The stock market is set to open lower this morning, as fears of a trade war grow larger. Stocks are reacting to last night’s news after U.S. President Trump threatened Mexico with a 5% tariff on all of its imports (from June 10).
The focus right now is on capital preservation and risk management.
We are in a wait-and-see mode…
…and despite the market looking weak…
I’m staying patient and waiting for the market to give me further confirmation before I place any new trades.
(I might not trade much today, but I will be scanning charts and trying to find setups, if you want to learn more about my trading system then watch this now.)
That said, I’d like to talk to you about a topic that gets thought about a lot… but rarely gets discussed…
Q: What is the best way to utilize your service and alerts?
As you can imagine, not everyone gets my alerts at the same time… and that means many traders will get in at different price levels.
Which brings me to another question that gets asked a lot…
Q: How far away from your entry should I buy? In other words, How badly should I chase the trade if I missed my entry?
Read on to find out my thoughts on this matter, as well as, practical advice on how to get the best out of my service (or any trade alerts service for that matter.)
Don’t chase stocks – that’s an old Wall Street adage that traders should follow.
Why am I bringing this up?
Well, I run a trading service and have clients… and the last thing I want for them is to chase stocks or me…
You see, it’s great when you have someone to hold your hand and walk you through trades… letting you know exactly when they’re getting into a stock and getting out. When it’s that easy, you get caught up in the moment and start chasing stocks.
Just because someone says they bought a stock, that doesn’t mean you should too.
You’re probably thinking, “Well, Petra… what is this trader is proven and I’ve seen this pattern before, it works 70% of the time… I’m just going to follow the trader?”
That’s great… the trader is proven, but you mentioned something about a pattern.
Well, what happens if the trader got in at the right price and had flawless execution.
You’re one step behind, right?
That said, just because a trader bought a stock… and it’s running higher… it doesn’t mean you should blindly follow them and get in.
Well, what should you do then?
Focus on the thesis, the plan, and the pattern.
For starters, if you have the privilege to chat with them… ask them how they formulated their trade idea… if you don’t, that’s okay… you can figure that out simply.
Figuring Out The Thesis
For example, I actually have checklists for the patterns I use to trade. First, there’s the rounded bottom breakout (RBB).
____ 1. Down Trending Price Action – Lower lows and Lower highs
____ 2. Moving Averages Confirming Downtrend – 8EMA, 20 SMA and 50 SMA are sloped downward and are almost parallel to each other. The 200 SMA is somewhere above the 8 EMA, 20 SMA, and 50 SMA.
____3. Stalling Price Action – Price starts to slow its descent and may move within a small range for a while (in a box-like pattern).
____4. Price Rising and the 8 EMA Crossing Above the 20 SMA – Pay Attention
____5. “The Switch” – The 8 EMA is now Above the 20 SMA. Price continues above the 8 EMA.
____6. Breakout – Price closes above the 50 SMA.
____7. Moving Averages Confirming the Breakout – Price is above the 50 SMA. 8 EMA is above the 20 SMA, and 20 SMA is above the 50 SMA.
____8. Target exit is the 200 SMA
If I’m trading the RBB pattern, my thesis is based on this checklist. So it’s easy for my clients to understand the trade and the thought process behind it… it just takes a bit of time to get familiar with the setup.
You’ve probably seen this chart before… but I want you to look closer at the details of it and focus on the chart… as well as the checklist, because it’s a “textbook” setup of how powerful this pattern is.
Let’s say I bought this stock at $47.60 because it satisfied all the rules on the RBB checklist.
Should you just follow my trade and hit the buy button, without looking at the price?
Of course not.
What you should be doing is developing a trading plan and focusing on the pattern.
For example, you could’ve actually gotten a better price after I got in. All you need to do is plan.
You see, every trader is thinking differently and has different goals and targets in mind… they also have different timeframes.
With the RBB pattern, you’re actually able to use a buy zone for example, you can say you would buy anywhere between $46.50 and $47.00, just as long as the moving averages hold. Therefore, your price would be much different from mine… and if the stock goes up, you’d have better percentage returns.
Think on the other hand, and you just followed my trade and didn’t care about the price.… well, maybe you would’ve paid $47.90… or even higher.
Well, what happens if the stock pulls back slightly, you’d actually have more losses, and you might’ve gotten stopped out… and you would’ve missed this.
Another pattern I use is the pinball. I’m going to walk you through the pattern and how you should approach it… rather than sitting around and waiting for an alert… and then chasing the stock.
Focus on the Pattern
___1. The trend must be in a definable downtrend, 8 EMA is below or equal to the 20 SMA, 20 SMA is below the 34 EMA, 34 EMA is below the 50 SMA, and 50 SMA is below the 200 SMA.
___2. Some form of a bottom forming. Some examples include, but are not limited to. double bottom, lower high, higher low, higher high, multi-bar candlestick bottom.
___3. There should be 10% or more from the 8 EMA to the 34 EMA.
___4. Yesterday’s close must be above 8 EMA.
___5. Buy on positive trading above the 8 EMA after yesterday’s close above the 8 EMA.
___6. Take profits on at least half of the position at the 34 EMA on the daily chart, or 200 SMA on the 60 minute chart, whichever comes first.
___7. Use a stop on a close below the 8 EMA.
Well, this is pretty similar to the RBB checklist right, but I’m looking at something different here.
This is actually the pinball pattern.
You can actually develop a trading plan and set an alert ahead of time… being solely focused on the pattern.
For example, the stock is clearly in a downtrend.
The 8 EMA (the blue line) is below the 20 SMA (the pink line)… the 20 SMA is below the 34 EMA (the red line)… and the 34 EMA is below the 50 SMA (the purple line).
We’ve got some kind of bottom forming… and there’s at least 10% between the blue line and the red line. Yesterday’s close was above the 8 EMA.
Now, all you’re waiting for is some positive trading above the 8 EMA.
Try to figure out a plan…
You have your thesis: the chart pattern – try to walk through the checklist on your own again.
Next, try to develop a plan.
Where would you buy the stock?
Where would you stop out?
Where would you take profits?
Write those down… and see how it works.
That said, if you’re just starting out… it’s great to get alerts about entries, exits, watchlists and the thesis… but you shouldn’t chase alerts or stocks.
Make the trade your own because everyone’s risk profiles are different – what I’m willing to risk is probably going to be different from you’re willing to risk… ultimately, this should benefit you in the long run.