Michail Shadkin Theories of Opening Range and Intraday Relativity

So as you've heard me mention before, Michail Shadkin is one of my biggest influences in the trading community for how I think and trade, and he has formulated some outstanding guidelines to follow. Today I am going to analyze how he uses relative strength/weakness intraday to give you better conviction and know when to stay in a trade, and when to bail out.

Below is a notecard I have taped to my laptop which I am forced to stare at before pushing any buttons and placing a trade. May be a little hard to read, so I'll write them out as well.

These rules are great for all traders, but especially for newer traders who should largely be avoiding the market open volatility. Wait until 10:30ish after things have consolidated, settled down and set up so you see a picture - use Michail's rules from there and you will have a much higher probability of success in your trades.

Michail Shadkin Rules

1) Never average down on a long

2) Can add on shorts up until ~10am (not for beginners) 

3) If stock is still above VWAP and in the top 25% of intraday range around 10:30ish - get ready to get out if short. If not short, consider going long.

4) If stock is under 50% intraday range at 10:30ish, don't ever go long. 

5) If stock is trading in the lower 25% of intraday range after 10:30 and you chase short, set mental stop at 50% intraday range, and get out if it crosses over this point with good volume. Consider going long. 

6) RESPECT YOUR STOPS! 

He has much more to say than this, but these are the basics and a few that I use regularly, and these can really improve your trading. I'll bring up a bunch of charts from Friday now where I have the intraday ranges labeled out and you can see how to use these rules to your advantage. 

So the way you do this is right at 10:30 am, draw horizontal trend lines at the very top and very bottom of the intraday range so far, and then break it into quarters, 25%, 50%, 75%, and 100% of the range. 

  4) If stock is under 50% intraday range at 10:30ish, don't ever go long. 

5) If stock is trading in the lower 25% of intraday range after 10:30 and you chase short, set mental stop at 50% intraday range, and get out if it crosses over this point with decent volume. Consider going long. 

Say at 10:50 you chased this thing short at $2 waiting for the whole number break. A likely plan would be to risk on the prior peak perhaps, 2.06 in this case. Right at 11am it breaks that peak, and you may have stopped out. But using Michail's rules, you should be using the 50% intraday range level as your stop (2.11), not the prior peak of 2.06. So you can see this thing gets right up towards the 50% level, and never crosses over. Therefor you can have the confidence to let this thing go, and it would have ended up being a nice trade and fading off. 

  4) If stock is under 50% intraday range at 10:30ish, don't ever go long. 

5) If stock is trading in the lower 25% of intraday range after 10:30 and you chase short, set mental stop at 50% intraday range, and get out if it crosses over this point with decent volume. Consider going long. 

It's after 10:30, FIVE is trading in the lower 25% of its range, so you can be confident to attack here going short and it would have been a nice trade. 

5) If stock is trading in the lower 25% of intraday range after 10:30 and you chase short, set mental stop at 50% intraday range, and get out if it crosses over this point with decent volume. Consider going long. 

6) RESPECT YOUR STOPS! 

Say you were short here in the morning - we can see right at noon LIVE crosses over the 50% intraday range with good volume, so this would be a time to either 1) cover your short or 2) consider going long. Once it crossed over the 50% intraday range there, it never went back under, so this would have been both a) smart to cover and b) smart to go long for a nice profit.

5) If stock is trading in the lower 25% of intraday range after 10:30 and you chase short, set mental stop at 50% intraday range, and get out if it crosses over this point with decent volume. Consider going long. 

6) RESPECT YOUR STOPS! 

We see NVAX right around 11:50 cross over the 50% intraday range with some nice volume, and this would have been an ideal spot to again both a) cover up if you were short or b) go long.

Also just a sidenote here - in yesterdays post I was discussing on my BKS trade that when you are short and a play is going your way, watch for a "speed up" in volume to the downside as a potential sign of a trend change, as this can be a good spot to cover your position. NVAX was washing out nicely through 11:30am and then you see the big "speed up" volume candle there at 11:40ish, a nice example of a pivot point and trend change - I would have been covering up there had I been short. 

3) If stock is still above VWAP and in the top 25% of intraday range around 10:30ish - get ready to get out if short. If not short, consider going long.

PLAB ripped in the morning and could definitely be an enticing short at first glance for someone who is not seeing the bigger picture. It's after 10:30, this thing is still in the top 25% of its intraday range, there is NO reason to attempt a short here, and we know from Michail's logic, that this is actually a great spot to go long.

5) If stock is trading in the lower 25% of intraday range after 10:30 and you chase short, set mental stop at 50% intraday range, and get out if it crosses over this point with decent volume. Consider going long. 

TRGP was trading in the lower 25% of its range after 10:30, so we know we are confident here if we are short, using the 50% range as our stop. Stocks trading in the lower 25% are usually pretty weak, and this one was no different and would have been a great short. 

Not going to post the rules again, you get the idea. Here again on VNR, if we chased this thing down or were already short, it could have been tempting to get squeezed out and cover right when it crosses over VWAP there at about 11:15. But using Michail's rules - it never breaks through the 50% intraday range of 5.11 nor does it have any good volume, so we can remain confident in our decision to be short and let this thing trade out, and it would have ended up being another great trade using patience and following rules. 

After a big morning rip, ZUMZ never gets below the top 25% intraday range, so we immediately know 1) there is NO reason to try and short this, and 2) this is probably a good spot to get long. Would have worked out once again like a beauty. 

This is GOOD stuff guys...utilize this in your trading and you will see much more success. 

Hope this was helpful - leave a comment or shoot me a tweet @DGTrading101 if you have any questions. Thanks for reading and have a good weekend. 

Dante