TRADING TACTICS
Upon completion of the market analysis, the trader should know whether he or she wants to buy or sell the market. By this time, money management considerations should have dictated the level of involvement. The final step is the actual purchase or sale.
This can be the most difficult part of the process. The final decision as to how and where to enter the market is based on a com. bination of technical factors, money management parameters, and the type of trading order to employ. Lets consider them in that order.
Using Technical Analysis in Timing
There’s nothing really new in applying the technical principles discussed in previous chapters to the timing process. The only real difference is that timing covers the very short term. The time frame that concerns us here is measured in days, hours, and minutes as opposed to weeks and months. But the technical tools employed remain the same. Rather than going through all of the technical methods again, we’ll limit our discussion to some general concepts.
Tactics on breakouts
The breaking of trendlines
The use of support and resistance
The use of percentage retracements
The use of gaps
Tactics on Breakouts: Anticipation or Reaction?
The trader is forever faced with the dilemma of taking a position in anticipation of breakout, taking a position on the breakout itself, or waiting for the pullback of position after the breakout occurs. There are arguments in favor of each approach or all three combined. if the trader is trading several units, one unit Can be taken in each instance. If the position is taken in anticipation of an upside breakout, the payoff is a better (lower) price if the anticipated breakout takes place. The odds of making a bad trade, however, are increased. Waiting for the actual breakout increases the odds of success, but the penalty is a later (higher) entry price. Waiting for the pullback after the breakout is a sensible compromise, providing the pullback occurs.
Unfortunately, many dynamic markets (usually the most profitable ones) don’t always give the patient trader a second chance. The risk involved in waiting for the pullback is the increased chance of missing the market.
This situation is an example of how trading multiple positions simplifies the dilemma. The trader could take a small position in anticipation of the breakout, buy some more on the break-out, and add a little more on the corrective dip following the breakout.
The Breaking of Trendlines
This is one of the most useful early entry or exit signals. If the trader is looking to enter a new position on a technical sign of a trend change or a reason to exit an old position, the breaking of a tight trendline is often an excellent action signal. Other technical factors must, of course, always be considered. Trendlines can also be used for entry points when they act as support or resistance. Buying against a major up trendline or selling against a down trendline can be an effective timing strategy.
Using Support and Resistance
Support and resistance are the most effective chart tools to use for entry and exit points. The breaking of resistance can be a signal for a new long position. Protective stops can then be placed under the nearest support point. A closer protective stop could be placed just below the actual breakout point, which should now function as support. Rallies to resistance in a downtrend or declines to support in an uptrend can be used to initiate new positions or add to old profitable ones. For purposes of placing protective stops, support and resistance levels are most valuable.
Using Percentage Retracements
In an uptrend, pullbacks that trace 40-60% of the prior advance can be utilized for new or additional long position. Because were talking primarily about timing percentage retracement can be applied to very short term action. A 40% pullback after a bullish breakout, for example, might provide an excellent buying point. Bounces of 40-60% usually provide excellent shorting opportunity ties in downtrends. Percentage retracements can be used on intraday charts also.
Using Price Gaps
Price gaps on bar charts can be used effectively in the timing of purchases or sales. After an upmove, for example, underlying gaps usually function as support levels. Buy a dip to the upper end of the gap or a dip into the gap itself. A protective stop can be placed below the gap. In a bear move, sell a rally to the lower end of the gap or into the gap itself. A protective stop can be kept over the gap.
Combining Technical Concepts
The most effective way to use these technical concepts is to combine them. Remember that when we’re discussing timing, the basic decision to buy or sell has already been made. All we’re doing here is fine tuning the entry or exit point. If a buy signal has been given, the trader wants to get the best price possible.
Suppose prices dip into the 40-60% buying zone, show a prominent support level in that zone, and/or have a potential support gap. Suppose further that a significant up trendline is nearby.
All of these factors used together would improve the timing of the trade. The idea is to buy near support, but to exit quickly if that support is broken. Violation of a tight down trendline drawn above the highs of a downside reaction could also be used as a buying signal. During a bounce in a down-trend, the breaking of a tight up trendline could be a shorting opportunity.