Today I want to quickly touch on a Rapid Fire post I put out earlier. This is not trading advice. I am not a financial advisor and I am not a CPA. Let me circle back to the four pyramids I posted, and then I will reference the chart and show you how I view my entries and why I plan every one of them ahead of time.
Here is the whole reason this matters. When you are a newer trader and the market is selling off quickly, you will not think clearly. That is just a fact. So the work has to be done before the fast market ever shows up. Take Micron. It had a nice bounce, made some good money on the stock (sold some), and I know I want to add more. The problem is I do not know exactly where we find the bottom. Is it the 50 EMA? Is it the 100? One thing I want you to notice is that a retest of the 100 EMA would also be a kiss back of this breakout resistance and the trend channel, which makes it a level worth watching.
So how do I start to allocate? I drop my pyramid. At my first level, the 50 EMA, I want only a small amount. Why so small? Because I do not have anywhere near even neutral mean reversion yet, and if I own none of the stock, this is just a starter entry. My 100 EMA, down around 800, is a larger entry, a two-fifths for me. And then I hold out for the absolute washout, the lower band of the trend channel together with the 200 SMA, where I also want my mean reversion to fall to around minus 1.8 or minus 2.
That covers the top of the pyramid. But the part most people get wrong is where the leverage actually goes, so let me show you.
Finishing the Micron pyramid
Notice I wrote 700-770, use mean reversion to enter. That is deliberate, because700- 770 is a big landing area. I am not certain whether we get stopped right at 770 on this old support, or whether we push a little lower. So I write a trading range, and I let mean reversion make the final call. If we get down to 770 and mean reversion is sitting at minus 1.5–1.8, that is probably close enough, good enough for me to launch another grenade into the market.
Then comes the leverage entry. Notice I only have one-fifth left down at the base. If we wash all the way out, this is where I decide: do I want to deploy that fifth as a modified synthetic long? Do I even have enough capital to do it? If not, maybe it becomes another two-fifths in stock instead. Yes, I know that adds up to six-fifths, that is fine. The point I want burned into your brain is this: my leverage does not get deployed up at the 50 EMA, or the 100, or anywhere in the middle. It gets deployed at the single most opportunistic entry, because I can lean on it much harder at the base of the pyramid. That is the same lesson I built out in MM68.
The Marvell pyramid
Let's do another one. I already own Marvell from 215 to 225, so personally I am not buying at the 50 EMA. But if I owned none, the 50 EMA would be my first and smallest entry, because I do not have a mean reversion signal yet, and this is a strong stock I want to own. The 100 EMA becomes a larger entry, with mean reversion telling me exactly how much. If we get down to that great support around 175, the 100 EMA, and mean reversion is only neutral, that might be a one-sixth for me. Then down around 170 it becomes a two-sixths, and by then it couples with much better mean reversion signal.. Finally the 200 SMA sits down at 140, and that is where the leverage goes, a three-sixths entry, and it is a major entry because it is the 200 SMA.
Now look at what else I wrote. A washout all the way to 75 is unlikely, but I put it on the pyramid anyway. That is where I would add beyond my normal 2 to 5 percent allocation, but only if I love the stock and only at the absolute lowest support. I will not press it in the middle. I press it at the very bottom. Even the unlikely NVDA 150 level goes on the pyramid, because I need to know it is there so my plan is complete. This is the money management discipline I keep hammering in MM61 and the patient scaling I showed you on the semiconductors in MM54.
Why you draw it all before the drop
Here is the payoff. When things are moving fast, when you have five stocks you want to buy and the Nasdaq is down 5 percent on the day, and Micron is suddenly at 700 and Marvell is at 140 and Broadcom is sitting down at 250, there is no way you are going to think clearly enough to draw these up and calculate your leverage, your levels, and your allocations in the moment. Especially if you are newer, or you are simply not used to fast markets. Many of you have never even seen a 5 percent correction in a single day yet. That is exactly why I love showing you this format. The decisions are already made.
Nvidia, a more orderly stock
One last one, because it looks different on purpose. On Nvidia my levels are closer together, and that is because it is a different kind of trading stock. It does not fly all over the place like Micron, Marvell, and Astera Labs. It is more orderly. So my 205 is a one-fifth, and my 192 to 195 is huge support, because it is not only a major level, it is also the 200 SMA. I have been trading Nvidia long enough to know that. That whole 190 area is an attack zone for me, so I do not have to think it through when it gets there. And interestingly, mean reversion is already heading back toward neutral, which makes it a lot less likely that we get all the way down to 170. We are up at 220 and almost back to neutral already, with earnings in six days, so this one could actually run a lot sooner than the others.
That is the whole point. I plan ahead and I draw it all out, so that when the market washout finally shows up, I am ready for battle. Not financial advice, but I hope this helped.
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Thank you so much for watching.