TLDR;
This video features Alex Tamse from My Investing Club, who shares his highly profitable trading strategy known as the "first red day" setup. This strategy involves identifying stocks that have experienced a multi-day parabolic run-up and then capitalizing on the first day they turn red. Tamse explains the nuances of the strategy, including how to manage risk, maximize profit potential, and avoid common pitfalls. He also shares real-life trade examples, including SMCI, INDO, DJT, and AMC, illustrating how he has used this strategy to generate significant profits.
- The "first red day" strategy focuses on shorting stocks after a parabolic run.
- Key elements include identifying multi-day extensions and waiting for the first red day confirmation.
- Risk management involves setting stops at the reclaim of the red-to-green area.
- The strategy is effective across various market cycles due to human greed and overextension.
- Real trade examples demonstrate the application and potential profitability of the strategy.
Introduction to the First Red Day Strategy [0:00]
Alex Tamse introduces the "first red day" strategy, which he learned from his mentor Bal, who traded OTC penny stocks. The strategy involves identifying stocks that have experienced multiple days of upward extension and then shorting them on the first day they turn red. This setup has proven effective over time and across different market conditions.
Defining the First Red Day Setup [2:42]
Tamse clarifies that the "first red day" strategy is not simply about a stock going red after a single green day. Instead, it requires a parabolic move over multiple days before the stock finally reverses. He illustrates this with a hypothetical daily chart showing a stock extending from $1 to $35 over five days, followed by a significant pullback on the first red day.
Intraday Chart and Execution [5:30]
Tamse explains how to identify and execute the "first red day" strategy on an intraday chart. He prefers to see the stock open higher than the previous day's close and then start to lose momentum before going red. Once the stock goes red, he attacks, shorting the stock with a stop-loss set at the reclaim of the red-to-green area. He emphasizes the importance of waiting for confirmation rather than anticipating the move.
Psychology Behind the Move [8:54]
The reason this strategy works is because traders who missed the initial move keep buying, believing the stock will continue to rise. However, when the momentum subsides, there is no fundamental reason for the stock to continue its ascent, leading to a sharp decline. Those who bought late become trapped, creating further selling pressure.
Healthy Charts vs. Rocket Ships [11:45]
Tamse contrasts healthy charts, which consolidate and discover price gradually, with "rocket ship" charts that experience rapid, unsustainable growth. When these "rocket ship" stocks finally come down, they often crash significantly due to the velocity of the move and the lack of solid price discovery.
Gap Downs and Alternative Scenarios [18:32]
Tamse addresses scenarios where the stock gaps down instead of gapping up on the potential "first red day." In these cases, he looks for a bounce towards the previous day's close that fails to reclaim it, indicating continued profit-taking. While he prefers the gap-up scenario, he still considers gap-down situations viable, though they may require more nuanced execution.
Classifying a True First Red Day [23:20]
It's crucial to differentiate between a genuine "first red day" setup and a simple pullback after a small gain. The strategy requires a parabolic move, such as a stock going from $2 to $25, not just a minor increase from $2 to $4. Examples like MicroStrategy demonstrate the ideal setup with a heavy run-up followed by a significant reversal.
Pros and Cons of the First Red Day Strategy [24:39]
Pros:
- Easy to spot and execute: Wait for the stock to go red.
- Huge profit potential: Gravity kicks in after a parabolic move.
- Available in every market cycle: Human greed and nature remain constant.
Cons:
- FOMO: Avoid getting in before confirmation.
- Infrequent: Happens about four times a year.
- Emotional control: Avoid letting missed trades affect future decisions.
- Maximize profit: Hold out with volatility to capture the full downside.
The Super Bowl Analogy [29:51]
Tamse compares regular trading to regular season games, where traders stay limber and practice. The "first red day" setup, however, is the Super Bowl. To execute it properly, traders must actively participate in the market, understand current themes, and have good execution skills.
Trade Example: SMCI [35:08]
Tamse reviews a trade on SMCI, a stock that broke out with Nvidia. He identifies the multiple days of extension and the gap-up day where he took his first short entry. After the stock went red, he added to his position. Although he made $50,000 on the trade, he admits he undercapitalized and could have made significantly more by using options.
Trade Example: INDO [44:58]
Tamse discusses a trade on INDO, an oil and gas stock that went parabolic after Russia invaded Ukraine. The stock rose from $4 to $86 before experiencing its "first red day." He highlights how the stock gapped down but could not reclaim the previous day's high, indicating weakness. The trade resulted in a $668,000 profit.
Trade Example: DJT [52:33]
Tamse analyzes a trade on DJT, a stock that ran up in anticipation of Donald Trump becoming president. The stock went from $11 to $55 before gapping down on its "first red day." Tamse shorted the stock early, scaled in as it came down, and covered his positions for a $400,000 profit.
Missed Trade: MSTR [57:08]
Tamse shares a missed opportunity on MSTR, a stock that had a similar breakout pattern to SMCI. He was unable to trade it due to being on his honeymoon. The stock gapped up and then broke the low of the day, presenting a clear shorting opportunity. The stock ultimately closed significantly lower, making it a missed opportunity.
Trade Example: AMC [1:04:32]
Tamse discusses a trade on AMC, where a news catalyst (ATM offering) amplified the "first red day" setup. The stock gapped up and then washed out after the news was released. Tamse sized up as it went red and locked in profits as the stock declined. He emphasizes the importance of locking in profits to remain patient and manage the trade effectively.