In stock trading, our goal is simple; beat the market and make money. There are many ways to do that, as a trader that uses chart analysis as my chosen path to success; there are also a number of methods.
Here 5 different types of trades I use. Each has a strategic method for putting money in your account.
I look for two different things when seeking reversals. The first approach is to find stocks that are in sustained price trends and then break their trend line. This can be the break of an upward trend line, telegraphing a downward move, or a downward trend that is broken as the stock makes a bottom.
The other set up is a shift from rising bottoms to falling tops (a topping pattern) or from falling tops to rising bottoms. This second approach to reversals is more conservative but also more reliable. You will get in later on the reversal but the success rate will be higher.
Generally, I prefer waiting for a move from falling tops to rising bottoms when looking for a bottom but I will short sell a simple trend line break on a strong stock rather than wait for the break down from a falling top.
There are a lot of stocks that trade in boring, sideways trading ranges that show little price volatility. These stocks are marking time. Investors have little new fundamental information to motivate strong buying or selling to create an upward or downward trend.
Stocks in these situations are opportunities waiting to happen. They will see abnormal price breakouts with abnormal volume signaling that well-informed investors have found a fundamental reason to buy or sell the stock aggressively. Since the spread of information in the market is not always fair, these well-informed investors are leading the crowd. When the wider market learns of the information that caused the breakout, the stock will be accumulated by many, initiating a money-making trend.
But buying breakouts alone is not effective. You have to be sure that the break is a signal that there is something going on with the company, that there is a significant change in company fundamentals behind the break. Understanding chart patterns is key to doing this.
#3 Run Aways
Once a stock gathers momentum and starts moving up, the emotion of the market may cause it to move too quickly. A stock that goes up or down too fast has a greater potential for a short counter-trend. This is caused by investors who take profits. If you bought a stock and make a very good return in a short amount of time, you will likely want to exit the trade to lock in profits.
One trading strategy is to play this process, shorting a stock that goes up too quickly or buying a stock that goes down too fast. This trade goes against the longer term momentum of the stock and is only a short-term trade. For savvy swing traders, it can be a lucrative move.
Where do you choose to go against the grain? Look for stocks that are trading with emotion, high volume and a very steep trend. Recognize that these stocks will find barriers at historical support and resistance and will like begin their counter trends there. Anticipate a counter move at these price levels.
#4 Pull Backs
Stocks have momentum once a stock has been in a trend for a while, and that momentum will dominate to bring the stock back on course when there is a short counter-trend. Pull Back strategies look for stocks that have a long-term trend in one direction and a short term trend in the opposite direction.
Playing Pull Backs require you enter the trade when the stock pulls back to the trend line and give some sort of confirmation that it is likely to bounce off of the trend line and continue with the longer-term momentum.
Some chart patterns show a mood but lack a trend. For example, those familiar with charts will know that ascending triangles show optimism and descending triangles pessimism. However, they are consolidation patterns, which means price in general is going sideways over time.
One strategy is to anticipate a breakout by buying stocks in ascending triangles or shorting stocks in descending triangles. Since price volatility is low, the risk of the trade is less and the upside greater if the stock does what we expect of stocks in these patterns, breakout. This is for advanced traders.