Thursday, September 21, 2006

classic Bounce play

This was the second trade that I made today. It was a classic breakout above a narrow range. The narrow range trading occurred for over half the trading session. What made this a low risk, high probability trade was that it was centred right at around the 50d MA. I think it just makes sense to buy as close to support as possible in an uptrending stock, and both criteria were met allowing me to purchase. (Incidentally, Dan Fitzpatrick has the same line of thinking in this article). Buying as close to a valid support level as possible allows you to limit your risk (the stop would be placed just below the support level. Whether the valid support level is a defined resistance/support level, or a MA or some other technical indicator will be arbitrary, and this is where the trader's intuition comes into play.

The only thing I could improve upon for today's purchase was to buy a larger position. Because it was a low volume stock that kept dropping all week as I watched it, I was conditioned to think defensively and not aggressively.

No comments: