Tuesday, January 22, 2013

Buying Into Strength

MetaStock SPRS Series - Week 102 - TechniTrader® Stock Discussion for MetaStock Users - Buying Into Strength - January 21, 2013
By: Martha Stokes C.M.T.

“Buying Into Strength” is a standard professional strategy helping traders avoid whipsaw action, and temporary retracements caused by large lot profit taking.

ZIGO is the chart example to explain how buying into strength, rather than using a Limit Order that gets you in at “a better price” is the preferred choice of professional traders.

Below is a daily chart for ZIGO which shows a consolidation, then a move up a little and then another consolidation. Say for this example you are trading the swing style resting day entry patterns, and feel this may be a good entry point before the stock moves up again.


Chart 1

The rule of entry is to “Buy Into Strength.” However you have heard other traders talk about getting in on a Limit Order, which says “Buy Me In At This Price Or BETTER” which means “LOWER” in the marketplace. For this example you feel pretty good about this new strategy, so you enter your Limit Order to buy into this stock.

The next day the stock drops and your order is executed. You’re not too worried because you are confident this stock is trending up, and you are using your favorite indicator MACD which is a momentum moving average based indicator.


Chart 2

You hold for several more days but the stock continues to move down rather than up. A big engulfing black candle forms and you either sell out at a small loss, or you hold on desperately hoping that the stock will reverse.


Chart 3

Those of you who would choose to hold hoping it would turn around, find yourselves losing even more money as the stock dropped further. Now by this time most short term retail traders gave up and sold out.


Chart 4

The reason you lost money is:

  1. You bought into weakness using a Limit Order allowing the computers of the market to buy you in as the stock was falling in price. Not a good idea. The notion is you “save” money with a Limit Order, but more often than not the above scenario happens.

Buying into strength means:

  1. Analyzing the strength of VOLUME and Institutional buying activity, to determine that the stock is going to move up and has enough strength to sustain that move up.
  2. Using a controlled bracketed order that ONLY triggers if the stock does move up into your buy zone, and also controls what you pay for the stock.

The “Buy into Strength” bracket order ONLY triggers when the stock moves up into your order price. Now you would be in a stock that is moving up making nice profits rather than a stock moving down.


Chart 5

Summary:

In this example ZIGO did have upside potential. However many pro traders took profits early and many retail traders got over zealous and started selling short, which caused a brief correction.

The downside sell off in this chart example was very brief because at this same time Mutual Funds were being invested in by those small lot investors, who use Mutual Funds for their investing. This increased the money in funds accounts allowing institutional investors to jump into good stocks like ZIGO to buy on the dip, which shows in the TechniTrader® Indicator TTQA in the bottom chart window.

The Gap took the stock back to its original buy in price, and the stock ran up in a velocity run for 4 days.

Limit Orders are usually used improperly by retail traders and are the cause of many poor trades.

Notice that the TechniTrader® indicators were weak on the initial setup but much stronger after the gap.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
http://technitrader.com
MetaStock Partner

©2013 Decisions Unlimited, Inc.

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