Trading on Pullbacks
Recommended strategy which capitalizes on pullbacks: Ten Steps To Profitable Trading.
Finding the right moment to enter a stock trade seems to catch out so many traders/investors. They make their purchase based on some good news only to see the stock price fall away and not return to purchase levels for weeks or even months.
Those using a stop loss (as they should) get stopped out with yet another loss. A small loss perhaps but a loss just the same. The vast majority of traders trade this way, and this partly accounts for why some 90% of stock traders lose.
The obvious answer to this is for traders to not buy when they hear good news, but to buy after the stock they are interested in has a pullback.
A pullback occurs when a stock which has been showing steady upward movement, then drops in price. In most cases this is nothing to worry about, perhaps an investor is taking profit, or perhaps there’s some news for example a senior manager has announced their retirement. Not really ‘news’, but it results in a pullback just the same.
In these cases the pullback is short term and the stock soon resumes its upward trend. You can learn more about this in the Stock Trading Nitty Gritty course by Bill Poulos.
If you are thinking about taking a position in a stock, it is a pullback which signals a buy in opportunity.
Before we move ahead and buy in we should do some quick common sense research on the company, for example, we should see if there is a reason the stock has made this pullback.
Normally there would be nothing, but as a contingency plan we should be aware if very serious problems lie ahead which may prevent the company from ever resuming its upward trend. This of course would make it one to avoid, and well worth that final effort to double check.
Whilst that would be highly unlikely, as a minimum a quick search of news of the company on the day of the pullback should uncover anything we need to be wary of.
More often than not however, the stock we have targeted won’t have hit the news, it is just taking a natural breather. Exactly how far down that breather will take the stock is anyone’s guess, but if the stock has shown steady upward momentum until now, there’s no reason to suppose it won’t resume its upward climb at some point.
Any hype, bad or good, will likely lead to a pull back in price, so do not concern yourself with why the price has pulled back unless it is news which may prevent the stock price from ever recovering, or at least prevent it from recovering in the shorter term, i.e. within the next few weeks.
To buy into the stock, place a note to buy at a price above the price the stock was at just as it had its pullback. This would be a ‘resistance level’, and means the stock would need to break that resistance again before you buy in.
Note you don’t actually buy until it has broken resistance, not before. The stock may not be able to for months, or indeed if the news turns out to be very bad, the stock may never recover to those levels again, in which case you never actually bought in and you have lost nothing.
If the stock is strong, and has been in an upward trend prior to the pullback, then the chances are it will eventually break that resistance and carry onwards an upwards, now with you holding shares in it.
If you want to learn more about this particular tactic and how if fits into an overall trading strategy, take a look at the Ten Steps To Profitable Trading where ‘trading on pullbacks’ is integrated beautifully.