Limit Orders And Bracketed Orders
“Buying Into Strength” is a standard professional strategy that helps traders avoid whipsaw action and temporary retracements, caused by large lot profit taking. The chart examples below are to explain how Buying Into Strength is the preferred choice of Professional traders, rather than using a Limit Order that gets you in at “a better price.”
Below is a Daily chart view which shows a consolidation, then a little move up followed by 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.
The rule of entry is Buying 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 a Limit Order to buy into this stock.
The next day the stock drops and the 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.
You hold for several more days but the stock continues to move down rather than up. A big engulfing black candlestick forms and you either sell out at a small loss, or you hold on desperately hoping that the stock will reverse.
Those who would choose to hold hoping it would turn around, find themselves losing even more money as the stock drops further. Now by this time most short term retail traders have given up and sold out.
The reason for lost capital is because buying into weakness using a Limit Order allows the computers of the market to buy you in as the stock is falling in price. This is not a good idea. The notion is that traders can save money with a Limit Order, but more often than not the above scenario happens. Limit Orders are usually used improperly by retail traders, and are the cause of many poor trades.
Buying Into Strength means the following:
1. Analyzing the strength of VOLUME and giant Institutional buying activity in Dark Pools, to determine that the stock is indeed going to move up and has enough strength to sustain that move.
2. Using a controlled Bracketed Order that ONLY triggers if the stock does move up into your buy zone, and it also controls what you pay for the stock.
The Buy Into Strength bracketed 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 as shown in the same chart below two weeks later, rather than a stock moving down.
This stock chart example did have upside potential. However many Professional 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 stock was very brief because at the same time Mutual Funds were being invested, by those small lot investors who use Mutual Funds for their investing. This increased the money in funds accounts allowing institutional investors to jump in to buy on the dip, which shows in the indicator TechniTrader Quiet Accumulation 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. Notice that the TechniTrader indicators were weak on the initial setup but much stronger after the gap. In addition it is best to use leading indicators written for the automated marketplace of today, rather than MACD which is a lagging indicator.
Martha Stokes CMT
Instructor & Developer of TechniTrader Stock and Option Courses
This weekly stock discussion is sponsored by TechniTrader.com a MetaStock® Partner
©2014 Decisions Unlimited, Inc. dba TechniTrader. All rights reserved.
TechniTrader is also a registered trademark of Decisions Unlimited, Inc.
Disclaimer: All statements are the opinions of TechniTrader, its instructors and/or employees, and are not to be construed as anything more than an opinion. TechniTrader is not a broker or an investment advisor; it is strictly an educational service. There is risk in trading financial assets and derivatives. Due diligence is required for any investment. It should not be assumed that the methods or techniques presented cannot result in losses. Examples presented are for educational purposes only.