“Patience, persistence and perspiration makes an unbeatable combination for success” – Napoleon Hill
Often enough I receive same kind of e-mails from traders asking pretty much the same thing: Why not buy the stock (or ETF) here, now, why wait for price trigger?
Buying or selling (shorting) stocks outside key areas is a common mistake among beginner traders. If there is a trade alert sent for an entry above $84.00 and the stock (etf) is trading currently at $83.56, the most common questions is: why not get in now, way wait, this will save me money and lower my risk, therefore I can buy more shares?
If you intend to take a long position, granted the stock is moving higher you want to make sure the stock proves that it can take out the previous resistance area by showing signs of strength (or for short positions signs of weakness under support).
THE STOCK NEEDS TO PROVE ITSELF
We need the stock to prove to us it can challenge and conquer the key focal area of interest. If each time when it gets close to that key trigger area a selling occurs (for a long position) it simply means that it is not ready to continue higher). By having the patience to wait for confirmation it will stop your aggressive approach towards buying a stock that is not ready yet to take off. This will increase your winning odds a great deal. This will also keep you away from “catching the falling knife” syndrome.
By waiting for the proper trigger with confirmation you will also have a defined stop area and there you have it a defined risk.
The key areas I am referring to are areas of support and resistance. These areas will be monitored for possible trigger. Trigger above resistance for long positions and triggers below support for short positions. If the stock/etf shows/proves it can trade above resistance (for longs) it is considered a sign of strength and the other way around for short positions (a trigger below support is considered a sign of weakness).
The quality of the set-up should be also analyzed. If you are in an ongoing strong trend on one time frame you have to make sure that all the other major time frames are still in sync with your potential new trade and this will assure continuation to higher targets and fluidity in the move of the stock.
Buying a stock with no price trigger confirmation will increase your odds of stop-outs. This simple trading rule will keep you out of trouble and in the green.
In the example below I want to emphasize the extra risk you may take on by choosing to enter a trade ahead of the trigger price.
PUT THE ODDS ON YOUR SIDE
The confirmation entry for this trade (ETF) $XLB to continue higher would come in if price will take out resistance area $84.48 if this happens then the stop is under support $78.33. So we have the game plan, entry, stop and defined risk. But, not waiting for price confirmation and taking the trade where it is trading now that would increase the odds of this trade now working.