodbath.

In fact that area became support for a big push all the way to a 273% gain by midday. At this level, volume was weak on a second push for new highs at $3.40. We were also beyond 1pm.

COCP double top at 273%
COCP double top at 273%

What happens next should give caution to any breakout trader when a stock is this extended late in the day.

Trend Change with Kill Candle

At this point, we are looking for a change of trend, perhaps a change of character in the stock as well. This is provided by a surprise news release that COCP is announcing an offering at a much lower price of $1.54. You can read the fine print for yourself:

COCP press offering press release
COCP press offering press release[efn_note]https://www.sec.gov/Archives/edgar/data/0001412486/000149315221010472/form8-k.htm[/efn_note].

The shelf offering dated back to April of 2020 and would be executed 3 days later according to this announcment. Clearly, $1.54/per share is much lower than the current trading price of $3.40. More than 50%. Yikes!

You can only imagine what happens next:

COCP 1-3pm bloodbath
COCP 1-3pm bloodbath

As soon as the news is announced, like an estocada to the heart of the bulls after being teased all day, the blood runs swiftly. Destruction. Devastation. Violence, as AllDayFaders says.

You may be asking, “how can I anticipate something like this?” The answer is simple if you are a bull. In the wise words of professional trader, Nate Michaud:

“Know what you own.”

If you’re going to day trade the world of low float stocks, you need to be aware of the type of company you’re buying or selling. What offerings do they have open? What is the past history of their big runs? Hence the name, “low float trash.”

The rest boils down to pattern recognition. Once you’ve seen enough 1-3pm Bloodbaths, you’ll figure it out.

1-3pm Bloodbath Example #2: ACY

For this example, let’s start by having a look at the daily chart to see what happens to ACY when it has these big runs. Notice that for each time it has a big lift in price, it typically retreats.

ACY daily chart
ACY daily chart

This is less surprising after doing a little homework to discover that ACY is bankrupt, literally. The news was released just before April 1, 2021. Evidently, someone felt this was bullish enough to have a run on bears on the morning of April 1.

To that end, the premarket gapped wildly, retreated, then squeezed for the better part of the day until it ran into #vwapboulevard at around, you guessed it, 1pm.

It then put in a mediocre rally and finally gave up the ghost around 3pm, denoted by the second circle in the image below.

ACY Intraday 1-3pm Bloodbath
ACY Intraday 1-3pm Bloodbath

All the boxes were checked for this ticker. The float is 1.20m. It was running more than 200% on the day. And, to top it all off, it ran into perfect resistance at VWAP Boulevard from the daily chart. Not only that, but the timing was perfect.

A little bear flag at the end of the day to trap bulls, and it turns into nothing more than a plank walk. Bulls go head-long overboard.

ACY lost nearly 50% of its value from the highs in a matter of a few hours.

Red Flags to Watch Out For

As with any setup, you want to wait for confirmation as much as possible. There is no such thing as a 100% effective strategy. Outliers, traps, and misreads will occur from time to time.

On that token, there are a few scenarios to watch out for when playing the 1-3pm bloodbath short.

  1. Beware of any “saves” in the price action
  2. Don’t fight a continuing uptrend

1-3pm Bloodbath Failed Example: SOLY

Notice in this example you have a stock with a low float of 11m shares that had gained 145% by 12pm. It sure fit the criteria for a possible late day fail. It was even hitting resistance on the daily chart for this day.

Despite all of that, what we see below is that SOLY never materialized beyond its initial kill candle around 1:30pm. The supply that entered the market wasn’t enough to overcome the underlying demand, and bulls were able to overcome the pressure and eventually squeeze the shorts well into the after hours trading period.

SOLY Bear Trap
SOLY Bear Trap

AllDayFaders calls this particular turn of events, the “you gon’ learn today” bear trap setup. In fact, when he sees this, it becomes a signal for him to flip his position long, likely because of the nature of the impending squeeze.

Here he is discussing this move on Twitter:

Keep this in mind when trading the 1-3pm Bloodbath, and be willing to be wrong and stop out at the very least.

Lastly, make sure all of your criteria are met. If a stock isn’t up significantly, ideally over 100%, it may not work. Likewise, if the float is too big, it will be harder too manipulate the price of the stock. Thus the bloodbath may never materialize.

How To Practice This Strategy

As with any strategy, it takes pattern recognition. And recognizing patterns means studying a lot of charts.

There are a handful of replay services available if you know of a specific ticker to look for. However, if you like to search for intraday stocks and filter your results according to price, float, gap% or more, we recommend giving our new scanning tool a try.

Here is an example of a filter you might use to scan for intraday runners:

Notice the criter

Notice the criteria set for low float stocks, premarket volume, gap%, etc. This should turn up a number results for you to practice with. Also, as the day wears on in replay mode, you can fast forward to 1pm and see what is hitting the live replay scanners.

Here is an example of what the scanners would have been picking up while replaying SOLY short back on this day in May 2019:

With enough of these under your belt, our hope is that you can eventually put real money to work.

Conclusion

A big thank you to AllDayFaders and the many members of the FinTwit community who give their nuggets of wisdom out for free. We hope you find this tutorial helpful in your trading. Please feel free to reach out to us and provide feedback on how we can better serve you.

Here’s to good fills!

How to Trade Parabolic Reversals

Parabolic reversals can be a very tantalizing setup in day trading. These patterns offer an edge to the disciplined trader looking for a sharp trend changes. But how do we know when to time the reversal? Where should our entries occur for the least amount of risk and the highest reward?

In this post, we’ll discuss in detail many of the topics covered in our YouTube tutorial on Part I of “How to Trade Parabolic Reversals.”

What Are Parabolic Reversals?

Parabolic reversals are just that: a stock that goes climactic or parabolic on a chart, and then reverses.

Think of it like an airplane at an airshow that races across the runway at high speed, then gradually increases its angle of ascent. Eventually it goes straight up!

But if you’ve been to an airshow, you know that the engine can’t sustain the upward momentum for very long. Eventually, gravity takes hold and the plane stalls, then begins to plummet back to earth.

This is exactly how we define the strategy in day trading. When the momentum of a stock reaches a fever pitch, it is often time for a breather.

What Is NOT a Parabolic Reversal?

As the name suggests, the stock must go parabolic.

We’ll get into the rules for identifying parabolic reversals in a moment. But for all intents and purposes, if a stock is not accelerating its trend in such a way that becomes parabolic or climactic, then it’s safe to say it hasn’t gone parabolic.

That isn’t to say that the stock won’t reverse. There are plenty of reversal patterns for stocks that haven’t “gone parabolic.” We cover those in other posts like head and shoulders patterns, spotting the backside of a trade, and more.

Generally speaking, though, if a stock is simply trending upward orderly and within a channel, it hasn’t gone parabolic.

Visual Comparison

For a quick and general representation, which of these do you think is parabolic, and which is not?

Trending Stock
Trending Stock
Parabolic Stock Image
Parabolic Stock

Once you’ve seen enough examples, the parabolic character becomes apparent. This is important, for reasons we’ll touch on next.

3 Reasons To Trade Parabolic Reversals

Parabolic Reversals give traders an edge. It isn’t an easy edge, but with practice, it can be a profitable edge.

When a stock enters a climactic run, it signals that exhaustion may be near. In essence, what goes up fast, comes down fast.

Climax runs typically provide opportunities for strong hands in the market to unload larger amounts of shares into weak hands who are chasing the stock higher.

Likewise, shorts provide the fuel for the parabolic run because they shorted too early and are forced to cover — pushing the stock higher.

1. Prevents FOMO

On that token, for the astute trader waiting for his proper signals, the parabolic nature of the stock denotes a change in trend is coming. Waiting for the right confirmation can lead to a fast reversal, and fast profits.

This can save the “fomo” trader from the headache of chasing a trending stock higher and higher. We discuss how dangerous this can be in our post on averaging down/up.

Stock Market Fomo Meter

Trying to time the top of a reversal is dangerous business without confirmation. If you’ve heard of the old adage “death by a thousands cuts,” then you understand the point.

2. Good Risk vs. Reward

Our job as traders is to identify opportunities in the market that provide us with the best risk to reward ratio we can find. For obvious reasons, we want a higher reward and a lower risk.

Parabolic reversals, when identified and traded correctly, can provide that opportunity for us.

3. Great For Contrarians

Many traders have a contrarian mindset. In other words, they like to take trades counter to the “crowd” or the “trend”.

For this reason, the parabolic reversal strategy offers a fantastic opportunity for these traders to capitalize on an extremely high-time-value trade.

As mentioned before, what goes up quickly usually comes down quickly.

3 Reasons It’s Difficult to Catch a Reversal

1. FOMO

You’re probably thinking, “if parabolic reversal strategies help prevent fomo, why is “fomo” also reason they’re difficult to trade?

The answer is human nature.

We are all prone to fear and greed. And it is for that very reason you need rules, patterns, and strategies to rely on when trading in the markets.

Veer from those rules and you get burned. Therein lies the difficulty of trading parabolic reversals. They are tantalizing.

Let’s look at the example we gave above, and consider how many times we might believe the time was right to enter that trade:

GERN Parabolic Reversal

The dilemma is identifying the key components of a reversal and waiting for that strategy to confirm. As we see in the above example, the stock didn’t go parabolic until the final overthrow of the orderly channel.

2. No Reversal

There may be times when you’re completely confounded because the stock simply continues higher. Usually there is some “leveling off” that takes place in this instance. Yet, the anticipation of a reversal is thwarted.

Notice how NIO launches off the open in parabolic fashion, but continues to put in higher highs and higher lows. By the end of the day, it closes at the highs.

NIO never reverses
NIO never reverses

Understanding the fundamentals of a parabolic reversal and being disciplined to wait for them can prevent taking trades like this.

3. False Signals

This is similar to the FOMO description above. When we aren’t waiting for the proper climactic action on a chart, we can be thrown off by every “red candle” that shows up at the highs.

Anyone who has studied candlestick patterns is already conditioned to see these patterns in the market.

Going back to the GERN example above, let’s see how many “reversal candles” we can find at the highs.

GERN reversal candles
GERN reversal candles

You might be thinking, “but the stock did reverse at these points.” And that’s true. Very true. To be clear, intraday scalpers could play these countertrend “mean regression” moves.

However, if you’re looking for the bigger picture reversal to work, it is worth waiting for the climactic confirmation.

Why Do Parabolic Reversals Work?

Stocks can’t go straight up forever. Nor do they typically go straight down forever.

There are really four reasons behind the move that can give us confidence the trade will work.

  1. Profit Taking
  2. Shorts Covering
  3. Bag Holding
  4. Supply / Demand Imbalance

At some point, like we mentioned above, successful traders are going to take profits on their long positions. In order to do this, they need plenty of “liquidity” or enough demand to sell those shares into weaker hands.

In order to understand that, we need to know that climactic price action has two buyers: early shorts who are finally getting squeezed and covering, and buyers who are finally tempted to buy the stock at the highs for fear that they are missing out.

When this occurs, the disciplined traders take advantage of the opportunity by dumping their shares into these covers and late buys.

Likewise, other disciplined traders capitalize on the imbalance by recognizing the exhaustion. They also spot the “bag swap” on the chart, signaling their opportunity to go short.

Then, as bag holders realize they have bought at the very top, they begin selling their shares. This creates the quick drop we often see that matches the speed of the climb on the front side.

Rules for Trading Parabolic Reversals

As with any strategy, their are rules for determining the proper entry. Parabolic reversals are no different. To this end, we’ve broken down the rules into three categories:

  • 5-Minute Chart
  • 1-Minute Chart
  • Confirmations

5-Minute Chart

On the five-minute chart, you want to see three things, plus a “bonus.”

  1. Clear uptrend/downtrend
  2. Stock extension from the 9ema
  3. Preferably 3 large 5-minute candles minimum
    Bonus: A confirmation candle

Let’s look at the EYES example from earlier, but on a 5 minute chart to see if we can spot any expanding candles on the parabolic extension:

EYES parabolic extension 5-minute chart
EYES parabolic extension 5-minute chart

Here we see the three parabolic candles, followed by another exhaustive move higher.

We then get our “bonus” engulfing candle after a huge extension from the 9-period exponential moving average.

All boxes checked!

1-Minute Chart

Multiple time-frame analysis is key to confirm any strategy. Now that we see the confirmation on the 5-minute chart, let’s discover the rules for the 1-minute.

  1. Clear uptrend/downtrend
  2. Trend acceleration
  3. Reversal Candlestick Pattern
  4. Preferably extended from the 1-minute 9ema
  5. New 1-minute low

Zooming into the 1-minute, what confirmation can we find on the EYES chart, now?

EYES 1-minute parabolic confirmation
EYES 1-minute parabolic confirmation

All ducks appear to be in a row: the accelerating/climactic trend, a bearish engulfing reversal candle, 9ema extension, and a new 1-minute low.

Confirmation Checklist

Now that we have the 5-minute and 1-minute charts confirmed, what other criteria can we look for to give us confidence on this trade?

Here are a handful to look for:

  • Climactic Volume
  • Daily resistance/support level
  • Strong moving average on higher time frames (i.e. daily 20ema)
  • False breakouts
  • Moves greater than daily Average True Range

Let’s take a few of these and show what they may look like in our EYES example.

In our example above EYES topped out right around $10. Let’s see what we can find on the daily chart that might have tipped us off to this level.

EYES daily chart overhead resistance
EYES daily chart overhead resistance

What we see when looking left is that $10 was a very significant level for this stock historically. Drawing lines like this can help us anticipate potential areas of resistance as we view the intraday action approaching these levels.

Climactic volume is also an important piece of the puzzle. Why?

It goes back to “why the parabolic reversal works.” We want to see those shorts exhausted, retailers buying with fomo, and strong hands dumping loads of their shares.

Climactic Volume on EYES reversal
Climactic Volume on EYES reversal

As we would expect, the volume signature associated with the parabolic highs are extreme. This gives us the confidence to take our entry, along with the other criteria being met for the setup.

Entry

As all the stars align and our setup is confirmed, the best entry is to take the 1st 1-minute low. (Or first 1-minute high if playing a climactic bottoming pattern).

EYES 1-minute parabolic confirmation
EYES 1-minute parabolic entry confirmation

Reviewing a previous image, we see our entry on the second red candle off the highs. This gives a point of low risk.

Stop losses can be set at either the High of Day, or into the body of the first red candle. This will depend upon your size and risk tolerance.

Common Questions on Parabolic Reversals

There are a handful of considerations for trading parabolic reversals that we haven’t touched on yet. For example, you might be wondering how extended the stock needs to be from the 9ema.

As a general rule, we find the following statistics helpful:

  • At least 2-3% extension from the 5-minute 9ema
    • (EYES was 48% extended at the peak!)
  • At least a 4R trade back to the 9ema on the 5 minute

If unfamiliar with what 4R means, it simply represents the risk/reward ratio of 1 risk unit to 4 reward units.

While this strategy can work any time of day, you may find a few early entry exceptions if you are keen on reading the Level II order flow and see a very large “wall” of orders stacking up on the Ask.

Market Depth
Level II Market Depth

As you can see, the orders on the Ask far outweigh those on the Bid (demand). Thus we interpret this as selling pressure entering the market at the top.

Otherwise, you might rely on at least 4 of your criteria being met before entering the trade.

How To Practice Parabolic Reversals

Deliberate practice is the key to success in day trading. You should not be “pushing buttons” with real money trying to trade parabolic reversals until you have successfully traded this strategy 20 times or more in a simulator.

This strategy requires discipline, and can often be a “one shot” opportunity during a very volatility moment.

We suggest trading in the simulator for some time and keeping a checklist of your parabolic reversals. Identify some of these key points in your journal:

  • what criteria were met
  • emotions during the trade
  • confirmations that were not checked
  • considerations outside of current criteria
  • success rate

Overtime, we hope you’ll have success with this pattern. And be sure to check out our Part II of Aiman’s YouTube lesson on reversals!

The Kill Candle

The Kill Candle.

It just sounds menacing, doesn’t it? And for good reason.

If you’ve ever been caught in one on the long side, you understand the pain.

What Is A Kill Candle?

Day trading legend Bao Nguyen, @modern_rock on Twitter as he is known, prefers to call it a death candle. His education service MyInvestingClub covers this candle in a few of his popular shorting courses.

But regardless of what you call it, death candle or kill candle, the result is bloody for bulls.

This pattern has become so notorious that professional day trader @rocketcatchnbob, who airs his trading day live to thousands of viewers, made “kill candle” t-shirts for his followers.

@rocketcatchnbob's kill candle t-shirts
@rocketcatchnbob’s kill candle t-shirts

As transparent as he is, @rocketcatchnbob admits giving up a $100k profit day, settling for $10k after getting caught in one of these red daggers — just to show how brutal these candles can be. His accompanying video is a great tutorial on what to watch out for.

Dangerous little buggers…

Yet for every kill the candle makes, there is always a short trader making a killing on the flip side. And depending on the setup and the skill of the trader, this candle pattern can actually be anticipated.

The Flip Side

As bulls were getting slaughtered on COCP at 2pm that day, someone else was profiting.

COCP kill candle tweet

Fintwit personality @team3dstocks (ADF) is known in the day trading world for his four main low float short setups. We’ll cover a few of them below.

More often than not, they’re centered around the formation of one of these kill candles.

To that point, on this infamous day in May, COCP fit the bill for his 2-3pm “Bloodbath setup.” As ADF likes to say, “it always arrives on time.”

COCP Kill Candle
COCP Kill Candle

Who knew trading could be so scary? 21% of the stock’s value gushing out in a single 1-minute candle.

Such is the world of low float, high volatility momentum trading.

But putting aside the gore, carnage and disappointment, there is a method to the madness here, as with most patterns in the market.

Our goal in this post is to highlight some key characteristics of these candles and uncover three strategies that may help you uncover significant profits if you decide to trade them.

Or, at the very least, learn to anticipate and side step the carnage.

How To Spot One

A kill candle does what you would assume. It kills the upward momentum of a trend at the very least. The best ones reverse the trend in a single candle.

Criteria To Look For In Kill Candles

  1. A large-bodied red candle
  2. High Volume
  3. Bearish engulfing characteristics
  4. Distribution leading up to the candle print
  5. (Usually) a failed breakout attempt

When we say a large-bodied red candle, we don’t mean “just any ‘ol red candle.” We mean something significant — more than likely the most bearish candle on the chart, accompanied by the heaviest (or heavy) volume signature on the chart.

It should look something like these examples:

2-3pm Selloff + Kill Candle:

Here are two examples of the end of day strategy that @team3dstocks uses often. It is also known as a “late day fade”.

COCP Kill Candle
COCP Kill Candle
LEXX 2-3pm bloodbath setup
LEXX 2-3pm bloodbath setup

10am VWAP Boulevard + Kill Candle

We cover this strategy in detail in a different post that is well worth your time. Another one from @team3dstocks, it has a very high success rate when all the criteria are met.

VWAP Boulevard kill candle example
VWAP Boulevard kill candle example

Range Bound Multiple Kill Candles

Not all kill candles will work immediately, as was the case with BLRX. Keep in mind that algorithms, institutions, chat rooms, and deep-pocketed traders can “manipulate” stocks with such low floats.

BLRX Multiple Kill Candles
BLRX Multiple Kill Candles

Sometimes you may see more than one kill candle. BLRX had multiple flushes, and they all occurred at the highs. As with any setup, if the trade recovers, respect your stops.

Kill Candles At The Opening Bell

Opening Bell Kill Candle
Opening Bell Kill Candle

Kill Candles can present themselves at the open as well. Opening Range Breakdowns are a great strategy for the open and can often include a nice kill candle after buyers get stuffed.

As you can see, kill candles can show up just about anywhere. That being said, there are a few caveats when trading this strategy:

  • Kill candles are more predictable and volatile with small caps
  • Larger caps usually require some news or other impetus
  • Without hotkeys, you may have a hard time trading them

The 2-3pm Bloodbath Setup

We’ll take the time now to dig a bit deeper into the setups associated with the kill candle.

No doubt many momentum day traders have probably seen this pattern play out in the afternoon. It goes by a few different names, like “late day faders,” “2-3pm selloff,” or the dramatic “2-3pm bloodbath” popularized by AllDayFaders.

For more info on this, we have a post entirely dedicated to the strategy.

Float and Institutions

Regardless the name, there are a few criteria to consider. The most important being the float size and the shares traded. AllDayFaders notes why this is very important for the strategy:

AllDayFaders talking about late filings

According to ADF, institutions must close their positions before the end of the day, otherwise it is considered a “holding” and has to be filed.

If this is the case, then it makes sense for a proprietary trading firm, hedge fund, or insiders manipulating the float to support the bid up until the bloodbath. Once time is expired, the bid collapses and the fund walks with whatever shares it had, giving it enough time to liquidate down before the close.

It is for this reason that lower float stocks fit the criteria for the pattern as opposed to higher float, larger cap stocks which are harder to manipulate.

Regardless of what institutions are behind the stock movement, the tape doesn’t lie. We can see the footprints leading up to the dump.

What do we mean by that?

Plain and simple. Distribution.

Example

ACY Kill Candle example
ACY Kill Candle example

In this example, we have a low float runner topping out around $16 for the high of the day. With the image we have shown, you can see that major selling pressure came in at the highs (indicated by the circles).

As the day wore on, the big players continued to prop the bid (demand) in order to make the stock look like a squeeze was imminent. Retail traders bought into the dip or covered there shorts. But time runs out, and 3:00pm and 3:11pm marked the last of the uptrend.

The big buyers walked away and the stock retraced half its value in a short amount of time.

We also like to call this “walking the plank.” A lot of the violent drops occur at the pivot line of an ascending lower channel marker. Others might call these bear flags.

For a nice video explanation on this setup, check out professional trader Nate Michaud’s YouTube clip.

The Opening Bell Setup

Kill candles that appear at the open can be great shorting opportunities. The best occur as bulls are pushing the stock higher only to be met with a wall of selling pressure.

In a recent trade on ticker CRSR, we see a perfect example of how bulls were trapped into buying a breakout at the open, only to watch the price immediately reverse.

Opening Bell CRSR kill candle.
Opening Bell CRSR kill candle.

As a trader, you can anticipate the breakdown if you are nimble with a trading platform geared for fast order-entry. The wick above the breakout line on the chart is our indication that price is stalling and distribution is flooding into the heavy buying pressure.

There is so much selling, in fact, that it overwhelms any bullish demand trying to move the stock upward. The result? A kill candle.

To learn more, MyInvestingClub does a great job explaining this type of setup with their free “Death Line” YouTube webinar.

The Chat Pump Exit

In the small world of momentum day trading, there are a lot of influencers on small cap stocks. Just as CNBC, or well-respected analysts might influence the movement of larger cap names, the small cap world has its chat rooms, social media, and other influencers.

chat room example
Example of a day trading chat room

Regardless of where the influence comes from, our goal as traders is to simply be aware of the price action on the chart.

To that point, if a chat room with thousands of retail traders is calling out buying opportunities, you can expect that with a small amount of shares available in low float stocks, you’ll see plenty of movement on the chart.

Sometimes, this can provide underlying demand for successful long plays. Other times, bears are lying in wait for the exhaustion, using the opportunity as a “liquidity event” to initiate large short positions.

And at the end of the day, it is all about who won: supply or demand.

And hopefully, there is enough meat on the bone for everyone to get a win.

Example

VCNX is an example of a stock that was being heavily pumped to its members, starting in the premarket and continuing into the regular session.

VCNX 2/19/2021 VWAP Boulevaard
VCNX Kill Candle at VWAP Boulevard

Admittedly, the bulls had a fantastic run! However, the momentum was eventually exhausted at a prior day’s resistance line we call vwap boulevard, credit to AllDayFaders.

Within seconds of the chat room moderator announcing that he was selling his remaining shares, the bottom fell out of the stock.

VCNX lost 16% of its value in 1 candle. It never recovered that day.

Other Considerations

When trading kill candles, it is important to note that volatility is at an extreme. This may not suit your trading personality or risk profile.

The candles move swiftly, as you can see, and the ability to get filled may be an issue depending on the broker and platform you trade with. Even with specialized trading tools, you may not get filled properly in such a fast-moving environment.

Along the same lines, not all of these securities will be available to short. For that reason, many professional traders use specialized brokers and trading platforms in order to locate shares at a fee.

DAS Short Locate Window
DAS Short Locate Window

Lastly, it is important to note that these are just a few examples. As you study this pattern over time, you’ll find that the more criteria you can find to support your trade plan, the better.

Criteria like daily resistance levels, supply and demand in the Level II, psychological support and resistance, etc., can all all help you with your execution.

How to Practice the Kill Candle

As with any strategy, it is worth practicing until you can’t get it wrong.

Daytrading is risky enough as as seasoned professional. Make sure you know what you’re doing and have a plan for all of your trades.

Once you’ve created a large enough subset of simulated trades to know your success rate, then you might consider putting real money to work in the market.

Until then, stick to a risk-free environment for learning these strategies and protect your hard-earned money. Save the gambling for Vegas.

Backside banner

As day traders, the biggest dilemma we will ever face is our own errors. That is, knowing what not to do, and yet still doing it. Lack of discipline, if you will. Therein lies the importance of finding the backside of a trade before going short.

Here’s Why

Most newer traders are impatient. A lot like babies, really. You want what you want, when you want it, and you want it right now! Profits galore! This trade to work!

And when it doesn’t work, frustration sets in. Then doubt. Then fear. And you finally hit rock bottom. No wonder so few make it in this industry.

Meanwhile, veteran traders smile and they smile — because they’ve been there. They know the pain of averaging up, and up, and up, only to be stopped out of a trade the moment it turns. Don’t take our word for it, listen to Professional Trader Nate Michaud’s own advice when you have time.

Guys like Nate are veteran traders for a reason. They learned long ago to stop beating their heads against the same old stubborn walls, thankfully before they went broke.

The winners have attained a mind-set—a unique set of attitudes—that allows them to remain disciplined, focused, and, above all, confident in spite of the adverse conditions. As a result, they are no longer susceptible to the common fears and trading errors that plague everyone else. -Mark Douglas-

With discipline as our backdrop, we are setting the tone for the importance of understanding the backside of a short trade. As with any trade, you want to have a plan, a thesis, confirmation of that thesis, and all the necessary components to line up before you risk your hard-earned capital.

The Risk

Jumping in too early can mean the difference between a profitable day, or a losing month. Heck, it can be the difference between a profitable day, or no longer being able to trade because you’ve blown up your account.

Shorting is risky because your reward is limited but your risk can be limitless. Unlike going long, where your risk is limited, and your reward is limitless.

If that doesn’t make sense, imagine shorting a stock with 100% of your capital at $5. If that stock goes to $10, $20 or more, you’ve lost more than your account had to begin with. That’s when brokers liquidate your positions and call wanting their money back.

Don’t think this can happen? Think again. It only takes one black swan event to change your life for better or worse. Don’t take our word for it, listen to this sobering reminder from Alex Salfetnikov in our podcast interview with him.

SPI on September 23, 2020 going from $1 to over $40 in one day.
SPI on September 23, 2020 going from $1 to over $40 in one day.

Now, that definitely looks scary, doesn’t it. But the great thing is, when shorting is done properly, it can lead to solid gains in the market. After all, stocks don’t always go up. So, why not capitalize on the opportunities when they fall?

In order to do so, it is imperative that you know what to look for and when to time the entry correctly.

Let’s look at a few high level explanations of what to look for, then we’ll dig in deeper with more examples later.

What is NOT the Backside

Frontside vs Backside chart for shorting
Frontside vs. Backside

Let’s get visual, shall we?

At a minimum, a stock has not entered the back side of a bullish run until it is no longer putting in higher highs and higher lows on at least a 1, 2, 3, or 5 minute chart.

Notice the new highs that are circled and the higher lows that are boxed in this CAN example below:

CAN Frontside Higher Highs and Higher Lows
CAN Frontside Higher Highs and Higher Lows

This doesn’t mean that if you employ a scalping strategy, you can’t take a small short from the new highs back to the new lows — granted you are skillful with such a tactic.

Nonetheless, if you step back and view the big picture, it becomes clear that we are on the front side of the bigger move.

What IS the Backside?

Depending on the the type of reversal you’re studying, this can vary to some degree. But, for all intents and purposes, a stock is not on the backside of an intraday run until it has either exhausted its upward momentum in such a way that it cannot move higher, or it begins to put in lower highs and lower lows.

Or both…

CAN backside chart
CAN Backside of Trade

On the back side of this CAN example, we notice the boxed lower highs and the circled lower lows.

Of course, the question is “when can you enter and anticipate these lower lows?”

There are many different ways to indicate this, but we’ve picked 8 of the more common and simpler methods.

8 Criteria for Confirming the Backside Short

1. Climactic Volume and Price Action (Exhaustion Volume)

Sticking with our CAN example above, let’s go back and analyze the price and volume action.

CAN Frontside price action analysis
CAN Frontside price action analysis

Notice two things on this chart: Effort (volume) and Result (Price). That’s really what we want to pay attention to when it comes to analyzing Volume and Price Action trading.

Using the callouts on the chart, what can we glean?

  1. As effort increases to push the stock higher, we begin to see upper wicks on the candles at those new highs (circled). Thus we can assume supply is entering the market here.
  2. For each new push to the highs, we see diminishing result (a correction on lower volume).

What this tells us is that there is distribution going into the upward movement, despite some re-accumulation or short covering occurring at the lows. Overall, this could lead the price increase to eventually stall.

2. Multiple Time Frame Extension

In order to qualify the overextended character of the stock in play, we ought to check other time frames as well. The above examples were taken with a 2 minute chart. For this example, lets examine the 5-minute chart:

CAN 5-minute parabolic candles signal backside short approaching
CAN 5-minute parabolic candles

As a good rule of thumb, for a stock to be considered “parabolic” you want to see at least 3 large marubozu candles (like you see in the Three White Soldiers pattern) in a row, speeding to new highs on heavy volume.

Judging from the chart above, we have just that.

Not only does the stock go parabolic here, but it reaches the upper bounds of its regression channel for that morning — a good indicator of a potential reversal.

CAN 5 minute chart regression channel
CAN 5 minute chart regression channel

Now we have at least a few criteria met as we begin to anticipate the reversal: overbought conditions with supply increasing on heavy volume; parabolic on multiple time frames; and hitting our regression lines.

3. Waves and Diminishing Force

Without getting too detailed on “wave theory” or indicators and such, suffice it to say that most market moves occur in waves. It is something that anyone with just a quick glance can see on a chart.

CAN 5 impulse waves
CAN 5 impulse waves

Here on the front side of CAN, we see 3 mature waves higher culminating in the “V” at the top and 2 consolidation waves that follow. As traders, it isn’t necessary to draw the lines, or even count the number of waves.

You can do that if you want, but the goal here is to mentally anticipate the “late innings” of the bull run. Being aware of the number of waves up, and the force with which those waves are moving can tell us a lot about where the stock may be going next. Especially if we spot exhaustion.

Bulls can’t run forever.

In the example with CAN, it indicates we are due for a pause at the very least.

4. Daily/Weekly Resistance Levels

Resistance levels on higher time frames can be super important when timing your entries. It doesn’t necessarily mean that these levels will work 100% of the time, but when you have multiple criteria lining up, these key levels become an important part of the recipe.

As we zoom out here on CAN to look at the 1 hour and daily charts, notice the arrows we have drawn around the rectangular “support/resistance” zone.

CAN daily and 1-hour resistance levels.
CAN daily and 1-hour resistance levels.

Looking left on the chart, we notice that prior support areas from over a month ago (indicated by the blue arrows) have now become resistance areas during recent trading sessions (more blue arrows).

In fact, this level lines up with the very top of our intraday chart:

CAN resistance levels on the daily representing the back side of the trade.
CAN resistance levels on the daily representing the back side of the trade.

As we are building our thesis for the short trade we want to take, this rejection of a key daily price level only adds to our confidence.

Levels like this can lead to really big gains when trading small cap stocks using the VWAP Boulevard strategy. If you haven’t read about it, be sure to check out our Ultimate Guide when you have more time.

5. Candlestick Pattern Reversal

Now we are getting into the nitty gritty of the of the price action. Candlestick Patterns are extremely useful for “reading” the psychology of the trade.

It is the candlestick patterns that tell us the story behind the action between bulls and bears.

Bearish engulfing two-minute candle pattern
Bearish engulfing two-minute candle pattern

On the 5 – minute chart we showed earlier, we saw three extremely climactic bars. When we spot that, we want to narrow our focus to see if we can find any other confirmation candles on lower time frames.

Here on the 2 – minute chart we see a bearish engulfing candle pattern. This occurs when a bearish candle completely engulfs a bullish candle next to it.

In fact, on just about any lower time frame, the 1 minute, 2 minute, 3 minute, or 5 minute, you’ll like find one of the above candle patterns to confirm the reversal.

Sometimes you might even find a deadly kill candle.

Why is this important? Is this the backside confirmation?

No. It is just one of many confirmations.

However, as this article is covering the question of “how to find the backside,” it if the speculative trader wants to find an “early entry,” this would be the spot.

With diminishing force, three-waves up, daily resistance, and now a bearish reversal candlestick pattern, you could enter the trade on the close of the engulfing candle and risk against the high of the day.

6. MACD Cross

For the MACD indicator, what we want to look for is an extension, a divergence, and a cross.

On the 5 minute chart of CAN, we get all three.

CAN MACD indicating backside
CAN MACD indicating backside

Pay attention first to the light blue line drawn from the top of the first MACD extension down to the second. What this tells us is that we have a divergence with the price of the stock and the force of the trend.

As the force of the trend is putting in a lower high, the price was putting in a higher high. This gives us pause for concern that any further price advances can happen.

In addition, we get a “convergence,” or cross, shortly after CAN puts in a top at the daily resistance levels. The short period (12) moving average crosses the 26 period — a bearish cross.

Both of these act as confirmation that we are topping.

7. Moving Average Cross

In addition to the MACD, moving averages can be a fantastic “change of trend” indicator.

The more popular intermediate moving averages for determining trends are the 20-period and the 50-period. Using these two, let’s impose them on the CAN chart and see where the trend changes.

CAN backside moving average confirmation for short trade
CAN backside moving average confirmation for short trade

In this 2 minute chart, notice how CAN is riding the blue 20ema for the entirety of the move. Likewise, the red 50sma is trending below the 20.

It isn’t until the top is formed and we have put in a lower low and lower high that we see a bearish cross of the two moving averages. This is the confirmation we need for the reversal.

If you want to try to time the reversal a bit early you might try a 1 minute chart. Just keep in mind that you will find more “noise” and false signals on lower time frames because of the volatility.

CAN backside short confirmation using moving averages
CAN backside short confirmation

As you can see, the 1-minute chart crosses at least once before reaching the top. But if you can combine these lower time frames with each other, it can lead to better pilot entries in anticipation of more confirmation.

Or, you can wait for the higher time frames to form a bearish cross. Many times a stock will bounce back into those resistance levels offering a chance to enter on the brief rallies.

8. Lower Highs, Lower Lows

The last bit of confirmation is quite obvious. Like we mentioned at the beginning. With all the above criteria lining up for your trade. You want to see the stock begin to put in lower lows and lower highs.

CAN backside chart
Lower highs and lower lows on the CAN backside short

Just as we had on the front side of the move, we now have a trend forming on the back side. A good trend will often mind the bounds of a channel, and CAN is no exception here.

We ride the new trend down until it changes on us.

And that is the anatomy of the backside of a short trade. The more “criteria boxes” you can check off, the more successful the trade will likely be.

As with any entry in a security, you want your thesis and trade plan to be supported by evidence. After that, it is a matter of mitigating risk by setting a stop loss if the plan goes awry.

The rest is just trade management. Follow the trend until it changes again!

Other Considerations When Going Short

Market Environment

As with any trade, it is always a good to check what the general market is doing. Are the indexes bullish? bearish? trending sideways?

When you watch for the indexes or other industry names associated with the stock you are trading, you can be more aware of shifting sentiment.

As an example, let’s pull up a few other stocks similar to CAN and see how they were performing on this day.

CAN backside short compared to FTFT, BTBT, RIOT
CAN compared to FTFT, BTBT, RIOT

See any similarities?

Clearly, there were more stocks running in the “blockchain” industry that day. This is what we mean by keeping track of broader-related sentiment, industries, and indexes.

One stock’s movement can often signal a change in the others.

Liquidity

As with any stock, you want to make sure there are enough shares being traded so that you can get in and out with the size you want. As a rule of thumb we don’t recommend trading stocks with liquidity below a million shares traded on the day.

Not only will they move more slowly, but your fill prices will likely be affected negatively.

Float

Keep an eye the float of the stock that you are trading. The lower the float, the more volatile — as a general rule.

Imagine a stock with only 5 million shares available to trade. If those shares are being churned through every 15 minutes, you can imagine that the price will fluctuate considerably.

Compare this to a stock like AAPL, which has billions of shares available to trade. Obviously, AAPL will move much slower.

Time of Day

We talk about this in a great post explaining a strategy called VWAP Boulevard. In that post, we outline how the strategy is “time-centric”.

In other words, if volume is not exponentially climactic before 10am and then drastically diminished afterward, the pattern could be broken. Our trading expert Aiman Almansoori also talks about this in his Reversal Webinar on our YouTube, so be sure to check that out.

While shorts can setup any time of day, there are a few generally accepted “best times” to trade. Those are considered the “reversal hour” around 10:30 – 11am and the 2-3pm “profit taking” time.

As always, backtest your strategy in a simulator to find the best times.

Availability of Shares

Not all securities will be available to your broker for shorting. We call these issues “hard to borrow” stocks. Often, you’ll have to locate shares to trade with your broker and this may cost a fee.

Example of a DAS Short Locate window
Example of a DAS Short Locate window

Targets

Knowing where to set profit targets will depend on a lot of factors, some of which may include:

  1. The type of reversal
  2. The demand behind the stock
  3. The price action
  4. The indicator you’re using
  5. Your desired risk to reward ratio

Ultimately, we want to ride the downward momentum of the stock until the character and trend changes.

Backside Indicators for Download

As of the time of publication, there is one known “backside indicator” that has been coded by scripstotrade.com in an effort to make “spotting the backside” easier.

We have not used the indicator, so be sure to test it out before using real capital.

How to Practice Finding the Backside

It has always been our goal here at TradingSim to build the most realistic learning environment for trading the stock market without real capital.

With over 3-years of tick-by-tick data, you can find more intraday examples to learn the “backside” of a trade than you actually have time for.

And that should be your goal.

Use our built-in scanners to scan for stocks that are going parabolic intraday. Watch them, identify your criteria as outlined above, and make the trades.

Analyze a set of at least 20 trades and determine your profitability. Once you see a winning success rate, take it live.