Friday, March 18, 2011

The Perfect Trade Setup

Here is an old example of the type of trade I take the most. The stock dropped 13% and then a candle with a long shadow formed near the bottom of its descent. The huge volume increase near the bottom is important as well. At first the increased volume is from panic selling and capitulation, and this is visible as the stock continues to drop significantly with high volume. The long shadow on the yellow highlighted candlestick represents the bulls coming in quickly at that price level. When the price moves above the high of this candle that is my entry signal. At this point I watch carefully to see what the price will do. If there is apparent weakness I sell quickly because stocks with this much downward momentum are very risky trades. The most I ever set my stop at is 0.5% below my entry price. After all, money management is the key to being a successful trader. If there is upward momentum after I buy, I ride it until that momentum appears to have run out. My threshold for pain is the candlestick highlighted in magenta, though some may have held it through that and got that extra dollar. I almost always take the sure gain rather than gamble. The setup for this particular stock was almost perfect, and I almost never expect a 2.5% gain like this stock offered. I hope for 1%, but I take what is given to me.

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