The following article is an oldy, but a goody.
In the article below, we discuss ways to get the best entry points, but do not discuss how to choose a breakout to trade. Go here for a great article on trading breakouts.
Getting the best entry point seems to be one of the top
issues for subscribers so today we are providing another strategy that often
works to help find the best entry point when opening a trade.
When a stock breaks out, very often it will return to the
point where it broke out from before it moves higher. Take this week’s recommendation IVAN for
example.
IVAN was trading in a descending triangle pattern until
last week when it broke out from the corrective trend it was in:
The
breakout point is highlighted in yellow.
The price, in line with the majority of breakouts, then proceeded to
correct, pulling back toward the point of breakout. From this daily view it is not possible to
see where the retracement, which occurred after the breakout, stopped making it
hard to know where to enter the stock.
The 15-min chart provides a micro view of this stock’s activity and
makes it easier to see when the selling has stopped making it safe to enter.
Let’s analyze the
above chart.
Monday: The report
recommended IVAN on this day with the following recommendation:
$2.70-2.80 is major support. This area has held more than three times over
the past few months so we expect it to be very strong here. It is likely that the price will return to
this area before it heads higher, so as long as there is not a strong volume
breakout on Monday, wait and enter as near $2.80 as possible, exiting if the
price closes lower than $2.70.
Since the target price range was not hit on Monday, you
would have waited.
Tuesday:
The target price was still not hit and the stock was not showing any
significant volume rise, so, once again, there was no reason to buy yet.
Wednesday:
When the price dropped down from the $3 area it became apparent that it
was in a minor downtrend. On this day
you could have drawn a trendline connecting the two outside extreme points.
Thursday:
The trend was tested, but proved to be in tact and it was still not yet
safe to enter. Besides, the target price
was not yet reached.
Friday:
Finally, the downtrend was breached and since the price was now close to
the target, you could feel safe in trusting that you were getting a reasonably
good entry point.
This breakout entry strategy will not work in every circumstance, but it is
one tool that you can use to find a good entry point. Remember, the goal is to enter as close to
major support as you can. When you can
use tools such as this strategy to do so, you are one step ahead of the market.