Scott Redler | Lesson Two | Trading the H Setup – T3 Live

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Scott Redler Trading Lessons

The H Sell Setup

Today we're covering the the H sell setup. To be honest, it looks more like a lowercase H,  which you'll see in a little bit. It's not really a capital H.

As traders we try and do is we try name patterns that we can remember because there's so many patterns, so many price points, and so many pivots - why make it harder on ourselves?

And we ended up with a capital H in the name. It's a way for a stock to decline, get a little bit of a bounce, and start to roll back over; you could short against the top of the little H and then add when it breaks a prior low, so you're getting one good short verse resistance, shorting a bounce, then adding when it breaks the prior low for momentum to the downside. 

Trading the "H" -- How I Trade My Favorite Stocks When They're Moving Lower

Let's get into the actual definition of it.

So again, this is my number one shorting strategy. Everyone who knows me knows that I'm not really a great short. I'm more of an active bull. I love when we’re in portfolio approach, I love having eight to twelve longs using a tier system, looking for breakouts, finding the best stocks of relative strength, but you know markets go up and markets go down. 

So this shorting strategy helps me, especially when I'm in tactical mode.

It helps you trade a stock that's in a downtrend in a way that's calculated where you're not just pressing, but you're shorting a bounce. So it helps enter shorts when stocks are in a corrective phase, helps you short bounces, and then add to shorts when they break prior support, which I just showed you- that’s the H. 

It breaks the spot and continues down. 

There’s also the strategy you need to know for down trends, and yes it’s happened, right? Remember the financial crisis, the tech bubble bursting, and then we used to get 3% corrections and sometimes 5%, 8%, and even 10% corrections; we haven't had it this year, but it does happen and need to know how to short it. I need to be able to do it, too. 

Back in 2008, Mark Haines call me Dr. Doom because I was the only one who said we weren't at a bottom yet. In 2013, people called me a Permabull, which is not true. It's just that that was a trend; we were above the 8 and 21 day and above the 50 and above the 200.

Why Use This Strategy?

Let's continue with why you would use the H Sell Setup and what would give you a clue to look for it to manage a trade to the downside.

This is when Tesla was starting to act a little faulty. It broke its ascending triangle and got below the 8 and 21 day moving average. So although I love being long Tesla when it's working like I have in the past, this broke below the 8,21, and 50.

Write this down: when you're trading high valuation momentum names, you get tactical. When they break the 8 and 21 day, you get out of the way because that lets shorts recover and not be trapped. Anyone who was trading the technicals should get out of the way. At the first move below a prior low, it took out the 8 and 21 day.  You would need to ask yourself how you get short. That’s when you use the H Sell setup. 

It’s really the micro version of this example. Again, you’d short because it broke below the 8,21, and the 50 day; that means it's no longer strong. It broke the little ascending channel, which means you have to be careful. That’s my thought process behind it. 

Then there’s another wide range bar that got rejected blow the 8 and 21 day. Here’ a micro view:

There’s your H Sell setup.

See the wide range bar all the way to the low of a sudden from 332 down to 325. You needed to try and bounce, right? It tried to bounce up a little bit, and got contained by the 8 and 21 day instead of being above it. So you might not even short it there.

But again, that’s in the bottom third of this range. You might short there verse that if you wanted a little confirmation. You’ve got your tier number one. Then it broke the bottom of the H, and you’ve got tier number two, and it wound up going as low as 321. It dropped fast, you waited for a bounce as you're shorting the lower end of this H. And then, you're adding when it breaks the prior days low, because, once it breaks a prior low, it can give another down day then even another little Bear Flag type of H Sell setup - a little smaller one.

That’s just to show you how you could have been managing this trade. This was the first opening move. I'm going to short a bounce, bounce happens into the moving averages, short more and add more, cover a little bit, it comes back up and doesn't reclaim that spot. You short a little bit more,  it goes low, short a little bit more, and it winds up all the way down to 321.

That's how you use this H Sell setup in order to stay with the trade with the tier system as it trends lower.

It's your way to short a bounce. Otherwise you might have got stopped out. If you short into resistance, or verse resistance, have a good price and it finally breaks, you're adding to it and you're making cash flow. So that was a pretty nice scenario for the H Sell setup.

Making Money From Breakdowns

Back to the daily chart, that was the breakdown.

This was prior to earnings, and I don't take stocks into earnings anyway, but either way, TSLA was below the 8 and 21 day.

You had lots of sell setups below this; the way you do it is to short a bounce that doesn't take back ⅓, because that’s the H, because if it goes above half it negates the power of that down move and then it keeps continuing. Finally it probably got people out , becoming a fast and furious day to the downside because fast moves usually happen from false moves. 

So let me show you another one in a different stock. This is a what is this HRB sell set up, which is very similar.

Here it fails to reclaim the 50 day after getting back above the 8 and 21 day, and then now this spot broke. That means it’s time to get short and potentially look for more downside actions. Now it bounced back into the 50 day, got rejected little, has an insignificant bar, and then broke.

So now if you're looking to short it, you’ll want to short potentially a bounce to then break the low, but you want to do it by using a plan. So with that being said, you can look at the follow-through day.

You could have used H sell setup in this one and then the downside move but, if you look closely, you'll see it happen the same way. It came in all of a sudden, had a wide range bar and came right back into the bottom third. So this is your H.

You might have decided to wait to see that there's not another bar here to take out the bottom end of this range. So on the bar, you can see it just got rejected.

You might have gotten short verse the high. So you're short verse the high and then you're adding once it breaks below the morning low because, in order to go lower for another day, it's got to break below morning low.

So that is your shortable bounce, which is the bottom of the H, and then you see you’re in Tier 1, then Tier 2, then back to Tier 1 because maybe you're holding some and then you end up having downside and it is those 24.60.

So by shorting a bounce, you're able to get a good price and then you can get the momentum price when it breaks the prior day low. 

Remember what we said before: it needs to go below a prior low. So you could short the bounce to actively trade using tier system and cash flow where it's not all or none. I do not like all or none. I never use all or none. You want to net money and you want to use a tier system.

That was the trade and the break. It moved increasingly lower before getting a little RDR. All in all, that’s how you make money from breakdowns.