Good Day Rookie Bloggers! Last week we went through the diagonal trade from start to finish, and by finish, I mean placing the quality trade. We did a video going through how to find suitable candidates and what to do with them once we discovered them. This week we are following up on the progress of our trade and learning a couple of lessons along the way.

Last week we looked at the Finviz screener tool and saw any number of candidates that could be potential setups and then we went through the process of vetting them. This involves looking at the chart, the sector, the patterns, the recent history and the overall view of the market and the sector bias as well. We did that with a few candidates and we settled on the ticker symbol CROX. We chose this one because it met our criteria from a techinical standpoint as well as a market expectation standpoint. We also looked at the sector and its bias was helping our trade instead of hindering it. Everything looked pretty decent on the trade and therefore we decided to try to put the trade on in a paper trading account to watch it play out. There was a couple of things that we could have looked at that could have given us a more confident feeling about how this trade might play out. We will discuss this and one of the problems that arose when putting on the trade in the hopes that this type of thing can be avoided in the future.

Let’s start with the little extra thing that we could have possibly helping our trade from this past week. We talk about seasonality a fair bit and there is good reason for that, seasonal trends tend to work often enough that we pay attention to it. We looked at the retail sector etf and it was showing a bullish trend and this is something one might expect around this time of year. So, in addition to the good technical setup we had we also got a little love from the seasonality of things as well. In addition to that we tend to be a bit more bullish this time of year generally speaking and this is also helping our bullish diagonal trade in CROX.

So, that was the good news. Here’s the cold water! When I placed the trade last week after finding a good setup I used a limit order. Unfortunately for us the trade was not taken. There is a couple of reasons why this could have happened and we will discuss them here in the hopes that in the future we don’t miss out on opportunities in the future.

First, we have something that I preach alot about to all new traders as it makes a massive difference to the bottom line of any trading results. That is liquidity. This means liquidity of both the stock and the options. When we used the finviz scanner we put in a requirement of at least 1 million shares traded per day on a 3 month average and CROX fits this bill. Take a look at the screenshot below and notice the red circled number.

This number is the number of shares traded which is plenty but we need the options to also be liquid. If they are not plentiful then we could have a problem getting in or worse yet getting out of a trade is something where to go wrong. Check out the option chain below and you will see that CROX has some open interest and volume in the options but that it is not through the roof with liquidity. We like to have at least 100 contracts of open interest in the AT THE MONEY strike price but this is a minimum and more is better when it comes to these numbers.

You can see that we meet the requirement for the call side but the put side is a little light. This could explain why my order did not get filled. This, however is not necessarily the only reason I didn’t get filled.

For those that are uninitated to the order types we use I will briefly go over a couple of order types. The first order type we use is a market order. The market order guarantees a fill on a trade but price is subject to change and therefore we seldom use these types of orders. The other order type is the one I used and that is a limit order, this guarantees I get my price or better but does not guarantee that the order will get filled and this is what happened to the order last week in CROX. I went in for the mid-price of the spread and it was later in the trading day and it didn’t get filled. This happens sometimes and we can miss out on trades but I would rather miss a trade or two that get hosed on a wide bid/ask spread.

It is these situations that are trade-offs, price or fill? There are many situations where a trader may need to make these kinds of decisions and each situation and trader are unique. Here is some good news and solace for us traders who have missed a trade or two that has gone in our direction. We can always find another trade and we may even be able to re-enter the same trade if we are presented an opportunity and this may be the case with CROX. CROX is at the top of its upward channel and could be poised for a pullback. We can exercise our patience and wait to see if CROX blesses us with another chance to get in.

In the meantime, I will search out another opportunity and see if we can get filled on that one and then we can continue in this blog series watching how these great trades play out.

Until next time, stay patient and trade on!

Coach “Old Money” Holmes