Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Coronavirus China Infection Statistics Analysis, Probability Forecasts 1/2 Million Infected - 21st Feb 20
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20
China Under Reporting Coronavirus COVID-19 Infections, Africa and South America Hidden Outbreaks - 12th Feb 20
Will USD X Decline About to Trigger Precious Metals Rally - 12th Feb 20
Copper Market is a Coiled Spring - 12th Feb 20
Dow Theory Stock Market Warning from the Utilities Index - 12th Feb 20
How to Get Virgin Media Engineers to FIX Hub 3.0 Problems and NOT BS Customers - 12th Feb 20
China Under Reporting Coronavirus COVID-19 Infections by 66% Due to Capacity Constraints - 12th Feb 20
Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? - 12th Feb 20
Stock Market 2020 – A Close Look At What To Expect - 12th Feb 20
IBM AI Mega-trend Tech Stocks Investing 2020 - 11th Feb 20
The US Dollar’s Subtle Message for Gold - 11th Feb 20
What All To Do Before Opening A Bank Account For Your Business - 11th Feb 20
How and When to Enter Day Trades & Swing Trade For Maximum Gains - 11th Feb 20
The Great Stock Market Dichotomy - 11th Feb 20
Stock Market Sector Rotation Should Peak Within 60+ Days – Part II - 11th Feb 20
CoronaVirus Pandemic Stocks Bear Market Risk 2020? - Video - 11th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

The Secret to Successful Trading - Using Rules to Time Your Entry

InvestorEducation / Learn to Trade Mar 10, 2007 - 01:55 AM GMT

By: Hans_Wagner

InvestorEducation

When learning how to invest in the stock market, one of the most important lessons is to entry the stock at the right price. Getting the entry right will go a long way to help you beat the stock market .

Many investors believe that learning to read and interrupt a chart will lead to profitable trading. Unfortunately, this isn't true. Good technical analysis is important to trading and can be learned. However, it becomes much more difficult when you are trading with real money and the emotional commitment that real-life trading creates. The key to success is using well defined rules to time your entry.


There are many ways to time an investor's entry into a stock, though there are three strategies that work best for value investors and swing traders. First, enter a breakout through resistance, or a breakdown through support. Second, wait for a pull back to support (if going long) or to resistance (if going short). Third, buy or sell within a trading range before the move begins.

Deciding which strategy is the best depends on a variety of factors including the current market trends, the risk-reward ratio, the chosen holding period, and the trading volume.

Support and Resistance

Before discussing these three strategies it is important to understand support and resistance. Support is the point where enough buyers come into a market to impede a drop in price. It is the price level at which demand is strong enough to prevent the price from declining further. Logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, the theory states that demand will overcome supply and prevent the price from falling below support. 

Conversely, resistance is where enough sellers enter a market that the price stops rising. It is the price level at which selling is thought to be strong enough to prevent the price from rising further. Logic dictates that as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. By the time the price reaches resistance, the theory states that supply will overcome demand and prevent the price from rising further.

Identifying Breakouts and Pull Back Entry Points

A breakout through resistance is one of the most common ways technicians use to enter a stock. A breakout is when the price rises through a resistance level. The logic is that buying volume is greater than selling volume, so the price rises through the resistance level. The key on breakouts is that volume is sufficiently strong to overcome the selling pressure that usually exists at resistance levels. Without sufficient volume, it is usually not a good idea to buy a breakout, as the price will likely pull back. 

For example, notice on the chart below that CRZO broke out through prior resistance levels at the 10.5 area and the 10.87 area. Then notice that the volume was above average, though only slightly. I like to see very strong volume on breakouts, at least 130% of the daily average, though the more the better. This is where the strong volume calculator comes in handy. It helps predict the daily volume and percent part way through the day. If the volume is sufficiently above average on a breakout, then that is a good buying indicator. If not, then it is usually best to wait. On the chart below the volume was not sufficiently above average, so it would be best to hold off on buying.

During the next several weeks CRZO pulled back to the prior resistance levels. This validated the decision to not take a position in CRZO on the initial breakout. Also, notice that RSI stayed at or above the 50 area, a good sign and the MACD indicator remained in a positive divergence. These indicators help to confirm the overall trend is still up. An entry in late December 2004 would have been OK as there was support below at the next prior high and the 50 day moving average. However, it was the last week of the year and trading during this time period is usually suspect as most professionals are on vacation. Waiting for the New Year to begin is a better idea. 

When the price bounced off of the 50 moving average, is was a sign that we might be able to make a pull back entry. The break through prior resistance level of 10.5 with volume was a very positive sign to take an initial position. Here we have a good example of a breakout with so-so volume, a pull back to support and then a new move up. This is usually a good time to buy as your risk reward trade off is favorable. 

Breakout Rules

  1. Trade with the overall market trend.
  2. Trade with the sector trend. This usually means that the sector is fundamentally strong and is expected to be a positive influence on the market for months to come.
  3. Find stock patterns that provide good support and resistance levels.
  4. Check to see that your indicators support the trend of the breakout. If using RSI it should be moving up through or above 50; MACD should show positive divergence.
  5. Identify exit target and stop levels. While not a way to identify breakouts it is an essential part of the entry strategy if investors expect to be successful.
  6. On breaks through resistance, buy when volume is sufficiently strong as determined by the strong volume calculator.
  7. Use limit orders where the price is likely to be executed. Good day traders often set the limit price at 0.05 to 0.10 above the resistance level and issue the order just as the price penetrates resistance.
  8. Once your trade is executed, set your trailing stop and target prices. Use mental stops if you have the mental discipline and are able to monitor the market. Otherwise establish these stop orders with your broker.

Pull Back Rules

  1. Trade with the overall market trend.
  2. Trade with the sector trend. This usually means that the sector is fundamentally strong and is expected to be a positive influence on the market for months to come.
  3. Find stock patterns that provide good support and resistance levels.
  4. Check to see that your indicators support the trend of the breakout. If using RSI it should be moving up through or above 50; MACD should show positive divergence.
  5. Identify exit target and stop levels. While not a way to identify pull backs it is an essential part of the entry strategy if investors expect to be successful.
  6. After a break through resistance on low or less than strong volume, look for signs that the support levels are holding. Also, look for other reasons the stock should move including fundamentals, the calendar, etc.
  7. Pullbacks that bounce off of support levels are good ways to enter a stock that shows good fundamental and positive technical signs. They usually have less risk as you are entering closer to key support levels.
  8. Buy after the move up from support as this usually indicates support is holding. Generally, do not try to pick the exact bottom as the support level may not hold.
  9. Use limit orders where the price is likely to be executed.
  10. Once your trade is executed, set your trailing stop and target prices. Use mental stops if you have the psychological discipline to stick with the stop and are able to monitor the market. Otherwise establish these orders with your broker.

Conclusion

Timing the entry is one of the most important techniques for profitable investing. When combined with good fundamental analysis that finds good companies at discounted prices, it can provide investors with optimal entry levels. Breakouts and Pull Backs to support are two of the best methods to time your entry into a good stock. As shown above the pull back to support often follows a breakout. As a result the blending of these two patterns can be used together to reinforce the timing of your entry. The next point of interest will primarily deal with the third entry strategy, buy or sell within a trading range before the move begins.

 

By Hans Wagner
tradingonlinemarkets.com

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at http://www.tradingonlinemarkets.com/


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules