|"Imagination is more important than knowledge. Knowledge is limited. Imagination encircles the world." - Albert Einstein |
Why Not Buy That Stock Now?
It is a common question many traders ask. It is also a common mistake new traders make. If we are intending to buy that stock OVER 32.00, and it is now at 31.75, why not buy it now? Why not save some money?
The key is that if we are going long, we want to make sure the stock is moving up. Even in a small way, we want to see some 'offer of strength'. (If we are shorting, the same applies. We want to see some extra sign of weakness.) Does that sign of strength guarantee the stock will move up? Of course is does not. But it does stop you from buying a free falling stock, and increase your odds of the stock moving up dramatically. It also gives you a built in stop, the low of the bar before the 'strength' set in.
We will always pick on points of resistance, (or supply), where there should be many sellers (or buyers) present. If the stock can clear that area without any problems, after several down bars, that gives us an indication the stock may be reversing in the short term. If you pick strong stocks that are on quality pullbacks, the only question is when that pullback has ended and when the rally will begin. Taking out prior resistance is the gauge we use.
Quality pullbacks mean that the trend on the major time frame is still in place, and we have a 'clean and orderly' move against the major trend on the minor time frame. For example, on a daily chart we may use a prior days high as the trigger point, after the rest of the set up meets the qualifications for a stock that is in a quality up-trend.
Of course, there can be other methods of buying stock. There are also times when the evidence is so over whelming that traders will correctly 'anticipate' the stock moving up. However, be aware, until you have the skill to make good estimations of these things, make sure your stock has passed the 'strength' test. It will keep you out of trouble, and provide you with the proper stop. Remember, if you miss a play, missed money is better than lost money.
By Paul Lange, Senior Pristine Certified Trainer (PCT), Certified Pristine Mentor, Head Moderator of the Pristine Method Trading Room, Member of the Pristine Research Team, and a Trader Coach.