“Buying Into Strength” in Stocks
Use A Professional Trader Strategy
Buying Into Strength in stocks is a standard professional strategy that helps Retail and Technical Traders avoid whipsaw action, and temporary retracements caused by large lot profit taking.
The chart example below will help explain why buying into strength is the preferred choice of professional traders, rather than using a Limit Order that gets you in at “a better price.”
The daily chart view in this example shows a consolidation, then a move up a little and then another consolidation. Say for this chart 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 to “Buy Into Strength.” However you have heard other traders talking about getting into a stock using a Limit Order that says, “Buy Me In At This Price Or BETTER” which means “LOWER” in the marketplace. 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, but the order is executed. You are not too worried because of confidence that this stock is trending up, using your favorite indicator MACD which is a momentum Moving Average based indicator. See the MACD indicator window below for this stock.
You hold for several more days but the stock continues to move down rather than up. A big Engulfing Black Candlestick forms, and the choice is to either sell out at a small loss or hold on desperately hoping that the stock will reverse.
Those who choose to hold hoping it will 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 many traders lost money is that they bought into weakness using a Limit Order, allowing the computers of the market to buy them in as the stock was falling in price. Not a good idea. The notion is to “save” money with a Limit Order, but more often than not the above scenario happens.
Buying Into Strength in Stocks means the following:
1. Analyzing the strength of the VOLUME indicator as well as giant to large lot Institutional Investing Dark Pool activity, to determine that the stock is 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 a personal buy zone, and also controls what price is paid for the stock.
The “Buy into Strength” bracketed order ONLY triggers when the stock moves up into your order price. Then you would be in a stock that is moving up making nice profits, rather than a stock moving down.
The chart example 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 was very brief because during the same time as the profit taking and selling short, Mutual Funds were being invested by those small lot Investors who use them. This increased the money in funds accounts, allowing giant to large lot Mutual and Pension Fund Institutional Dark Pool Investors to jump into good stocks, which is revealed in the TechniTrader Quiet Accumulation TTQA Indicator 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.
Martha Stokes CMT
TechniTrader technical analysis using a MetaStock chart, courtesy of Innovative Market Analysis, LLC dba MetaStock
Instructor & Developer of TechniTrader Stock and Option Courses
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