The red-to-green pattern can be confusing to some traders…
When a stock is gapping down in the morning, it looks like the move is over.
And it looks like the stock is set up for one of the most common shorting patterns…
But that’s exactly what we want.
The difference between the two comes down to the right entry, exit, and timing of your trade.
So today I’ll break down the key points that separate a first red day setup from a potential red to green trade…
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When To Go Short And When to Go Long
During my live morning training, I got asked about my plan for Cardio Diagnostics Holdings, Inc. (NASDAQ: CDIO)…
I said it was a watch for a red-to-green move.
But as the stock continued lower in premarket, one member was concerned about how much the stock was dipping.
Wasn’t it a first-red-day setup to short a stock that’s gapping down after a prior big move?
It is…
But here’s the thing about a stock with the potential for a red-to-green move — I don’t care how far it drops.
Remember the thesis with a red-to-green move…
We want a stock that’s gapping down on day two or later of a move so it attracts short sellers.
They’re shorting it as if it’s the first red day — and it might be…
But what’s the key to that shorting strategy?
It’s having risk management and stopping out when the stock goes green. That’s when everyone starts to buy…
When It’s Time To Go Long
If a stock goes green, it’s not the first red day.
And that’s when it’s time to go long.
As long-biased traders, we want to buy when all the shorts are panicking at the red-to-green level.
When these stocks gap down, attract short sellers, and go back green — everybody’s buying.
That’s the momentum we want to catch and ride to the upside.
So I don’t care how much a stock dips.
And I don’t care that people are shorting a stock that I’m watching for a red to green…
All I care about is whether that stock goes green. So I can time an entry at that level and join the buying momentum.
If it doesn’t go green, I don’t take a trade, I keep my money in my account, and the shorts can have their first red day.
CDIO had a choppy red-to-green move…
But it still smoked shorts when it crossed that key level and held it.
CDIO chart: 2-day, 5-minute candle — courtesy of StocksToTrade.com
Remember, shorts are right about most of these penny stocks…
CDIO was a 20-cent stock last month — it doesn’t deserve to be trading at $2.50.
But the reason it’s still up so much is because the short sellers are too early and too aggressive.
We aim to take advantage of that.
That’s why I teach traders patterns like this and give these lessons in my live webinars.
We go over the hottest stocks in the market, which patterns to watch for, and make trading plans.
If you want to join me daily — attend a live training session to learn how.
Have a great day everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade