If you have been worked in the markets for more than a little while, you have likely heard the expression “The trend is your friend.” Putting easily, over the years many traders have summed that it is commonly a top probability plan to trade with the present flow of money, instead of paddle upstream.
You have to plan to swim with the present. Is there an idea that lets you dive in but reduces the possibility of quickly drowning? The reply is resounding “Yes!” Welcome to “The Pullback”.
A pullback is a little term move in the opposite direction of the lengthy term trend. It can provide a chance to join trend with chasing the stock. Pullback trading can be complicated. Let me talk with you some solid won insights about existing and entering this kind of trade.
The initial one is trying to solve if a pullback is really a pullback and not the starting of a new reversal. You never understand for sure, but here are few hints I look for.
Initially, I look at the volume pattern. Has there been less in pullback volume in the previous up-leg? If not, the sellers might be getting energy and will commonly pass.
Next, I will double check to ensure that earnings or other anticipated vital announcements are not coming over the next week or so. I do not want to take the danger of the stock gapping fall right after I enter.
Then lastly, and perhaps most vitally I will take a look at the previous trading day. Has the stock pulled back to a price that buyers might find perfect? This could be a supporting moving average or an uptrend line, or previous low.
So much for the entrance criteria, now for exits. I commonly set a primary stop loss under the low of the pullback. The rationale is that for a stock to keep trending up it has to make top lows. If it breaches the previous low this would no longer be the case.
I commonly have 2 primary targets. The initial is the previous high before the pullback. Old tops can often act as resistance and it is easy that the stock could test it, down and reverse, so I will sell a quite bit. At the same time, I will also raise my previous stop loss on the remaining position to attempt to violate even. I doesn’t want a potential successor to turn in to a loser.
I set the 2nd target based on what is called the “measured move.” I will look at the space the stock traveled from its end swing low (the low prior to the present pullback low) to its end swing high (the most new high prior to the present pullback) and then add that amount to the low of the present pullback. How much will I sell there? It depends. If the market has been powerful and the stock area is showing perfect relative strength to the market I will sell less than if those criteria are not met.