Here’s a tutorial on intraday trading. This is typically the type of content I reserve for members, but I am choosing to share it with everyone because I think it’s important. This is what I did on Johnson & Johnson (JNJ) today (December 14, 2018)

by DAN JNJ 
Let’s look at a type of trade that I don’t do that often just because the situation doesn’t happen that often. This is day trade based on news. Again, it’s not the typical trade I do. I mentioned in the forum that I was buying Johnson & Johnson ( NYSE: JNJ ) today. I will get into the details in a second, that’s what this video is about, let’s see if we can learn from this and see how we can distinguish trading from gambling. And from, Okay this stock has gone done enough, which is a strategy often used by many but rarely for success.

I want to kind of explain the difference here. I mentioned, be careful buying in Johnson & Johnson ( NYSE: JNJ ) and I explained you don’t want to do this it is kind of a falling knife. You never know where the bottom is going to be so it is really problematic to do that. So just know it’s really risky and then about 5-minutes later I post, Okay, I bought some Johnson & Johnson ( NYSE: JNJ ). Let me explain how I did this, what the situation is. I have no idea how this trade is going to work out, though, as I do this video it’s working out pretty well. Let’s get into the decision-making and see if we can learn a little bit and hopefully you will be able to replicate this.

The news is, as I read it and I didn’t get into a lot of detail because it didn’t warrant it. The bottom line is what matters is the chart but apparently there is some report that the Johnson & Johnson ( NYSE: JNJ ) executives knew that their baby powder, that would occasionally test positive for traces of asbestos, which is a bad thing. This is not like baby powder now has asbestos in it. Or people are dying right now because they’re putting baby powder on their kid’s butts. It’s not that. It is what did they know? That type of thing. So it opens the company up to massive class action lawsuits and that is a big, big deal, no question about it. It is totally bad news. We don’t even know what the liability is.

When you see something happening like this there are two things that an active trader can think about. First of all, I have got to get into this short. The second is, I want to buy this big sell-off. One is a trend follower and typically you are going to be following the trend a little bit late. The second is a snapback buyer, somebody who looks to catch the exact top of the move or the exact bottom of a move and that can be problematic unless you have a methodology.

I feel really strongly based on experience, some of it painful, that shorting a stock that is already in a big downward momentum, you think you are going with the grain but you are actually really not. You are getting in late and so that is something that you should never do. On the other hand, it’s fine if you want to try to buy the bottom, catch the bottom; as long as you have a methodology based on something other than you well-reasoned opinion that the stock is going to bounce anytime soon.

Let’s look at this and I am going to be kind of switching around to different charts because I want to look at different things. First of all, the stock gaps down at the open, big time and then just keeps going. Here it is on the 5-minute chart. What I have here is pretty simple, just standard stochastics indicators. Now, one thing that you have got to know, all these indicators are secondary indicators. There are two primary indicators on this chart, volume and what the price is doing. Everything else is based on what the price is doing. Literally, there is no volume indicator here; well there actually is, actually VWAP, volume weighted average price, I will get into that in a second. The Bollinger Bands, the moving averages, stochastics, it is all based on what the price is doing. The only time I am really looking at these, honestly, is right when I am making a trade or in this case, actually, afterwards. If you have been trading long enough you can almost draw the indicator blind. Just saying, “I see the price. I am pretty sure this is what the indicator is doing.”

So here’s the deal: The stock keeps going. Stochastics is a momentum indicator. All this stuff that happened yesterday, we don’t care about that, it doesn’t matter. What matters is today, that’s what we really care about, right? So the stock starts selling off. At some point in here CNBC is yipping about it and the stock just keeps going. Look at the volume, this is the first hour of the morning. This is where the volume should really, really be heavy, and it is relative to yesterday. But then it really starts actually picking up here. This is when the volume really started to pick up and it finally peaked here. Right here when the stock pushed through 130.00, 133.00 on this big massive volume. If I have CNBC on the volume is muted. I think I might have picked this up on Twitter, somebody tweeted JNJ ( NYSE: JNJ ), wow. And so I looked at this and then I see CNBC yipping about it. I’m sure they were covering it all morning but I think they were actually talking about it a lot more here. I forget because I was looking at the chart. Here’s my arrow right here. I bought this at 131.59 and I bought it at 11:32, right here, so I bought this stock here.

Now, why did I buy it? This is what the stock looked like as I was posting stay away from this stock. You never know where it’s going to be, etcetera, etcetera. I am looking at this and these are the things that I am seeing. I am seeing a clear downtrend with occasional clear bars, the open bars, meaning the close is higher than the open on this particular minute. Stochastics are pegged, oversold, which I would expect so this is literally a useless indicator.

Every once in a while I will hear somebody talking about RSI or stochastics. They are talking about an extreme level. You don’t have to look at RSI or stochastics that are pegged one way or another to know that the stock has strong momentum; you can just look at the price chart. But I see that we are kind of into the middle of the day, which is not the time, that is not the time when volume is supposed to be picking up. Particularly on, relatively speaking because this is an old news story, it’s going on all morning. The stock is obviously factoring the news into the price because it just keeps selling.

And of course some of the selling is promoted by the news. Then others are promoted by stops being hit and then that drops the stock lower and then you are getting shorts piling on. So there is all this selling dynamic and you know at some point the selling is going to abate. The stock isn’t going to zero we know this. But we don’t know, if you are really itchy you are probably buying this stock right here. Good for you, maybe you made a couple bucks on it as long as you sold here. But there was nothing magical about this so we will forget about that. Maybe you bought it right here, that didn’t work. Maybe you bought it here because you assumed that’s the bottom right there, Oh the stock has gone down enough, a double bottom. Okay, well that didn’t work.

Now, any of these could have worked. What matters is what your risk was. Did you define your risk? If you bought here, okay, fantastic. Did you have a stop in place or were you just assuming you were right and you would figure out the rest after you started making a gang of money? Where was your stop? You probably didn’t have one. Okay, did you buy it here? Great, where was your stop? Maybe your stop was right here. Maybe you bought the stock on the first little move higher and you said, “You know what? This will be my stop.” So you didn’t sell here. You got stopped out for a little loss, maybe you did.

The bottom line is, there is a bunch of different to trade this chart but this is a 1-minute chart and the stock just keeps moving lower, walking along the Bollinger Band. Volume is what it is. And so as I am watching this stock trade what I am seeing is this pickup in volume. I see the amount that the stock is down and I am thinking, You know I don’t know when the stock is going to bottom, if the stock is going to bottom. But I see that the sellers are really picking up their activity. BUT, what else are we seeing here? We are seeing a big volume bar here, a green one, it’s this one right here. So this is massive volume for this time of day. It is the highest volume bar that we have seen in this frame here and it is on the upside. So that is encouraging. It is not really a signal it is just good information. And then we see the stock continue down. But what happens to the volume? The volume here is less than it was here so that’s encouraging. But the price is still moving down. Prices can continue to trend on decreasing volume. Otherwise, all we would need to do is look at volume so this doesn’t tell you very much.

I’m looking at this stock and right about here I am probably saying, “I don’t want to buy this stock here, it’s still going down. You never know when it’s going to stop.” Then we get another volume spike here. Pretty high volume. Not quite like this but pretty high but it is at a lower level. It is at a lower level so the downtrend is still intact. But what we are seeing here, what we are seeing is, the first kind of inkling that buyers are coming in, and they are stepping in, this is a 1-minute chart and this is over 400,000 shares traded. The same thing here. Now, you could say, “Yes, but they are selling here, over 400,000 too.” Exactly, I am not picking a bottom. What I am saying is, “That finally some of the bulls are stepping up and saying,” “Alright Dude, let’s duke it out. I think I want to buy me some stock.” So we are watching this stock but it keeps going down. Look at the volume here. The bars that really stand out are these ones that are above 400,000. Volume is still picking up to the downside here over the last 3-minutes. We’re doing microsurgery here.

So I am just kind of watching this stock at this point. I am not really looking to buy it but I am open to it if I see something that is enticing to me. This is the middle part of the day, this is not when the money is made but I will watch it. So the stock still continues to go lower. You can look and see what the stochastics are doing; by the way, they are just starting to tick up here, which isn’t really much in and of itself. But what I was looking at here, because this is where I bought it, right here, I was looking at volume bars here; lower than this one which was lower than this one. We see big buying coming in here but the stock is still down, then we see the stock starting to move up here. Honestly, I wasn’t looking at, Oh this was a higher high relative to what the last 1-minute, I don’t really care about that. I am just looking at this on a couple different levels here. First of all, $130.00 is a key level just like 125.00 would be or 120.00 or 100.00, it is just an even number. It’s the old, if the stock gets down below $130.00 I will buy it. And so I am looking at that. I am also looking at the 200-day moving average but basically I am just watching this.

So when I see the stock start to move up here, after this lower volume spike, I am thinking, Okay, I can buy the stock here and have this much risk. I am buying it at 131.60 and where am I going to put my stop? Well, I am not going to put it just below this because that is just above 130.00. I am not going to put it at 130.00 because that is just stupid. People would look to buy this stock at 130.00; you just kind of know that. So why would you want to put in a good ‘till cancelled order to sell to them? All I am saying is if the stock falls to below 130.00 this thing could just continue to free- fall. But I don’t want to put it in at 129.95 either because that is kind of high. But I don’t want to give it too much room, for crying out loud I bought the stock here. I got an opportunity to take a small amount of risk and put myself in a position to make some money. So I will take 129.90. That is 10 cents; it’s a very liquid stock. If the stock falls 10 cents below $130.00 I can probably accurately assume that all the limit orders to buy at $130.00 have been executed and there is still enough supply to drop the stock more.

What I have just explained to you is my rationale for getting in when I did and also for how to manage my risk. So my risk is this right here: I am taking essentially a $1.70 risk, which is a 1.3 percent risk on a $130.60 stock. This is a very, very, very low risk. So I am in the trade and I have my risk defined. Now I have to let the trade play out. And you will see, in fact, I posted this here, you know I am probably going to get stopped out but I put in my stop and I am going to let the trade play out. Because part of my plan, part of my expectation I should say, is that you are not going to just catch the exact bottom and see the stock run up to victory here. That’s not the way trading works and bottoms on this type of thing are virtually always being tested but we don’t know that for sure. So I took my shot, I have my trade in place, I have my risk and now the stock is pulling back here.

I am comfortable with the risk that I took. I know exactly how much money I am going to lose if the stock stops me out, exactly to the penny. Unless for some weird reason it gaps right through a stock that is trading hundreds of thousands of shares every minute. So the stock comes down here and I am realizing, Okay, well this 130.00 level is holding so I am good here, I didn’t do anything, wasn’t even tired, had my stop in place. In fact it’s a good ‘till cancelled order and I will probably adjust it before the end of the day or maybe I will be out, we don’t know. So I have got the stop in place.

Now remember what I told you about stochastics here, I didn’t just keep these on here for noise. Huge downside momentum. This was a big swing up here now. A big swing up similar to what we got here but we didn’t buy here so I don’t care about this stuff. This thing was trading flat lined for so long and then as you would imagine on a rebound like this, remember volume doesn’t matter here with stochastics, but I got a move with stochastics here. A pretty significant move and right now I don’t care about this crossover. You can find all the magic you want in crossovers. I don’t make money on crossovers, they are good signals but I make money on the price and in knowing what stocks typically do. I see this move higher. I see the natural reaction, kind of the retracement, the initial buying spurt is over, now the selling pressure continues pushing the stock back down. And now this is when you REALLY get the information. The real information that you are going to get, you are going to get right here over the next 5-10 minutes or so because this is a retest of this low. Look, this one, you don’t get the information there. You get the information here on the retest, it failed that test, the stock keeps going down.

Here, the stock starts moving up again; nice stochastics move, you get the retest here. The stock moved down again. So if you bought this and you were patient with the retest you will lose money here. Not a problem, it is a small amount of money. If you bought this move up here you will lose a small amount of money, you put in your stop so two unsuccessful tests of support. So now where are we? Now we are on the third test of support; where the stock rallies here, comes back to test that level, and then what happens? The stock continues to move higher. Look at stochastics. Stochastics here were much higher than they were here. They never really got back to oversold so that is a positive divergence.

On the Bollinger Band side you don’t really see any kind of a positive divergence on the lows. In other words, the stock hit here, and I wasn’t really looking at that here, I see the stock hit the lower Bollinger Band but big deal it did all the way down, that’s what downtrending stocks do. Then the stock comes up; this is the level that I am looking at here. What is the distance between where the stock peaked and that upper Bollinger Band? That much. So the stock comes back down. Again, back to the lower Bollinger Band, nothing different. And now we are looking at whether the stock is going to push up above 133.00. So far where is the stock relative to the upper Bollinger Band? Very, very close. Much closer than back here.

I’m feeling good about this trade because I didn’t get stopped out. I would have felt pretty stupid had I looked at this decline, I am talking to you because you will do this, I have done this many times before; where you look at the stock pulling back. You have got your stop and you say, “Wait a minute. You know what? I am going to get stopped out. The stock is at $131.00 now. Why do I want to risk another $1.10 and just leave my stop here? I am going to go ahead and sell this stock. That shouldn’t have been your strategy to begin with because you are not going to buy the stock here and have some stop right down here; it just doesn’t work. It’s kind of silly. So instead you leave your stop there. The stock comes and does its thing.

Let’s stop and think about this for a minute, this is a 1-minute chart. What is going on in the market? What is going on in this stock? Institutions are buying the stock and institutions are selling the stock. There are traders with big orders to sell the stock and to buy the stock. They have been working them all day. You have to think about this interchange all morning long. Institutions have been selling the stock more aggressively than those that were buying the stock. This is a condition that exists. They are there at the desk selling the stock. Anytime the stock rallies a little bit, Okay good, we will go ahead and sell that. And then the stock starts falling a little bit. They are saying, “You know what? I think we’re pushing the stock down. Let’s ease off on our selling. We will wait for the stock to come up and then we will sell some more.” That’s the stuff that’s happening.

These charts actually reflect what’s going on in the market. You have to understand that. Frankly, if you do this for a while you are not even going to be thinking about that. You are just going to kind of intuitively know it. The only reason I am explaining this to you is because you kind of have to know something before you can intuitively know it so we are going through that now. Look at the stochastics now. Higher lows, right back up to a strong upside momentum. It is obvious now that the new trading range is right here; 133.00 is the high and then 132.00 or whatever is the low so it is trading in a tight range. Then we finally break out here and now the stock is obviously in an uptrend.

Now let’s look at the 5-minute chart and this is what we see. So we are starting to get rewarded by jumping in here on an early entry and allowing the stock to test our thesis. We’ve got our stop in place now we are getting paid off and we are actually thinking about adding to our position. So we are in the trade, you can see the profit we are making. Stochastics are working for us. The issue that you have to look at here is this indicator, the VWAP, volume weighted average price. It’s like a moving average only it’s based on the volume of shares traded and at what price. We can see here, this stock is getting very close to the level at which anybody with ongoing sell orders, they are going to want to be selling this stock. Don’t think that they don’t look at this stuff because they do. They all look at it. They want to be selling a stock as close to the VWAP as they can, which is why it is important to take note of this divergence. When the stock is not trending with the VWAP, it is actually trending down this way, it is not going to keep diverging deeper and deeper. You are just not going to get that kind of a move because traders are reluctant to be selling a stock that is too far away from the volume weighted average price. They are going to get fired by their boss, you can’t do that. And so at some point the stock is going to start moving back up and it does. But this is our level of resistance right there. So we will continue to see how the stock trades, right up to the VWAP, a little bit above that, right? It’s all good, only for a moment and now we are back down here.

This is a long story here on a very short-term trade but I wanted to walk you through it because this is the type of stuff that if you are going to be an active trader you really need to understand how stocks work. And so I am hoping that this was a good use of your time. By the way, what am I looking at now? I wasn’t trading this stock while I was doing this video. It’s been up and down and I actually still have my original stop here. I am going to leave it here for the rest of the day. I will watch and see how the stock trades but this is the one thing that matters to me, the VWAP. The VWAP right now is here, If the stock moves back above the volume weighted average price and keeps going then I would expect the stock to continue to move higher. Because it is going to reveal that all the selling pressure has pretty much been soaked up by buyers who are pushing the stock up. And they’re going to want to be really aggressive right around the VWAP, particularly if the stock is getting away from them. Because they don’t want to be explaining to their boss at the end of the day why they bought the stock at 141.00 or 142.00 when the stock traded as low as 130.00 and the VWAP was at 135.00 or 136.00. These are the dynamics that I swear they really do matter. And so you would be well advised to know them. And knowing this kind of stuff is what will separate you as a gambler from a trader; I hope it helps.

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