Trading Guide - Chapter 2
Contents
Momentum (with Trend) Long Trade
- Momentum, stock trade setups, depend on overall and trade quality indicators.
- A good long trade setup has an overall indicator => 65% and trade quality => 70%.
- The long trade detail provides targets 1 and 2 (for an extreme rally), stop, P/L (profit to loss) ratio and rating (excellent for P/L of 3 or greater).
- The Typical timeframe for a momentum trade to reach the target is 1 to 4 weeks (5 to 20 trading days).
- Price targets can sometimes be conservative, especially if the stock has had only one or two big rallies or pullbacks over the past year (low volatility/movement). The price target accuracy is better when there are many rallies and pullbacks (volatility/movement) over the past year.
Long Trade Action
Overall Indicator
This indicator represents the overall picture for the past 2-4 months. Momentum and bottom trade setups require at least a mild bullish reading of 65% or greater.
- Price movement in an uptrend
- Good positioning, not overbought
- Typical short-term pullback for an optimal long entry area
Trade Quality Indicator
- The black dot represents the price movement and blue line support.
- The trade quality is a short-term (1-2 weeks) entry indicator. Momentum and bottom high trade quality setups have a 70% or greater reading.
- High trade quality features:
- Near or at support
- Tight stop
- Good profit
- Good target potential (low number of resistance areas to target)
- The highest trade quality (90-100%) occurs in a narrow price range with the tightest stop and maximum trade profit.
Stocks in a more extended two-week+ narrow price range can have high trade quality for long and short trades. In this case, look at other indicators for a hint of future direction (in uptrend? overall? bullish moneyflow/candlesticks?) to decide whether to take a long or short trade.
Trade Quality Cycle
- When a stock pulls back to a support area, the trade quality's black dot (representing price movement) will move down the left side from 0% (falling price; poor trade quality), 60%, to the 70-100% support area with the highest trade quality (the blue line represents support).
- When the stock rallies off support, the trade quality's black dot will move up the right side, from the 70-100% support area, 60% to 0% (rising price, far from support, poor trade quality).
Bottoms
- After a significant price gap down (or many large down days, i.e. falling knife), it is best to wait for some stability and double or triple support areas to form before looking for trade setups.
- Bottom long trades at single, double, or triple support areas can be hazardous since there may also be a breakdown watch.
- Failure to hold support will result in a breakdown to even lower prices.
It may take one to three months for a stock to stabilize, form support areas, start trending higher, and breakout into the previous price gap.
A failed breakdown in an established bottom area may signal a significant price reversal and trend change.
Breakouts
- Breakouts may occur when the price moves through a resistance area with either no resistance above (new high area) or resistance is much higher due to a price gap or previous large price drop area.
- On the breakout indicator, the red line represents resistance and a breakout level price. If the stock price moves above this level, it means a confirmed breakout.
- When the price moves above the breakout level shown on the indicator, the stock may rally quickly, as there are no resistance areas to halt the advance.
- Since breakouts occur at resistance and sometimes near the top of ranges (new highs), you may have poor or bearish overall and trade quality indicators. This area may also be an excellent area to enter short trades.
- When you have a flat top (narrow price range) breakout or a bottom breakout, you may have good overall and trade quality.
- The breakout trade provides a price target, stop and profit to loss (P/L) ratio and rating (excellent for 3 or greater profit to loss).
- The typical timeframe for a breakout trade to reach the target is from 1 day to 1 week (5 trading days); this is a short-term event.
- The breakout target can be conservative, especially if the stock has had only one or two big rallies or pullbacks over the past year (low volatility/movement). The breakout target accuracy is better when there are many rallies and pullbacks (volatility/movement) over the past year.
Breakout Types
The most reliable breakout patterns:
- Short run
- Narrow price area
- Flat top (bull flag)
- Bottom
Short Run Breakout
- Rally is just getting started (short-term direction up), and volume may increase.
- Important support nearby at 42.96
A high trade quality long trade may be available at 42.96 support.
Narrow Price Area Breakout
Flat Top (Bull Flag) Breakout
- Flat top (bull flag pattern) breakouts have well defined breakout levels and stops.
Bottom Breakout
- Bottom breakouts may have large upside price and resistance gaps.
The least reliable breakout pattern:
Run Up Breakout
- The least reliable breakout is the run-up breakout watch. The stock has already rallied (strong/extreme short-term direction) and now needs to consolidate at resistance (56.69) before making another breakout move. The consolidation may create a bull flag before another breakout.
- Indicators and price actions that hurt breakouts:
- Overbought indicator: a 7 or higher; stock has had a good 1-2 month move higher.
- Intermediate Trend: An unsustainable uptrend; stock has been in a strong uptrend for 4 months or more.
- Short-term direction: Strong/extreme; a large 1-2 week rally has occurred.
- Recent breakouts within the past month that have had large volumes may lead to exhaustion on the current breakout.
- Be aware of false breakouts; some studies suggest taking the 2nd breakout attempt has more success.
Narrow Range Breakouts And Support
- A pre breakout high trade quality long trade may be available at 11.44 support.
- Many narrow range breakouts may have high trade quality entries at the lower range support area.
Breakout Trade Action
Breakouts and Short Trades
- Breakouts may also have possible short trade setups since they are at resistance.
- A failed breakout may turn into a short trade setup.
Disclaimer: This is NOT investment advice, just general help and opinions. Please check with a registered investment
advisor before making any investment decisions. This
document may contain errors. Chapman Advisory Group LLC employees are not investment advisors. Please review:
https://www.stockconsultant.com/disclaimerpage.html
